Islamic Accounts Add Interest to Forex Brokers

Islamic Accounts Add Interest to Forex Brokers

Islamic Accounts Add Interest to Forex Brokers? Sharia laws prohibit acceptance of specific interest or fees for loans of money (known as riba, or usury), whether the payment is fixed or floating.

As of 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles. As of 2014, sharia compliant financial institutions represented approximately 1% of total world assets totaling close to $2 trillion in funds. Not all Muslims follow Sharia laws. According to accounting firm, Ernst & Young, Islamic Banking makes up only a fraction of the banking assets of Muslims, but it has been growing at an annual rate of 17.6% between 2009 and 2013, faster than banking assets as a whole and it is projected to grow by an average of 19.7% a year up until 2018.

Islamic banking is able to make money by keeping within Sharia frameworks. Unlike conventional banking, Islam forbids simply lending out money at interest, so specific Islamic rules have been created on transactions in order to prevent this from happening. The basic principle of Islamic banking is based on risk-sharing which is a component of trade rather than risk-transfer which is seen in conventional banking. As such Islamic banking employs concepts such as profit sharing, safekeeping , joint venture, cost plus and leasing.

Islamic Brokerage Accounts

Under normal trading conditions, trades in commodities and currencies are executed in the spot market for 24 hours. At 5:00 pm New York time, all open positions are rolled over for the next 24 hours and the daily interest is added to the company’s accounts every 24 hours. The brokerage company can then either pay the interest or charge the client’s account to cover what is considered rollover fees. For traders who hold positions overnight, rollovers can have a significant impact on an account’s bottom line.

In an Islamic account, things are different. Since there is no interest (Riba) in any form throughout the duration of the Islamic account contract, any open trades at the end of the trading day that are automatically rolled over pose a problem for those following Islamic law as this type of transaction is considered usury. So rollovers in a conventional form are simply not allowed.

Sharia laws prohibit acceptance of specific interest or fees for loans of money

Over the years, Islamic rules have been tweaked slightly so as to allow Muslims to participate in currency markets without violating sharia law. Most brokers now offer Non-Swap accounts which can be used under certain conditions that allow traders to either trade as much as their money permits, or take a loan from broker on the condition that the broker doesn’t receive any usurious interest on the loan. In most cases, there is no interest or commission taken on contracts lasting longer than 24 hours and zero rollover interest is a constant.

Revenues Come from Spreads

So how does a broker make any money on Islamic accounts?

A broker’s revenues come strictly from the trade spreads which is the difference between the Ask and the Bid prices of a currency pair. Many brokers that offer swap-free accounts will either raise the spreads on these accounts or require an additional commission or fee, so at the end of the day, it is like paying for interest incurred on overnight positions but often at a higher rate. Other trading brokers offer the Islamic account with no commission or additional fee and maintain the same spread as in its swap accounts.

There are also some brokers that offer additional perks for swap-free accounts in the form of Hibah. Hibah are gifts or donations awarded voluntarily, therefore the broker enables its Muslim clients to donate a share of their profit for charity.

With the Muslim trading community expanding, brokerage houses are doing their best to accommodate Islamic trading accounts. Not all brokers have jumped on the bandwagon just yet but if they wish to stay competitive they will have to add this feature to their offerings.

One Response to “Islamic Accounts Add Interest to Forex Brokers”

  1. these days almost all forex brokers offer Islamic account

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