Swap Free Islamic Forex Brokers
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ASIC (Australia) license №443670 IFSC (Belize) license №000261/158 CySEC (Cyprus) license №120/10
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ASIC (Australia) license №No.406684, CBI (Ireland) license №No.C53877, FSA (Japan) license №No.1662, FFAJ (Japan) license №No.1574, ISA (Israel) license №514666577, FSCA (South Africa) №45984, B.V.I. FSC № SIBA/L/13/1049
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RoboForex Ltd has a special brokerage license IFSC Belize "Trading in financial and commodity-based derivative instruments and other securities" under the number 000138/210.
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IFSC (Belize) license №IFSC/60/301/TS/17 NAFD (Russia) FSA (Saint Vincent and the Grenadines) license №20389 IBC 2012 AFD (Russia)
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Services Authority of Saint Vincent and the Grenadines registered number 20623 IBC 2012
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Financial Services Commission (FSC) BVI, license registration number: SIBA/L/13/1063
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FCA - 186171; CYSEC - № 259/14; CIMA - 1442313. DFCA - F000048; Saint Vincent and the Grenadines - 25228 (IBC 2018)
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FSA - SD025, CBCS - 0003LSI, FSC - SIBA/L/20/1133, FSC - GB20025294, FSCA - 51024, CySEC - 178/12, FCA - 730729
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Forex trading is very popular. Presently the daily forex trading volume is more than $4 trillion. Muslims comprise more than 25% of the world’s population and Islam is the second-largest religion. Yet, Muslims are effectively shut out of most forex markets because certain features of forex trading are forbidden by Sharia law. Now there are Islamic forex brokers who offer accounts that comply with Sharia law.
Why are Swaps forbidden by Sharia law?
Sharia law forbids the charging or earning of interest. Swap is the interest earned or paid where a forex position is held open overnight or longer. The swap (interest) fee is negative (paid by the trader) or positive (earned by the trader), depending on the difference in the central bank interest rates of the countries whose currencies are being traded.
Forex trades are multi-national transactions involving a pair of currencies. He has to effectively buy or borrow the currencies to facilitate his trade. The currency pair consists of a “base” currency and a “variable” currency.
For example, suppose a trader wants to trade a EUR/USD position and buy Euros (EUR) and use US Dollars (USD) to pay for them. EUR is the “base” currency and USD is the “variable” currency. The trade is expressed as “EUR/USD”.
Swap fees are relevant only where the trader rolls over (keeps open) his position to another day, and only where a forex trade is leveraged. That’s because the broker is loaning to the trader (carrying) a portion of his investment for more than a day.
In a swap-free trade, the buy and sell theoretically happen at the same time, so there is no carrying cost. A trader who does not hold over their position overnight or the trader who does not leverage their trade need not be concerned with swaps.
However, a customary forex trader can hold his position open (“rollover” or “carry”) overnight or longer. The rollover period most often begins at 5 pm in the broker’s time zone. While a trader holds open or rolls over the position, the currencies cannot be traded by someone else. Somebody has to pay for the use of the currency. That is tantamount to interest.
The “carrying” cost of a rollover is a factor of the difference between the respective central bank interest rates applicable to the pair of currencies traded. A positive rollover occurs when a trader buys a currency that has a higher central bank rate than the currency he is selling. A negative rollover occurs when a trader sells a currency that has a lower central bank interest rate than the currency he is buying.
Take our EUR/USD example. Say the central bank rate in the European region is 4.25% Assume it is 2.25% in the US. Whether the trader is selling or buying somebody has to pay the piper for the bank rate difference.
If a trader is selling, say 1,000 euros, he is borrowing those euros at 4.25% interest and he is buying US dollars that earn interest at 2.25%. He is losing (costing himself) 2% interest (cost of the carry). That cost is debited to his forex account. That’s the negative swap.
Where the exchange is reversed in a positive swap he is buying euros and will enjoy a profit because he is incurring 2.25% interest on the purchase of USD and earning 4.25% interest on the euros. The difference is credited to his forex account.
Islamic Swap-Free Accounts
A simple swap-free account does not permit rollovers and does not permit margin trading. Forex trading without the involvement of swaps is permitted under Shariah law. But most of the real advantages of forex trading involve swaps.
Some brokers accommodate Muslim traders with substitutes for swap fees. For example, increasing the spread on Islamic accounts or charging daily administration fees. These devices sometimes look like a cost of carrying an account (i.e. interest). To paraphrase Shakespeare, “A rose by any other name” is still a rose. If the substitute broker fee is calculated including a factor of the time a position is held open, it is tantamount to interest.
Some arrangements do not look like substitutes for interest. Some brokers do not offer certain forex pairs with an Islamic account. Also, a broker might widen the spread on Islamic accounts. A broker might also charge a fixed commission that is not dependent on the period of forbearance.
In some cases, Islamic brokers offer a form of partnership. There is an age-old distinction between advancing funds as a debt investment and making an equity investment. The principal difference is two-fold: (i) the obligation to pay it back and (ii) risk/reward to the investor.
A debt requires the debtor to pay it back and the lender has no upside. The lender’s sole compensation is interest, that is, the cost of forbearance (i.e. compensation for the use of money).
By comparison, an equity interest has no defined payback. Instead, the lender/broker shares in both the downside and the upside. He bears his equity share of losses and shares his equity share of gains and profits.
Islam forex brokers often effectively form an equity partnership (“Mudharabah”) with Islamic forex traders. The broker’s compensation for forbearance is a profit share that is not forbidden by Sharia law.
Summary
There are many reliable online reviews and lists of reliable, regulated Islamic brokers and other brokers who offer so-called swap-free accounts. Traders should scrutinize those brokers the same as any forex broker.
Qualification under Sharia law necessarily requires a personal judgment of the trader. There is no specific Islamic seal of approval or licensing by Islamic authorities. Ultimately, an Islamic investor must exercise personal judgment as to whether a forex trade is Sharia-compliant.