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
Advantages:
- 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.
Drawbacks:
- 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.
Summary
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.