A Complete Guide to Islamic Trading Accounts

When I began trading in the early 2000s, all brokers charged interest on Forex and commodity accounts, which is forbidden under Islamic financial principles. Fast-forward a couple of decades, and today, brokers worldwide offer “Islamic trading accounts” with access to a full range of Forex pairs and commodities without charging interest.

This article examines Islamic trading accounts, how they work, the fees they charge, and how to apply for them.

Top Forex Brokers

1

Get Started 74% of retail CFD accounts lose money Read Review

What Is an Islamic Trading Account? 

To understand how Islamic trading accounts work, I’ll first examine how interest or “swap” payments work in a non-Islamic Forex account and then compare it to Islamic accounts.

What Is a Forex Swap? 

A swap is an interest payment made or received  in Forex trades.

Let’s take an example. If I enter a long position on GBP/USD, I will buy British Pounds and sell the equivalent amount in US Dollars.

Because I hold British Pounds, I receive interest on the GBP portion. (The broker usually bases the interest rate on the corresponding country’s central bank rate, in this case, the Bank of England’s interest rate.)

Let’s not forget I sold US Dollars when I went long GBP/USD. That means I must pay interest on the US Dollars I have sold.

The swap is the difference between the interest I receive in the long currency (GBP) and the interest I pay in the short currency (USD). If the long currency interest exceeds the short currency interest, it’s a positive swap, and I will receive a payment. If it is the reverse, it is a negative swap, and I will make a swap payment.

Brokers charge swaps once a day. The broker incurs the swap payment at a pre-set time each day, usually around 6 p.m. ET or 11 p.m. GMT. If I have a trade open during this time, there will be a credit or debit on my account (depending on whether it is a positive or negative swap).

Forex swaps are also called “rollover” or “carry” because I have “rolled over” or “carried” the trade from one day to the next.

Brokers do not charge swaps for trades not held during the swap charge time, e.g., for intraday trades.

Islamic Trading Accounts or “Swap-free” Accounts 

Islamic trading accounts are often called “swap-free” accounts because removing the swap charge makes the account Shariah-compliant or Halal.

In place of an interest-based swap, there are several models that the top Islamic brokers use:

1. The broker charges a fixed fee instead of a swap: The fixed charge is always paid by the client to the broker and never the other way around. It does not matter if the Forex pair normally has a positive or negative swap.
2. No swap for a limited period. For example, the broker will not apply a swap or other charges for up to 5 trading days. If a trade remains open after 5 trading days, the broker will apply the swap or a separate fixed fee.
3. Wider spreads. Some brokers offer swap-free accounts but with wider spreads.

Islamic Forex Trading Principles 

The most applicable area of Islamic finance for Forex trading is the ban on interest. Let’s talk about why Islam prohibits interest.

In Islam, money is considered a “medium of exchange” rather than an actual asset. This is a crucial distinction because, under this principle, for money to change hands, there must be an underlying exchange of goods or services. When there is a charge for simply holding or giving money, i.e., interest, there is no exchange of goods or services. This is why interest, or “Riba,” is forbidden under Shariah-finance.

A fixed charge in place of a swap is seen as a Halal service cost, where the broker provides the client with the service of executing the trade.

What Can I Trade with an Islamic Account? 

Most Islamic account brokers allow clients to access the same markets from their Islamic accounts as their non-Islamic accounts. Depending on the broker, this usually includes:

• Forex majors, e.g., EURUSD, GBPUSD, USDJPY, AUDUSD, USDCAD, etc.
• Forex crosses, e.g., GBPJPY, EURGBP, CADJPY, AUDNZD, etc.
• Commodities, e.g., oil, natural gas, and precious metals such as gold and silver.
• Cryptocurrencies such as Bitcoin.
• Equity indices, e.g., S&P 500, NASDAQ, UK100 (or FTSE 100), etc.
• Individual stocks.

The availability of markets will vary from broker to broker.

There are some markets that not all Muslims see as Halal, regardless of whether the broker charges a swap. These could include cryptocurrency and some individual stocks in sectors such as banking, gambling, or alcohol production.

How to Start Halal Trading with an Islamic Forex Account? 

Here are some pointers to get started:

1. Regulation. The best regulated brokers have high-tier licenses. I highly recommend not using a broker covered by a weak regulator, no matter how attractive the terms or leverage.
2. Markets. Ensure the broker has available the markets you wish to trade in their Islamic accounts.
3. Costs. Are you comfortable with the way the broker charges for swap-free accounts?

How to Apply for an Islamic (Swap-free) Account? 

All the Islamic account brokers I have seen have account-opening procedures identical to their non-Islamic accounts. Usually, the process follows these steps:

1. Complete their online account opening procedure and send proof of identification and address documents.
2. Deposit funds once the broker confirms the account is open.
3. Download the trading platform to get started.

Brokers allow anyone, Muslim or not, to open Islamic or swap-free accounts.

Halal Trading Strategies 

There are plenty of Halal trading strategies across many markets that Muslim investors can consider. These include:

1. Intraday trading of Forex pairs.
2. Swing trading of Forex pairs so long as there is no swap or interest-based charge for overnight trades.
3. Buying stocks in companies involved in products and services that benefit society, e.g., transportation, medical devices and technology.
4. Trading commodities such as gold or oil, provided the broker does not charge a swap for overnight trades.
5. Dividend plays: buying stocks specifically for their dividend payouts. Profit sharing of this nature is considered Halal.

Islamic Accounts in MetaTrader 

MetaTrader is Forex’s most popular trading platform, and nearly every Forex broker offers MetaTrader 4 (MT4) or MetaTrader 5 (MT5) to their clients.

The best MT4 brokers allow clients to use MetaTrader for their Islamic trading accounts, but some brokers have a separate version of MetaTrader for Islamic accounts. This takes into account any pricing differences, spreads, or available markets.

Whether a broker uses the same or different MetaTrader download for Islamic accounts, the MetaTrader user experience and interface are identical. That is MetaTrader's key advantage—it is the same experience regardless of account type or broker.

Islamic Trading Account Commissions 

When a broker charges a commission instead of a swap:

1. It is usually a dollar amount per lot.
2. The amount will vary per currency pair.
3. The commission will remain the same regardless of whether the Forex pair has a positive or negative swap. In other words, the swap does not change the commission.
4. The commission can be as low as $5 per lot for majors such as EURUSD and as high as $70-80 for exotic pairs and crosses. Sometimes, high commissions make specific Forex pairs unviable to trade.

Islamic Trading Accounts—Pros & Cons 

Pros 

1. Many well-regulated and reputable brokers worldwide offer Shariah-compliant accounts.
2. Some brokers do not charge a fee to short-term traders who hold trades for less than 5 days in their swap-free accounts.
3. Traders can access Islamic trading accounts on the MetaTrader platform.
4. The costs and choice of Islamic trading accounts have reduced over the years as more brokers offer the service.

Cons 

1. Some brokers exclude specific markets, such as cryptocurrencies, from their Shariah-compliant accounts.
2. The high commissions on some Forex pairs in Shariah-compliant accounts can make them unviable to trade.

Bottom Line 

Today, the most reputable and well-regulated brokers offer cost-effective swap-free accounts for Forex and commodities. The commissions and costs are reasonable, although they can be high for specific Forex pairs, including some crosses and exotics. The wide choice of brokers offering Islamic trading accounts means every trader can find an option to suit their needs, including access to specific markets, reasonable fees in place of the interest-based swap, minimum account size, and regulation.