How do Forex Islamic Accounts Work?

Islamic thought has a unique approach to business and to understand how Forex Islamic Accounts work, it is helpful to understand this philosophy and the laws that result from this way of thinking.  Islamic business is based on a shared risk, not exploiting either the lender or the borrower.  The premise of the law against paying interest is that the lender should give out of the goodness of his heart and the borrower should not assume a large risk when borrowing.

The purpose of business under Islamic law is contributing to the good and the development of the community, not the acquisition of profit and property.   This belief is evident in the Sharia Laws that govern muslim traders which lead to the establishment of Forex Islamic Accounts by many of the major Forex brokerage firms.

Islamic law prohibits paying interest, excessive risk and gambling.  The excessive risk and gambling factors of Forex are very subjective and each Muslim can interpret the connection between them as he or she chooses because there is no objective resolution.  There is a board called “Shari’a Supervisory Board that monitors the Forex Islamic Accounts and will endorse products and services of brokerage firms sanctioning their use by Muslims.  This board is considered the authoritative way to decide if this type of trading is compliant with Islamic law.

The prohibitions against interest is much much clearer than the other restrictions when it comes to forex and therefore there are Forex Islamic Accounts that are in accordance with this law.   Forex Islamic Accounts are interest-free.  These accounts are also call “swap-free”.

Rollover fees are also prohibited under this law.  When a trade position is left open overnight it would normally generate Rollover fees, which are waived in a Forex Islamic Account.  Traders who often leave trades open overnight would benefit from using a Forex Islamic Account because they would save measurably on the fees for overnight trading.  This lack of rollover fees can really make a difference to traders who leave trades open even longer than one night allowing them to do that type of trading a no additional cost.

Traders with a Forex Islamic Account can hold their positions indefinitely without accruing interest but sometimes they will be charged a holding fee after a set period.  Some brokerages will check that traders opening these types of accounts are in fact Muslim and not doing so for speculation.  Others are open to anyone who chooses this type of account. There are lists online of which brokerages offer a Forex Islamic Account.

Although this might sound like a great alternative for non-muslims to trade in a less expensive way, that is not really the case.  These accounts make up their fees in other ways.  Often the minimum investment is significantly higher than a regular Forex account and they offer lower leverage.  Interest fees are often exchanged for other types of fees so that there is not usually a significant savings in using a Forex Islamic Account.