One of the amazing aspects of the popularity of forex trading is that it has caught on across the globe, through all types of cultures, ethnic backgrounds, and religious affiliations. Being a “one-size-fits-all” forex broker, however, is not an easy task in this day and time. Not only must the broker have customer service representatives that speak many different languages, but they must also understand the nuances of various religious beliefs that call into question the actual practice of speculating, hence the establishment of Islamic forex brokers.

The Islamic faith is one of the major faiths of the world that stretches across all continents and nationalities, but religious clerics have toiled for long hours arguing whether the standard offering of most forex brokers is permitted by Shariah law. The two terms that appear most often in the literature on this topic are “Riba” and “Gharar”. A brief definition of each term from Internet sources reveals the following:

“Riba”, commonly thought to mean “interest”, is best described as a loan with the condition that the borrower will return to the lender more than and better than the quantity borrowed.  Riba is forbidden under Islamic law.

“Gharar” is an Islamic finance term describing a risky or hazardous sale, where details concerning the sale item are unknown or uncertain. Gharar is generally prohibited under Islam, which explicitly forbids trades that are considered to have excessive risk due to uncertainty.

Financial markets are driven by the time cost of money at every avenue, but forex brokers have learned that, in order to appeal to a wider audience of potential customers, the issues surrounding interest or “Riba” within the Islamic world must be addressed in some way. The result has been what is referred to as an Islamic, No-Riba, or Shariah forex account. The broker handles the delicate issue of covering their interest related costs by modifying the spreads offered on these accounts to provide the margin they need. There may also be additional fees or restrictions placed on these accounts to prevent abuse.

As a result, typical overnight interest-swap fees, other interest type charges, or commissions that appear like interest are not present. As traders know, they never have to worry about taking possession of foreign currency. They only speculate on a position and then on its possible direction going forward. The reason no real currency ever changes hands, as it typically would after a 24 to 48-hour cycle, is that a forex broker actually closes all accounts at midnight, and then quickly re-opens them.

The broker’s liquidity providers, typically banks, will charge a swap fee based upon the net-interest differential between the countries involved in the currency pair. These fees are waived on Islamic accounts, but there may be a restriction on how many nights the open position may exist. Once again, religious issues may dictate a different approach, but you can be assured that the broker will recover his costs through some mechanism.

Why is Gharar so important?

Forex brokers have obviously found an easy way around any concerns over the concept of interest, or “Riba”, that Muslims may have. The second term, however, that being “Gharar”, is not as easy to deal with or eliminate. All forex trading involves speculating in a volatile market where returns and outcomes are highly suspect. Islamic jurists have had the most difficulty with this concept, as a result.

Any dealing in the financial derivatives market will naturally touch upon “Gharar”, and for that reason, trading in forwards, futures, options, short selling, or speculation in general where doubt or uncertainty surrounds the future delivery value of an underlying asset, the true nature and definition of a derivative, is suspect.  For this reason, each of these items are forbidden by most interpretations of Shariah law, but trading on the “spot” market, however, is allowed, at least, once again, by the majority of jurists that opine on this issue.

What should an aspiring Islamic forex trader do?

There are many brokers featured in our top list above that offer Islamic, No-Riba, or Shariah accounts, but before making your choice, it would be prudent to study the issues presented here. Not everyone agrees with the points made in the above discussion, and you may not agree, as well, after a thorough review of the literature. The issues are not simple, but complex. One of the best papers on the topic that is often cited by experts was written by Dr. Mohammed Obaidullah.

After you have gained your own peace of mind that your religious beliefs can be accommodated in the forex world, it is time to search for a broker offering that appeals to you, is regulated, and well respected in your locale by authorities and, most of all, by other traders. Islamic accounts are unique and may not be for everyone, due to their restrictions and different pricing modalities, but they offer a way to trade currencies for those Muslims that accept the religious complexities.

The accounts, however, do have restrictions that other accounts do not have. Why are there restrictions? Unfortunately, unscrupulous traders have attempted to use combinations of Islamic and regular accounts to take advantage of the pricing differences employed by the brokers at hand. Brokers are on the lookout for this type of activity and will shut an account down immediately, if they suspect foul play.

Concluding Remarks

Shariah law embodies the Islamic principles that Muslims are expected to follow in their daily lives. When it comes to investing and financial matters, interest is forbidden and speculation risk is only tolerated under certain specific conditions. Islamists that are considering active trading of foreign exchange are advised to research the material on forex trading and determine for themselves if this activity is deemed permissible by their interpretations of their own religious standards. After this internal review is completed, the best place to start looking for various Islamic account offerings is among the brokers we listed above.