One of the best features of the forex market is its accessibility. People from all over the world, irrespective of their status or financial income, can engage in trading. All of this is possible because of forex brokers. It is a fact that they have revolutionised trading. With a minimum deposit requirement of as little as $5, traders are no longer barred from stepping into any financial market and achieving their goals.

By always going the extra mile for their customers, forex brokers ensure they provide the best services in the market. One such leap is offering Islamic Forex Accounts to customers. Often, Muslim traders avoid joining the forex market because it doesn’t comply with their religious sentiments. Their reluctance is because of brokers’ interest/overnight fees, which they believe is haram.

Therefore, brokers have come up with an Islamic Forex Account or swap-free account. This is a halal account for Muslim traders, as they are exempt from paying/receiving interest rates. Traders also get additional benefits, though there are some limitations. – which we will cover in this article. After the end of this article, you will have all your questions related to Islamic forex accounts answered.

What Is An Islamic Forex Account?

Islamic Forex accounts are a type of forex trading account that operates on the principles of Sharia law. This religious law stops Muslims from paying or receiving interest (riba).
Created to cater to the needs of Muslim traders, Islamic Forex Accounts allow Muslim traders to engage in the forex market freely without worrying about Islamic finance principles. Generally, these accounts offer Islamic alternative methods or models to offer their services to traders. These include profit-sharing arrangements or commission-based structures to ensure compliance with Sharia law.

If you open an Islamic Forex account, you don’t have to earn or pay interest on overnight positions. Hence, these accounts are safe for traders seeking interest-free trading options. In addition to Forex, some brokers offer Islamic accounts for other financial instruments like stocks, indices, and commodities.

What is a Swap-free Account?

Swap-free accounts are another name for Islamic forex accounts. As the name clearly suggests, traders who open Swap-free forex accounts are exempt from overnight charges. Hence, they adhere to all the guiding principles laid out under Sharia Law, giving Muslim traders a stress-free trading experience.

Why Does Sharia Law Forbid Swap?

Swap is prohibited in forex trading under Sharia law for multiple reasons. The first reason is that Sharia law strictly prohibits the involvement of interest (riba) in financial transactions. Since a swap involves the payment or receipt of interest based on the interest rate differential between currencies, Muslims consider it a riba, which is forbidden in Islamic finance. Additionally, swaps are seen as exploitative and unfair, contrary to the principles of fairness and avoiding exploitation in Islamic finance.
Another reason why Sharia Law is against swapping is that it does not align with the risk-sharing principle emphasised in Islamic finance. And it does not genuinely distribute risks and rewards. Thus, so that Muslim traders can engage in trading by adhering to their religious principles, Islamic forex accounts, also known as swap-free accounts, have been created.

Is there any Forex Fatwa by Muslim Scholars?

Islamic scholars play a pivotal role in issuing Fatwas. They offer legal opinions and guidance on the permissibility of Forex trading within the framework of Islamic law. Determining the permissibility of Forex trading under Sharia law involves looking for various factors so you do not break any rules. These factors include avoiding prohibited elements such as interest (riba) and speculation (gharar).

Notably, some scholars emphasise the significance of immediate settlement and physical possession of currencies in Forex trading to ensure compliance with Islamic principles. The application of modern Forex trading practices within the context of Islamic finance principles remains an ongoing topic of scholarly discourse, resulting in diverse opinions on the subject matter.

Fatwas related to Forex trading also examines issues like leverage, margin trading, and the utilisation of automated trading systems from an Islamic perspective, aiming to provide comprehensive guidance in line with Islamic teachings.

Why are there rollover fees?

Now, you might be wondering, “Why do forex brokers charge rollover fees?” Here are some of the reasons that substantiate their stance.

  • Interest Differential

Rollover fees are fees that are charged or earned based on the difference in interest rates between the currencies in a currency pair. These fees are applicable when you hold a position overnight, as you essentially borrow one currency to buy another. The rollover fee compensates for the potential interest that would have been earned or paid if the position was held until the next trading day. If you want to know how the swap is charged, create an account on the MT4 or MT5 trading platform, depending upon which platform you are most comfortable with, and leave the trades open overnight. You will get to see whether you have been charged with a positive or negative swap.

  • Financing ChargeRollover fees, also known as financing charges or swap rates, are applied when traders close open positions for the current value date and open the same positions for the next day’s value date. These fees reflect the cost of financing the positions overnight.
  • Compensation for BrokersForex brokers charge rollover fees as a means of generating revenue. These fees serve as compensation for the brokers for facilitating the rollover process and managing the interest rate differentials between currency pairs.
  • Market LiquidityRollover fees are influenced by market liquidity conditions. In instances where a currency pair has low liquidity or significant events impact interest rates, the rollover fees may be higher. This adjustment reflects the increased risk and potential costs for the broker.
  • Weekends and HolidaysRollover fees are typically not applied to intraday trades, as they specifically pertain to overnight positions. If the rollover date falls on a weekend or a market holiday, the rollover fee may be adjusted to account for the non-trading period.

What is a No-riba Account?

Unlike other trading accounts, Islamic accounts have many names. Some traders prefer to call them swap-free accounts; others call them no-riba accounts. Regardless of the alias, these accounts are created for the same audience: Muslim traders seeking trading accounts that adhere to their religious guidelines.  Here are the features of the No-Riba account.

  1. Prohibition of Interest: In a no riba account, the account holder does not earn or pay interest on deposits or transactions, aligning with Islamic law.
  2. Profit and Loss Sharing: Rather than levying an interest, these accounts may offer profit and loss sharing. This means the account holder and the financial institution share in the investment outcomes.
  3. Ethical Investment Criteria: The best thing about no-riba accounts is that they adhere to ethical guidelines. Hence, it avoids industries deemed non-compliant with Islamic principles.
  4. Compliance With Sharia Law: These accounts are designed to comply with Sharia Law and are overseen by Islamic scholars and regulatory bodies for adherence.
  5. Limited Availability: No-riba accounts may have limited availability compared to conventional accounts. They may be operating through specific Islamic financial institutions or banks catering to the demand for Islamic finance. Hence, some brokers verify whether you are a Muslim before opening a Forex account.

Does Hiba in Forex Make It Sharia-friendly?

Hiba refers to a voluntary gift or donation without expecting anything in return. Some Forex brokers offer Hiba as a gesture to comply with Islamic principles, which allows traders to donate a portion of their profits to charitable causes.The permissibility of Hiba in Forex trading is a topic of debate among scholars, as opinions vary regarding the appropriateness of such arrangements within the context of Islamic finance. Hiba may be considered a way to align Forex trading with the principles of charity (sadaqah) and sharing wealth (zakat), as encouraged in Islam. However, in reality, the acceptance and practice of Hiba in Forex trading may vary among Islamic financial institutions and individual scholars.

Final Thoughts

One thing that prevents Muslim traders from trying out forex trading is whether it works in accordance with Islamic principles. Brokers charge interest and overnight charges for multiple reasons. Participating in interest, whether paying or receiving, is against Sharia Law. Hence, many Muslim traders avoid trading at all. However, brokers have come up with a solution: an Islamic forex account.

These trading accounts remove all the hindrances that prevent traders from engaging in the forex market. From swap frees to any other charges, Muslim traders can trade like any other forex trader. We have comprehensively talked about swap-free accounts, another name for Forex Islamic accounts, and no-Riba accounts. We hope that we have addressed all your doubts. If you are still confused about the swap fee, try trading on a demo account to get an idea of how the swap fee is charged for overnight trades. Otherwise, begin with opening an Islamic account after checking all the trading conditions offered by your broker. We also recommend doing your research and trying out a demo account to get a risk-free trading experience. Wish you all the best for your trading!