Understanding the theory and practice of Islamic forex trading

In the Islamic religion, the objective of the religious law, or the Shari’a is the happiness and satisfaction of people in this life and in the afterlife.  These laws govern all aspects of the lives of observant Muslims including, of course, finance.  The basis of the laws of business and finance is evenly distributed justice, aiming to improve the lives of all who are part of the Islamic community.  This idea of business aiming for mutual benefit between parties, is especially evident in the law prohibiting interest.

Interest is said to put too much of a burden on the borrower, and therefore not permitted.  The loaner should be giving from his own good will, to help another member of the community.  This is a very practical consideration in Forex trading considering most brokerage accounts are dependant on interest or swap fees to support the brokers.  Obviously, the brokerage firms that offer Forex Islam Accounts are still intent on making a profit, so they will find other ways of doing so, while complying with Islamic Shari’a (law).

Forex Islam Accounts are known also as Swap Free Accounts.  These special accounts are offered by many brokerage firms, some limiting the accounts to Muslims and some allowing everyone to avail themselves.  Swap Free accounts charge no swap or rollover fees on positions held overnight.  Most firms offering these Swap Free accounts, make up for those fees in other ways, some traders might even refer to this as Swap Free in disguise.

There are varying opinions in the Muslim community about the other controversial aspects of Forex trading.  Most Forex trading involves some significant risk, and there is a strong prohibition in Islamic Law against taking excessive risks.  The law refers to lack of clarity of price and the term Gharar which refers to this restriction, literally means trick so the intent of this law is to protect Muslims from exploitation.  Most traders enter into trades with their eyes wide open and would not consider Forex trading to be taking advantage so there is disagreement within the community about whether Forex trading, even with a Forex Islamic Account, falls into this restriction.

Those Muslims that understand the laws to accept Forex trading as long as it is interest free and rollover free,  will have Forex Islamic Accounts and use them in a permissible way according to their laws.  These types of accounts allow for Forex trading within the framework of Shari’a law.  Another possibility for what is called Halal trading or Forex trading that is allowed under Islamic law is to make sure to close all trades by the end of each day.  If a trader either does this manually or sets his computer to do so, the trader can eliminate the concern of interest being charged overnight. This is called spot transaction, meaning transactions done on the spot or close to immediately.  Spot trading where there is no speculation and interest is sanctioned under Islamic Law.

It seems that although there are concerns about Forex trading being Halal, or not, many Muslims have found a way to practice their religion and do Forex trading at the same time.