Best Swap Free Forex Islamic Account 2018

An Islamic or Swap free trading account is a trading account allowed by the Islamic Shariah principle where there is no interest applied for an overnight position. The Muslim population represents 25% of the Global population and online trading is favored by a huge chunk of the world’s Muslims. As such many brokers now offer Swap Free Islamic Accounts so Muslims can trade according to Shariah principle. FX Empire has ranked the leading brokers offering the best swap free Islamic Accounts.

What is a Swap Free (Islamic) Account in Forex?

An Islamic or Swap free trading account is a trading account allowed by the Islamic Shariah principle where there is no interest applied for an overnight position. This type of trading account is often referred to as Islamic account due to the Islamic Shariah principle which forbids Muslims from charging and paying interest on a loan. In addition because the forex market is a leveraged market, trading forex on leverage is technically a loan transaction between the Muslim trader and the forex broker. To better understand how swap free trading accounts work, let us examine the concept of a roll-over forex trade and how it can affect the trader.

In the forex market, currencies are always traded as a pair eg. EUR/USD, as it involves the buying or selling of one currency for another. For each currency, there is a prevailing market interest rate which can differ between the two currencies of the traded pair. If a forex trader enters into a market position and holds the position in the currency which has a higher interest rate than the other currency in the pair, there will an interest differential between the two currencies. Since the trader’s position is in the currency with the higher interest, this means that he will earn the interest differential once the position is carried over to the next trading cycle. This sort of trade where the focus of the trader is to earn on the interest differential is known as a “Carry Trade”.

The carry trade strategy was often used by forex traders before the 2008 global financial crisis where interest on currencies such as the Australian dollar were as high as 8% in comparison to the Japanese yen which had an interest rate as low as 0.1%. So if a forex trader’s position was on the Australian dollar, his trading account would earn this interest differential. But if the trader’s position was in the Japanese yen, his trading account would be debited by the same amount of interest earned if the position was in the Australian dollar. This happens at the end of every trading day when the position is rolled over to the next trading day.

Given the fact that a Muslim trader is forbidden by his religion to charge or earn interest, how can he trade the forex market without breaking the Islamic Shariah principle on interest payment/charges?  Well, the solution to this dilemma is to trade the forex market with a swap free trading account.

So how does a swap free trading account work? Normally for overnight positions, the forex broker will retain a portion of the interest swap as handling charges. In the case of the swap free account, the broker instead of taking a portion of the rollover interest swap, charges a fixed commission against the trader’s account balance. Alternatively, the broker may just widen the spreads more on such trades. Just before the rollover, the trader’s position is closed and then reopened once the rollover periods is completed. In this manner, the trader will not be charged any interest or get to earn any interest on his trade. Since no swaps were involved, this type of trading accounts is called a swap free account.

Is it Halal or Haram for Muslims to trade forex?

As more and more people start to participate in retail forex trading and it becomes more popular, many Muslims are asking if it is “haram” (forbidden) or “halal” (permissible) for them to participate in forex trading. As the Muslim population represents a quarter of the world’s population and a sizeable market, many forex brokers are beginning to realize the importance of clearing the air on this issue. There is a consensus that forex trading with swap free accounts is halal due to the fact that there is no interest applied, and commerce and trading has always been an activity that has been encouraged by Islam.

The Muslim’s Way of Life

“Shariah” is an Arabic word which is literally translated to English to mean “the way”. In the context of Islam, it is taken to mean God’s divine law and is compulsory for every Muslim to follow. Taken from the main doctrines found in the Muslim’s holy book, the Quran, and from the Hadiths, the wise sayings and teachings of Prophet Muhammad, Shariah laws represent a way of life which every Muslim aspires to follow.  These laws cover all aspects of how a Muslim should live and governs how a Muslim should conduct himself in society and in commerce.

Shariah Law No Riba Principle

In Islam, interest or “Riba” is strictly prohibited and is regarded as a major sin. In Islam, a Muslim has always been encouraged to be selfless and be generous and make sacrifices to those who are less fortunate than them in life. For example, if a person in need was to approach a Muslim for loan, the Muslim is obliged to provide the loan without charging any interest on the loan.

As you can see, the Islamic way of life is completely different to the modern way of life where personal benefits and self interest reign. The differences also extend to the modern banking system and the Islamic banking system. In Islamic banking, there is interest involved and banking transactions are conducted using 2 types of arrangements known as Mudharabah and Musharakah.

The Mudharabah Arrangement

A Mudharabah banking arrangement is a mutually beneficial arrangement which doesn’t involve the imposition of interest in the transaction. Essentially, both the depositor (investor) and a bank enters into a profit sharing arrangement where the profit from the transaction is shared based on a mutually agreed formula. As this form of arrangement is regarded as a partnership, the investor is also liable for a portion of the losses should the investment transaction fail. In short, the Mudharabah banking arrangement permits Muslims to loan out their money for a share of the profits in a similar fashion to where conventional banks pays out interest to depositors. So what a Mudharabah banking arrangement does is to extend the concept of an ordinary business partnership to cover the relationship between the depositor and the bank.

Musharakah Arrangement

With the Musharakah arrangement, the bank enters into a business relationship with an individual who is regarded as the investor. Under this arrangement, profits are divided based on the capital contribution. The profit which the bank earns from the venture is essentially the “interest” that a conventional bank would have earned by making a loan to an investor. The Musharakah arrangement is normally used when an individual wishes to take a mortgage for the purchase of a property. For mortgages under the Musharakah arrangement, the property is actually purchased by the bank in return for a share of the rent that the property would earn from the occupier of the property. The Musharakah arrangement works just like a normal mortgage arrangement where all the terms and conditions between the parties are clearly defined. Once the buyer has fully paid up his loan, the arrangement between the buyer and the bank will end.

Permissibility of Islamic account

As retail forex becomes more popular over the years, it has triggered a debate among Islamic scholars as to whether it is permissible for Muslims to participate in it. The availability of swap free trading accounts means that Muslim traders can still participate in forex trading while fulfilling their religious obligations at the same time.

Which brokers offer Islamic trading account?

As mentioned earlier, there is a sizeable market among the Muslim populace for forex brokers to tap into. As such, most forex brokers nowadays are beginning to offer swap free accounts as part of their product offerings to Muslim traders. While swap free accounts operate without rollover interest being applied to it, traders trading with a swap free account also have full access to the range of products which normal trading accounts have access to. It is important that when looking for brokers with Brokers with Swap Free/Islamic accounts that you check if they meet the following criteria:

  • Full access to all assets that are available for trading
  • Leverage offered by the broker operates on the “Hiba” policy (this means the broker “donates” in charitable manner when “loaning” the money for traders to trade on leverage).
  • No Interest for overnight positions
  • No hidden fees
  • All positions are closed by the end of the trading at 23:59:59.

Conclusion

Now that we understand that an Islamic or Swap free trading account is a trading account allowed by the Islamic Shariah principle where there is no interest applied for an overnight position, Islamic traders can benefit from online trading. In order to assist Islamic traders in finding the best brokers for them to trade with, FX Empire has ranked the leading brokers offering the best swap free Islamic Accounts.

Top Brokers
// Top Brokers By Bonus Type

List of Brokers

BROKERUSER RATINGREGULATED BYHEADQUARTERSMIN. DEPOSITOFFICIAL SITE
Plus500
ASiC, CySEC, FCAIsrael$100Open Account
CFD Service. 80.6% lose money
AvaTrade
ASiC, BVI, FSA(JP), FSB, MiFIDIreland$100Open Account
Your capital is at risk
eToro
CySEC, FCACyprus$50Open Account
Your capital is at risk
Markets.com
CySEC, FSBCyprus$100Open Account
CFDs carry risk. 73% of traders lose
FXCM
BaFin, FCAUnited Kingdom$300Open Account
Your capital is at risk