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What are the Most Commonly Traded Financial Instruments with Islamic Accounts?
From the outset, it’s important to qualify what an Islamic account is, and what types of trading activity is permissible with Islamic accounts. All Islamic financing activity is based on jurisprudence and Islamic principles. The receipt of interest, known as riba is prohibited. Any speculative contracts, known as maysir, and contracts involving uncertainty, known as gharar, are generally avoided in Islamic finance, based on conditions. Islamic accounts therefore focus on equity and debt-like financial instruments such as earnings, and bonds.
At first glance, it may appear that derivatives trading such as CFDs trading are not halaal under Islamic principles and jurisprudence, however that’s not the case. Investments are legally entitled to include hedging strategies against risks. Therefore, derivatives trading instruments are entirely possible with Islamic accounts. Indeed, it is halaal to speculate on high-risk financial instruments using derivatives, but these must be included as part of structured products, complex trading strategies, and illiquid assets in a trader’s financial portfolio.
Under the guidance of Islamic accounts and jurisprudence, there are several tenets to investments, notably the risk/return, time factor (short-term, medium-term, long-term), as well as the trader’s appetite for risk. The latter is particularly important, in that it lays out the groundwork for derivatives trading at brokers like AvaTrade ZA. There are high-low risk investments, medium-diversified financial portfolios, and low-conservative diversification of financial instruments. It is wise to carefully assess the expected returns, as capital gains tax and income taxes may be levied on earnings.
When Islamic traders engage in the buying and selling of shares, it is important to assess the nature of the companies being traded. For example, gambling stocks, adult content stocks, and alcohol-related stocks would be deemed illegal under Islamic principles. Specific terms must be understood when dealing with Islamic accounts, such as haram which means forbidden. If an investment is permissible, it is deemed halaal. Oftentimes, trading practices delve into the minutia of companies. If Company A deals with Company B which is engaged in the sale of alcohol at nightclubs, and a minor percentage of Company A’s profits come from Company B, it is still halaal to invest in Company A.
Among the most popular financial instruments to trade with Islamic accounts are forex pairs such as GBP/AUD, GBP/USD, GBP/NZD, AUD/NZD, EUR/GBP, and so forth. The only problem comes with leveraged trades which the brokers typically offer to retail and professional clients with interest. At AvaTrade ZA we comply fully with Islamic account rules and regulations and don’t charge the standard interest-related payments on leveraged trades. To compensate for the loss of interest-related charges, AvaTrade ZA increases the spread on Forex pairs trading with Islamic accounts.
Trading Islamic Account
At AvaTrade South Africa, every client is important to us and we always strive to meet the different trading needs and preferences of all of our clients. As such, we offer an Islamic trading account that has been tailored to meet the needs of our Muslim clients.
How to open an Islamic account in 3 simple steps:
- Verify your account by sending all the relevant documentation.
- Fund your current trading account.
- After you’ve funded your account, you can apply for an Islamic account, which operates under the Sharia Law. The request will then be forwarded to the relevant department for review and approval. Requests are usually processed within 1-2 business days.
What is an Islamic Trading Account?
Also known as ‘no swap accounts’, Islamic trading accounts allow Muslims to engage in online forex trading in conformity to Sharia law. With 25% of the world’s population practicing the Islamic faith, Islamic forex trading has continued to gain popularity worldwide. Basically, an Islamic forex trading account charge no swap or rollover interest on positions held overnight in the forex market. An administration fee is, however, charged on open positions.
To understand Islamic forex trading, it is important to first understand the guiding principles of Islamic finance. Unlike conventional finance, which is driven by the profit motive, Islamic finance is driven by ethical goals and considerations. Two principles guide Islamic finance as follows:
- The first principle is a risk sharing philosophy between the lender and borrower. In Islamic understanding, interest is unethical. Interest guarantees a reward for the lender, with the borrower incurring all the risk. This, according to Islamic finance, is unethical and exploitative.
- The second principle is that financial activity must promote social and economic activity. The objective of finance in Islam is to promote happiness and well-being in this worldly life. Finance is just one part of life and society.
Based on this, the elemental feature of Islamic finance is to encourage socio-economic justice. It is why interest (or riba) is prohibited. Excessive risk (or gharar) is also prohibited, as is excessive gambling or speculation.
Why is Interest Frowned Upon in Islamic Trading?
Interest is any predetermined fee paid over and above the principal amount, whether it is a personal or commercial loan. Charging interest, or as is described by Sharia law, making money from money, is unlawful. The major reasons for its condemnation include:
- Riba induces negative growth. It may increase money quantitatively, but essentially, there is no primal progression in social wealth.
- Riba disgraces the human personality. It effectively promotes a culture that places undue significance on that which is monetary, while disregarding that which is human.
- Riba is, in essence, the unlawful acquisition of property.
- When entrenched, Riba corrupts society.
- Riba is, for all intents and purposes, unjust. While it creates money for the lender, it is very oppressive for the borrower.
Islamic Forex Trading
In tandem with Islamic finance, online forex trading ought to conform to Sharia laws. Under normal circumstances, forex and futures trading would, in Islamic finance, fall into a category known as Riba al-nasi’a. This is loosely translated as postponement Riba. This happens when two products are exchanged, but one is handed over immediately, with the other incurring a delay. This is the nature of Forex transactions, where money to money transactions are done with deferred settlement. Deferment carries additional charges in the form of swaps or rollover.
A money to money transaction, of different currencies, but equivalent values, is allowed. For instance, an exchange of US dollars (USD) for an equal number of euros (EUR) is certified as halal. This implies that there is no interest in a spot Forex transaction. But if one payment is delayed, or deferred, an al-nasi’a transaction could arise.
For legitimacy, there is a Sharia Supervisory Board (SSB) that ensures all financial transactions are Sharia compliant. Any firm with an SSB seal of approval is certified that its financial products are halal and that they comply with the ethical principles of Islamic finance. For Muslim traders, any financial institution with an SSB seal, is an indication that transactions do not involve underhanded interest, and as well do not carry excessive risk or uncertainty (gharar).
AvaTrade Islamic Forex Accounts
Are you an online forex trader of Islamic faith? If yes, then the Sharia compliant AvaTrade Islamic account is tailored just for you. There are no charges in the manner of daily swaps or rollovers, with all such fees replaced by administration fees on all forex trading products. At AvaTrade ZA, we want you to have a productive experience in our trading environment and so we have ensured that our Islamic account will meet your needs.
Come and experience the full power of MetaTrader (MT4) trading, with all charges now transparent on all currency trading pairs, stock CFDs and commodities. All interest charges are waived, and there are no hidden charges levied to cover the foregone fees. With other unethical brokers, hidden charges, such as wider spreads or limitations on the length of any open trade positions, are imposed, making the accounts basically swap free in disguise. AvaTrade is firmly opposed to such practices and is fully committed to fair and ethical trading conditions that will meet the goals of Islamic finance.
AvaTrade also offers access to the Islamic halal trading gold and silver. True Islamic gold and silver trading must have physical support in gold and silver. AvaTrade offers a trading account that complies with Sharia rules to all traders who wish to trade gold and silver based on Sharia finance in an acceptable way.
Key Features of the AvaTrade Islamic Forex Account
- Zero interest/swap charges on overnight positions
- No commissions on trades beforehand
- Stable, secure and intuitive trading platforms with no requotes, nor any hidden charges
- Instant trade execution
- Similar trading conditions, services and features as other AvaTrade trading accounts; the only difference being the elimination of non-Sharia compliant interest charges
- Free and unlimited access to all AvaTrade trading platforms including WebTrader, and Android and iOS platforms
Please Note: AvaTrade is not a legislative institution, therefore, do not take the Islamic Account definition as permission to trade. Please verify that all trading offered is in accordance with your beliefs and laws.
With reference to our Islamic accounts, please note that:
- Cryptocurrency trading is not available on Islamic accounts. Should you wish to trade cryptocurrencies, you will be required to give up your ‘Islamic account’ privileges and be subject to special fees or interest associated with digital currency trading.
- Certain forex instruments (TRY, RUB, ZAR, MXN pairs) are not available on Islamic accounts. Should you wish to trade these currency pairs, you will be required to give up your ‘Islamic account’ privileges and be subject to fees or interest.
- Islamic accounts are subjected to an increase spread on FX pairs
Should you require any assistance, or if you have any questions, please feel free to contact the AvaTrade support team who is available to answer any of your questions. We look forward to welcoming you to the AvaTrade family.
Islamic Account main FAQs
What are the advantages of an Islamic account?
Obviously the main attraction of the Islamic account is that it allows those who follow Sharia Law to trade on the markets without breaking with their faith. It also allows traders to stay true to their morals and ethics. Islamic accounts are founded on the principles of fairness and transparency in financial markets. While these accounts are based on Sharia Law that is followed by Muslims, these Islamic accounts are also available to non-Muslims. Islamic accounts at AvaTrade ensure that there is financial inclusion for all.
Is forex trading allowed under Islam?
AvaTrade does not offer cryptocurrency trading in their Islamic accounts, however they do offer traditional fiat currency, or forex, trading. It has been determined by Muslim scholars that forex trading is halal, as long as the trading adheres to several principles, all of which are included in the conditions of our Islamic accounts. Currency exchange and profiting from currency exchange is allowed under Sharia Law because any individual has the right to pursue activities that allow them to improve their financial condition.
Does Islam allow CFD trading?
If the individual is strictly trading on CFDs then it is not allowed under Islam’s laws. This is because when you purchase a CFD you are not actually purchasing anything tangible. Instead you are speculating on the price rising or falling. In CFD the trader is leveraging the value of the stock in order to make profits. By opening a no-swap Islamic account the trader is avoiding the issue of taking or giving riba. AvaTrade makes Islamic accounts available to any trader who wishes to abide by Sharia Law and remain halal in their trading practice.