Islamic Forex Accounts or No Riba Accounts or Shariah forex accounts are accounts are based on Islamic clients’ religious beliefs which basically state that people should give and not expect anything in return and as such they do not pay or receive interest within the Economic industry. This belief was adapted to Forex Trading and as such Islamic clients can request an Islamic Forex account which allows a client to trade and not pay any interest on open positions. You must be a Muslim to open an Islamic Forex account. That might cause legal problems. The reason they are called Islamic Forex accounts is because they were created to meet the needs of the Islamic trading community
Forex brokerages and companies charge interest on positions clients have open overnight; not as an excuse to charge clients for the profit of the Forex Company but to cover the charges that the banks enforce for positions Forex companies have open through the night. These interest charges are referred to as SWAPs, or roll over fees, and can vary depending on which currency pair a client is trading and can also be adjusted from time to time. The reason for this is that it is an interest charge and as we all know interest rates differ from bank to bank and are also adjusted from time to time.
a forex swap (or FX swap) is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward)
The downside of Islamic Accounts
The only two issues that are found due to Islamic Forex accounts are that non-Islamic clients who are therefore not entitled to Islamic accounts feel that it is unfair. This is not the case, as within day trading, Forex markets swaps are part of the industry and generally Islamic accounts that are offered have other charges that Normal Accounts do not face. Depending on the Forex Company this may be higher spreads, limitation on the duration a position may be kept open or certain hidden charges.
The other flipside caused by Islamic Accounts is that some clients take advantage of the benefit of having no SWAPs to pay. They can do this by opening positions and leaving them open for very long periods of time, for which at some point their position will go into profit. This is unfair on the Forex Company as they are the ones that are left to pay the SWAPs charged by the banks they work with.
Another method is if a client opens an account with two Forex Companies, one being an Islamic trading account and the other with the second Forex company being a normal trading account that pays interest on Long positions. As such they will take a short position with the Islamic account and a long position with the other Forex Company so that the profit made on the one position cancels out the losses on the other account and the client is left with the earned interest. This is called Carry Trades and is an unfair method of trading so it is not allowed by professional Forex Companies.
Islamic Forex accounts are very common with many Forex brokers, but must be used wisely and responsibly, just like everything else in Forex trading. The following are some of the primary characteristics of islamic Forex trading accounts:
- Swap Free Forex Account: In Forex trading, when traders leave positions open overnight, it is referred to as a rollover. This usually entails rollover fees, but when trading with a Forex Islamic account, these fees are waved.
- No Riba: According to Islamic law, giving or taking interest on transactions is strictly forbidden. This of course presents a problem when dealing with banks or other financial institutions. With Forex Islamic accounts, all “Riba” charges are canceled.
- Musharaka: This term refers to a collaboration between two players. In this case, the profits and losses are split based on a predefined ratio.
The following brokers offer Islamic Forex Accounts and have a good reputation in the market.