In this overview, we will discuss the specifics of Islamic accounts on Forex: what they are necessary for and what advantages and drawbacks they have.
Specifics of swap trading on Forex
A swap is an exchange (buy-sell) operation for various assets, where a direct exchange deal is accompanies by a reverse deal that implies returning the same assets after some set time on agreed conditions. A currency swap (overnight) is two deals in the opposite directions for the same currency but with different value setting dates.
In the Forex market, brokers normally charge/deposit a certain fee for transferring the position for the next day. A swap (rollover) on Forex implies depositing/withdrawing money (interest) for transferring an open position for the next day.
After the position gets transferred overnight, the rollover emerges from the difference in interest rates of different national currencies. The bigger this difference is inside the currency pair you choose, the bigger swaps are. Swaps can be either positive or negative.
What are Islamic Forex accounts
In Islam, usury, i.e. crediting on interest, is strictly forbidden as a grave sin. Hence, broker companies providing access to the currency market offer to their Muslim clients the so-called Islamic accounts on Forex.
In essence, those are swap-free accounts with no interests on them. As a rule, they latter ones are replaced by a fixed commission charged for transferring deals for the next day.
How Islamic accounts work on Forex
Instead of swaps for transferring positions for the next day, clients pay a fixed commission that only depends on certain currency pairs and open lots but not on the interest rates of issuing banks. The more days the trade remains open, the more money the trader will pay as the commission. The calculation formula for calculating the commission fee for transferring open positions for the next day looks as follows:
Commission = (Commission per lot) * (Number of lots)
The commission charged for transferring an open position for the next day differs from currency pair to pair. To see how much it will be, check the list of commission fees for rollovers on swap-free Islamic accounts offered by your broker.
Advantages and drawbacks of Islamic accounts
- Respectful attitude to religious clients and terms & conditions adapted for their needs;
- Possibly economic in the long run: the commission for transferring position overnight might be smaller than the negative swap.
- As a rule, not all account types and instruments offered by the broker are available for swap-free trading;
- There is no replacement for a positive swap, which makes it impossible to make money on transferring an open position for the next day.
Islamic accounts on Forex are a step towards Muslim clients that stick strictly to their religious beliefs. Thanks to replacing the unacceptable swaps by fixed commission fees, a lot of Muslim traders worldwide have the chance to trade on Forex violating no religious rules.