Haram or halal? Forbidden or permitted by Islamic law? The forex market is an exciting one and offers many possibilities to investors, but its’ also important for Muslims to know where forex trading and forex accounts stand in relation to Shariah – Islamic law. Islam is favorable towards trade and commerce because they can improve life for all. On the other hand, Islamic law stipulates that trade and commerce also need to be conducted appropriately. Among other things, interest (“Riba”) charged or paid on money, loans or debts is haram – it is forbidden by Islamic law. What is the consequence of Riba for forex accounts? It depends on how you want to trade on the forex market. If you make short term trades where you open and close positions within one trading day, then your profit is determined by the price at which you opened compared to the price at which you closed. However, if you make longer term trades that last more than one trading day, then there is an effect of “roll-over” that must be taken into account. What happens overnight is that your broker (whichever organization you have chosen as your point of access to the forex market) will compare the central bank interest rates for the two currencies concerned in your open trading position. The difference in the two currency rates is then considered by the broker to be positive or negative interest to you.
A simple example of roll-over leading to Riba (forbidden interest payments) is the following. Suppose you have exchanged Euros for US dollars, and the “Fed” in the US has set the official interest rate for the US dollar at 2.5%, whereas for Europe, the rate for the euro is at 2.1%. As you are holding US dollars in your open position, the net interest rate is 2.5 – 2.1% or 0.4% positive interest to you. How brokers deal with this roll-over interest varies. Some brokers do not pay positive interest to traders, but do charge traders for any interest that is negative. Other brokers both pay out positive interest and charge for negative interest. However, whether it’s positive or negative interest, it’s still Riba.
Islamic forex accounts handle the situation differently. Islamic brokers and banks, or those organizations with an Islamic “window” (investment services for Muslims) do not pay or charge for this interest. This already resolves one issue. As a Muslim, you don’t have the problem of figuring out what to do with such additional, but haram income. Depending on the broker, the interest payment if it is positive may also be disposed of in a way that is approved by Shariah. That typically means making the interest payment into a donation (“Hibah”) to be made to a Muslim approved charity. Brokers may place restrictions on the usage of Islamic forex accounts, because the worldwide forex market is still based on a system involving overnight roll-over interest. For example, to avoid having to absorb too much in the way of interest charges, brokers may for example limit the total number of days (and therefore nights) that a position can remain open.
Islamic forex accounts may be available to both Muslims and non-Muslims (there are also non-Muslim investors who support the Islamic principles of trade and commerce). However, the broker may suspend the account if it is found that a trader is deliberately using it to avoid paying interest charges that would otherwise be due. Otherwise, when an Islamic forex account is used according to Shariah, then the account and the trading should function normally and in the spirit of trade and commerce as described in Islam.
Risk Warning: Forex, Commodities, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you fully understand the risks involved and do not invest money you cannot afford to lose. Please refer to our full Risk Disclosure.