We can see that all financial markets are setting new records when it comes to trading volume and daily turnover over the past few years. The rise in the number of market participants is a result of technological advancement as everyone can kickstart their trading journey with ease. The growing popularity of online trading is very evident as people from all parts of the world are actively joining the trading community. This community consists of individuals from different countries and cultural backgrounds.
There is a lot of diversity and traders belong to religious communities that want to navigate the markets in a way that does not contradict their religious values and beliefs. Islam is the 2nd largest religious population in the world and Muslims have to abide by the rules of Islamic finance and Sharia law while engaging in any financial activity. This also includes trading and the purpose of Islamic trading accounts is to promote financial inclusion as the trading conditions are modified to match the morality and ethics of Islam.
There are a lot of brokers that are offering this account type to function as a halal trading platform for believers of Islam. In this blog, we will have a close look at the functioning of Islamic accounts and their unique features.
Intricacies of Sharia-Compliant Trading & Investing
As per the Sharia law, there should be fairness and transparency in all your financial dealings and anything that breaks the rule is considered to be Haram (prohibited). For example, you cannot speculate on something that you don’t own and that means a Muslim person should not be trading futures & options. The act of paying or receiving interest (riba) is considered to be unethical and a means of financial exploitation in Islamic finance.
Thus, you cannot trade or invest in any asset that is subject to interest charges. Examples are bonds and overnight positions opened in the forex market as the swap or rollover fee is based on the interest rate differential between the currencies in a pair. Taking excess risk in trading is also not encouraged in Islamic finance and the risk and reward have to be shared equally without any bias.
It would be hard to use a regular or standard account for halal trading especially when you want to trade forex. Islamic trading accounts were introduced as a solution as they incorporate special features that allow you to engage in Sharia-compliant trading with ease.
Islamic Trading Accounts
Islamic trading accounts are not available on all trading platforms but you can find quite a few forex & CFD brokers that are offering this option to their clients. Islamic trading accounts are also known as interest-free accounts or swap-free accounts as the primary feature of this account type is the removal of riba (swap) from all trading activities. Different brokers have different methods for modifying the trading conditions in a way that you get to trade all the available instruments without the incidence of a swap or rollover fee.
If you want to know how the swap calculations are done, you can use a swap calculator which is offered as a part of the free online trading tool on the brokers’ platform. You just have to choose the currency pair being traded, base currency of account and enter the trade size in lots along with the number of days for which the trade will be kept open. Then, the swap calculator will determine swap fees for both long and short trade positions.
The following features are offered in Islamic accounts allowing you to access the market in a halal trading environment.
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Interest-Free Trading
As I said earlier, the element of interest is eliminated from the trades that are placed on an Islamic account. You can keep the trades running for an extended duration without any rollover. However, the broker may charge an admin fee or compensate for the loss of the swap fee by adding a markup on the spreads or commission because swap is the cost of keeping a trade position open in the market.
However, this will be a flat rate which changes depending on the instrument you are trading. This fee is permissible and you can freely trade while complying with the Sharia law. Other instruments like bonds that will always carry an interest will not be offered in Islamic accounts.
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Fair Sharing Of Risk and Rewards
Islamic finance instils and promotes fair chances for all and as per the Sharia law, one should get an unfair advantage over the other in any scenario. Since there is no interest involved, Islamic trading accounts adhere to the rule that the risk and rewards have to be shared equally between both parties. This is another feature that is essential for halal trading.
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Immediate Trade Settlement
The majority of trading activities in forex happen in the spot market. This means that orders you place on the platform will be executed without any delay and there will be immediate trade settlement. Instruments like forex futures are not available for trading on Islamic accounts and thus you can feel at ease and trade halal assets. This does not mean that you have to close your trades on the very same day. The immediate settlement is just about not entering into a contract that is set for execution on a future date.
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Removes Risky Assets
Islamic finance also talks about Gharar which means the uncertainty or risk in trading. You cannot speculate on an asset or instrument that falls into the high-risk category. In the case of forex instruments, exotic pairs are very risky as they are extremely volatile and lack liquidity. Such risky assets will not be available for trading on Islamic accounts. Some brokers may even restrict the amount of leverage you can use for trading in Islamic accounts as margin trading increases your risk exposure.
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Transparent Fees
Islamic finance is strict about transparency in transactions and dealings. Hence, Islamic accounts clearly state all the costs associated with halal trading allowing you to make an informed decision. The spreads, commission and admin fee will be mentioned already and this transparent pricing is essential to engage in Halal trading. Thus, there will be no hidden costs as you already know the spreads, commission and admin fees that have to be paid for executing the trades and keeping the trades open for longer duration.
Bottom Line
In the end, the features and functioning of Islamic accounts make the trading process easier for those who want to hold on to their religious beliefs while trying to make profits from the price fluctuations in financial markets. But you should also learn about halal trading in detail to find a strategy that aligns with your principles and values as a Muslim. Risk management has to be prioritised as risk-taking behaviours are prohibited in Islam.
You should not enter any trade without in-depth analysis and calculation. If you have any doubts about the possibilities of Halal trading, you can talk to an Islamic finance expert or scholar to get more clarity about the subject. That’s how you can master Halal trading.
