For followers of Islam, financial trading isn’t always easy. Shariah law forbids its followers from earning interest, which makes rollover/swap payments that can be paid on overnight positions a bit of a problem. The Forex world, out of respect, and possibly also to corner a section of the market, has started introducing swap-free, or Islamic, accounts. This type of account is now being offered by an increasing number of Forex brokers.
There is no interest paid on overnight positions, but some brokers with swap-free accounts charge additional account fees instead. There is a big question mark over this type of practice, and many Islamic traders feel it just makes the account a swap account in disguise. It really is down to personal preference and religious beliefs whether an interest charge transferred to a different type of fee is still a charge relating to interest, which would make it against Shariah law.
For anyone looking to open a swap-free account, there are also a number of brokers that allow Muslim clients to donate a percentage of their profit to charity.
What do we mean by Forex trading swap rates?
In the world of Forex trading, swap rates refer to overnight or rollover interest that can be earned or paid for holding positions open overnight. A swap or rollover fee is charged to a trader when a position is held open overnight. The charge for the swap is based on the current interest rates of both countries involved in the currency pair. Whether a position is long or short can also affect the swap rate. Whatever the currency pair, interest is payable on the currency being sold, and received on the currency being bought.
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Forex trading involves currency pairs, and there will always be the need to borrow one currency in order to buy another. It makes sense, therefore, to expect to have to pay interest on the loan. However, in Forex trading you get to enjoy the best of both worlds, as you also receive interest on the currency you are holding. It is very unlikely that both interest rates will be the same, so you become eligible for a net swap credit if the difference between the interest paid and the interest received is positive. Alternatively, if the difference is negative, in that you are paying more interest than is received, you will have your account debited for the appropriate amount.
The beliefs of Islam and whether Forex trading fits in
There are many differing views as to whether followers of Islam are permitted to trade in foreign currencies in the Forex market; so much so that it has become a very controversial subject. It seems that the majority believe Forex trading is permitted only if it is spot trading, and there are no overnight swap or rollover charges. This includes interest that is hidden by being charged as a so-called commission.
We have done some extensive reading regarding the subject of Shariah law and Forex trading, and it seems that the problem lies with margin trading and hedging. We came across an informed article by a Dr. Mohammed Obaidullah, from the Universiti Tun Abdul Razak. It is extremely well written, and covers many aspects of Forex trading as well as providing references to the fundamentals of Islam. He states a very good case for Forex trading being legal for Muslims, providing there is no Riba involvement.
What options are available for Muslims who want to try Forex trading?
For followers of Islam, there are a number of options. There are a number of Forex brokers with swap-free accounts that also come with different names such as No Riba, Shariah, or Islamic accounts. The important thing for anyone with such religious beliefs is to analyse the issues for yourself and make your own mind up as to whether Forex trading is allowed. There are people, traders, brokers, and experts on both sides of the fence. Some say it’s allowed, and others say it’s forbidden; so you really have to make up your own mind.
If you come down on the side that says it’s OK and your religious beliefs can be accommodated, the next step is to find a Forex broker that can fulfil your needs. An important consideration is to find a broker that is regulated and respected in the industry. A broker offering Islamic accounts will have a different pricing structure and set of restrictions when compared with other types of broker.
The important thing is that the introduction of Islamic or swap-free accounts has meant that more people can get enjoyment and make a profit from Forex trading. But why has Forex trading become a popular form of investment all over the world?
Forex trading has become so popular for the following reasons:
- The hours of trading are more flexible than in any other financial market.
- Forex trading provides traders with some of the best risk/reward opportunities.
- The Forex market has a high level of liquidity, as it has such a large trading volume.
- The cost of starting this form of investment is very small – both in terms of time and money.
- It is impossible for anyone to corner the market.
- It is possible to earn a steady income from just rollovers and swaps, unless it is contrary to your religious beliefs.
- Traders are able to take advantage of the smallest changes in the rates of currency exchange by using leverage.
- Demo accounts are readily available to help newcomers find their way around, without risking any real money.
- Traders are able to make use of analysis, news, and charts to help with trading decisions.
The world of Forex trading is ever-changing, and every day new ways of trading are introduced to cater to the needs of such a wide audience. The number of Forex brokers offering swap-free accounts is also increasing on an almost daily basis. Whatever your beliefs, needs or requirements there is always going to be a Forex broker that will be able to offer the right kind of service for you.
