Islamic forex brokers for Halal trading
One interesting aspect of the popularity of currency trading is that it has spread all over the world, across all types of cultures, ethnic backgrounds and religious affiliations. However, it's not easy for a broker to be a "one size fits all" firm. Not only must the broker have customer service reps that speak many different languages, they must also understand the nuances of various religious beliefs.
The Islamic faith is one of the world's leading beliefs that spans several continents, but religious people have worked hard to determine whether the standard offer of most brokers is authorised by Sharia. The two terms that appear most often in the literature on this subject are "Riba" and "Gharar".
A brief definition of each term:
- Riba: which means "interest", is best described as a loan with the condition that the borrower will give back more than the amount borrowed to a lender. Riba is prohibited by Islamic law.
- Gharar: an Islamic finance term describing a risky sale, where details regarding the purpose of the sale are unknown or uncertain. Gharar is generally prohibited by Islam, which explicitly prohibits transactions deemed to pose excessive risk due to uncertainty.
Financial markets are also affected by the time cost of money, and forex brokers have learned that in order to attract Islamic traders, issues relating to interest (or "Riba") must be addressed. The result is what is known as an Islamic, or riba-free or Sharia-compliant forex account. Brokers address the touchy subject of covering interest-related costs by changing the spreads offered on these accounts to provide the margin it needs. Additional fees or restrictions may also be imposed on these accounts to prevent abuse.
Therefore, overnight interest swap charges and commissions that look like interest aren't present. As you probably know, traders never have to worry about taking physical possession of foreign currencies. They only speculate on a position and then on its possible direction in the future. The reason no real currency ever changes hands, as it would after a 24-48 hour cycle, is that a forex broker actually closes all contracts at midnight and then quickly reopens them.
The broker's liquidity providers (banks mainly) charge swap fees based on the net interest differential between the countries involved in the currency pair. This fee is waived on Islamic accounts, but there may be a restriction on the number of nights the open position can exist. Again, religious issues may dictate a different approach, but you can be sure that the broker will recover its costs through some mechanism.
Why is Gharar such a big deal?
Forex brokers have obviously found an easy way around Muslim concerns regarding interest, or "Riba". The second term, however, namely "Gharar", is not so easy to deal with or eliminate. All forex trading involves speculating in a volatile market where returns and results are highly suspect. This is why Islamic jurists seem to struggle with this topic.
Any transaction in the financial derivatives market naturally involves "Gharar", and for this reason, trading in futures, options, short selling, or speculation in general where doubt or uncertainty surrounding the future delivery value of an underlying asset, the true nature and definition of a derivative, is "suspect". For this reason, each of these elements is prohibited by most interpretations of Sharia, but trading in the "spot" market, on the other hand, is allowed, at least by the majority of those who express themselves on this issue.
Forex brokers recommended for Muslim traders
What should an aspiring Muslim trader do on the forex market?
Many of the brokers in the above list offer Islamic, riba-free, or Sharia-compliant accounts, but before making your choice, it would be wise to consider the issues presented here. Not everyone agrees with the points raised in the discussion above, and you might not agree either, despite a thorough review of the literature. The questions are not simple, but complex.
Once you're confident that your religious beliefs can be in tune with the world of forex trading, it's time to find the best broker, one that's regulated and respected in your region by the authorities and, above all, by other traders. Islamic accounts are unique and may not be suitable for everyone, due to their restrictions and different pricing arrangements, but they do provide a way to trade currencies for Muslims who are comfortable with the religious complexities.
These accounts, however, come with restrictions that other accounts don't have. Why are there restrictions? Unfortunately, unscrupulous traders have tried to use combinations of Islamic and ordinary accounts to take advantage of the price differences charged by brokers. Brokers are on the lookout for this type of activity and will immediately close an account if they suspect wrongdoing.
Conclusion
Sharia embodies the Islamic principles that Muslims are expected to follow in their daily lives. In terms of trading and finance, interest is prohibited and the risk of speculation is only tolerated under certain specific conditions. Muslims who plan to actively trade currencies are advised to conduct some research in relation to the forex and determine whether this activity is deemed permissible according to the interpretation they make of their own religious standards. Once this internal review is complete, the best place to start researching the various Islamic account offerings is among the brokers we've listed above.
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