How Do Forex Islamic Accounts Work?

If you are a Muslim and wish to trade on the Forex market, there are plenty of options available to you. Most practicing Muslims often try to avoid the Forex market due to the interest rates. However, many brokers that deal in Forex accounts and binary options have begun to provide their customers with the option of opening Islamic accounts. In order to understand how Islamic forex accounts work, you need to develop a sound understanding of the Sharia law, which is the law followed by most practicing Muslims.

The Sharia law provides detailed guidance about different parts of life, and has a whole section pertaining to banking and finance. According to the teachings of the law, a Muslim is prohibited from accepting interest or any loan fee in monetary or other form, whether the payment is floating or a fixed amount. In Islam, this is known as riba or usury.

As of today, there are more than 1.6 billion Muslims in the world. By 2009, more than 300 banks and 250 mutual funds across the globe were using the Sharia law. Just last year, that figure rose to represent around 1% of the total world assets, equaling an amount of just around $2 trillion in funds. It is important to note that not every Muslim practices Sharia law firmly. According to Ernst and Young, only a small percentage of Muslims follow the law. However, Islamic banking has grown considerably in the past few years (at a rate of 17.6% annually between 2009 and 2013). If projections are to be believed, Islamic banking will grow at an accelerated rate of around 19.7% per year until 2018.

Now, under standard trading conditions, all currency trades are executed within 24 hours in the spot market. At 5:00 PM New York Time, all positions that are left open are rolled over to the next 24 hours. Daily interest is calculated and added to the company’s accounts every day. The brokerage firm has the option to pay the interest or charge it on the client’s account. This is often added to your account as a “rollover fee.”

There are plenty of traders who hold positions overnight. As a result, rollover fees can have a huge impact on their final account balance. However, things are different in Islamic accounts. For starters, no interest is charged for as long as the Islamic account remains open. But then, this poses a problem for any open trades that are rolled over at the end of the day. This would be known as usury in the Islamic world, which is why conventional rollovers are strictly prohibited in Islamic accounts.

This leaves us with one question: how does a broker make money out of the account? Simply put, the broker generates money from the trade spreads. Essentially, this is the difference between the Ask and the Bid prices of any pair of currencies. Most brokers who provide Islamic accounts often increase the spread in order to recover their amounts.
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