Islamic laws or Shar”ah does not allow Muslims to trade Forex or any other financial market in the way that a non Muslim does. According to Islamic law, one is not allowed to give or receive interest payments on any of their transactions.
If you have spent any time trading the foreign exchange market, you probably know by now that there are many different aspects to the market that you learn as you go along. One such unique Forex characteristic is an Islamic Forex account and the resulting industry of Islamic Forex brokers.
Now, you are probably thinking: “Wait, Islam is a religion, what could a religion possibly have to do with the Forex market?” The answer is simple. Islamic laws or Shar”ah does not allow Muslims to trade Forex or any other financial market in the way that a non Muslim does.
The main difference between a standard Forex broker/account and an Islamic Forex account and the service offered by Islamic Forex brokers is the interest involved in trading. According to Islamic law, one is not allowed to give or receive interest payments on any of their transactions.
In Forex, there is interest in many steps along the way. For example, when leaving your positions open overnight, there are what is called rollover fees, which are basically interest payments for not closing your trades at the end of the day. In Islamic Forex account, there are no rollover fees.
However, it is not that simple, because if it was, everyone would open an account with an Islamic Forex broker. There are of course some minuses to Islamic Forex trading. These disadvantages sometimes show their face in the form of higher commissions, stricter rules or in a variety of other ways.
The Islamic Forex community enforces the strict observance of Islamic law by making sure that every Islamic financial institution appoints an independent religious advisory council, that will guide the organization’s business practices and transactions.
The members of the council are authorized to issue fatawah, or religious rulings, regarding the institution’s practices. They are therefore generally experts of both Islam and economics, with experience in banking and finance.
In the Forex broker industry, there are countless Islamic Forex brokers as well as regular Forex brokers who offer their customers the ability to open an Islamic Forex account.