“Riba”, commonly thought to mean “interest”, is best described as a loan with the condition that the borrower will return to the lender more than and better than the quantity borrowed. Riba is forbidden under Islamic law.
“Gharar” is an Islamic finance term describing a risky or hazardous sale, where details concerning the sale item are unknown or uncertain. Gharar is generally prohibited under Islam, which explicitly forbids trades that are considered to have excessive risk due to uncertainty.
Whereas the first term, “Riba”, is commonly understood, it is the second term that puts the heaviest restrictions on how an Islamic follower must act within today’s volatile currency markets. “Gharar” is typically found in all derivative contracts, and, for this reason, Muslims are forbidden from trading in forwards, futures, options, short selling, or speculation in general where the future delivery value of an underlying asset is in doubt or uncertain. Trading on the “spot” market, however, is considered within the rules, according to most Islamic jurists.
“Riba”, on the other hand, has led to the issuance of a special Islamic forex account that prevents the advent of this condition, as would happen on most other accounts. The majority of forex brokers have offered these accounts to attract additional customers around the world. These accounts are similar to other accounts with the following differences:
- No Interest Charges or Commissions: Often termed ”No Riba” accounts, interest charges are waived. There may, however, be wider spreads on these accounts, hidden fees, or limitations enforced on how long a trade can be carried over. A user can sleep easy knowing that his in conformance with his beliefs, but the forex broker will usually find a way to cover his costs in any event;
- No Rollover Fees: Spot forex contracts typically settle in 48 hours, due to an international convention regarding differing time zones. In order to avoid this settlement event for trades held overnight, a forex broker will literally close every account each evening and then re-open the position for the next day’s trading activity. Banks charge the broker a “swap” fee for this transaction, subject to prevailing central bank interest rates, and the brokers generally pass this fee onto the trader. This “rollover” fee does not apply to Islamic forex accounts, but each broker may define a limit for holding open a position to prevent abuse from his perspective.
Research the topic and reach your own conclusion before opening an Islamic account offering.
Guest Article by Tom Cleveland from Forex Traders