In Islam, the term “haram” means ‘prohibited’, so anybody following the religion would avoid doing such things. Haram is also used in the financial markets, as Muslim traders can’t charge or receive interest because it is against the Shariah (Islamic) law. Forex trading is another field where the word ‘haram’ is quite often used. There are rumours in the market that trading is haram, which is inaccurate. Trading can be regarded as halal if participants adhere to all Shariah regulations. The swap-free trading account is therefore available to traders. This permits people to transact in currencies without going against Islamic principles or hurting religious sensitivities. The term “Islamic Accounts” also refers to these swap-free accounts. To accommodate the demands of Muslim traders, several brokers now provide swap-free accounts.
What Are Islamic Trading Accounts?
An Islamic account is a forex trading account whose owners have decided to adhere to Islamic law’s ethical and moral values. These accounts contain various restrictions meant to ensure that trading is done ethically and responsibly. As a result, it is different from a standard trading account in several ways, including:
- The positions are left open overnight without any swaps being paid or received.
- Spreads on Islamic trading accounts are often larger
- Physical gold is used as collateral for commodity trades like silver and gold on Islamic trading accounts.
- Certain currencies from emerging markets cannot be traded with Islamic trading accounts with many brokers.
No Interest Charged
A trader may pay or get interest overnight when they leave an open position. Unlike traditional forex accounts, Islamic accounts will not accumulate swap interest. Trading in forex is considered Haram when swap interest is being paid. In contrast, Islamic forex trading accounts do away with them to allow halal trading for Muslims.
Because of this, commissions are calculated unusually. All Muslim customers who utilise an Islamic trading account are responsible for paying the administrative, commissions, and margin charges.
These expenses are unrelated to Riba Haram’s corporate goals. The main difference between Islamic and conventional accounts is the absence of swap charges, which can be their most significant benefit.
For scalpers and day traders, this is not a big issue. Because they frequently exit open positions well before a trading day ends. Traders who use this sort of trading strategy do not incur rollover fees. For swing and long-term traders, however, this can be a serious issue and significantly affect their profitability.
Conversely, swap-free trading accounts allow market players to select any positions in major currencies without worrying about rollover fees. As a result, they are free to base their trading decisions solely on technical analysis and fundamental news without considering the differences in interest rates between various currency pairs.
Wider Spreads
The swap interest charged by brokerage firms is undoubtedly their major source of revenue. However, since they cannot obtain profits from swap interest in Islamic trading accounts, brokers must find a way to make up for this income loss. That is why almost all brokers use bigger spreads for Islamic trading accounts to allay this worry. This enables them to enhance their spread revenues and compensate for the cash lost when the swap costs were eliminated.
Commodity Trading
The fact that the commodity deals, such as those in gold and silver, are secured by the real metals holdings of some brokerage firms is another crucial component of Islamic Halal day trading. It is customary for the broker to buy the actual silver and gold from the merchant and keep it safe in a bank vault. The company will then alter those holdings in line with the transactions made on the Islamic accounts. Similar to currency pairs, there are no rollover fees when trading commodities.
Restricted Currencies Available
Many forex brokers only allow traders to open positions on minor and major currency pairs for Halal Forex trading. Muslim traders, therefore, cannot trade exotic currencies like the South African rand (ZAR), Turkish lira (TRY), and Mexican peso (MXN) with most of the brokers. The central bank’s interest rates are often higher for emerging market currencies.
As a result, borrowing money in those currencies is typically highly expensive regarding nominal interest rates. The brokerage firms cannot cover those expenses by adding interest to their clients’ Islamic trading accounts. That kind of forex trading is prohibited.
Conclusion
Swap-free accounts are designed to meet the demands of Muslim traders, who frequently cannot trade due to their religious convictions and can also not pay or earn interest. Due to the limitations on interest-based income, swap-free accounts are very well-liked. Interest-based income is viewed as immoral in Islam. Shariah outlaws interest-based income to promote fair wealth distribution and safeguard others.