- Foreign Exchange Trading in Malaysia
- Why is Gharar so important?
- Islamic Forex Accounts Explained
- Forex Brokers Offering Islamic Swap-free Accounts
- Forex Rollovers & Swap Rates Explained
- Islamic Financial Regulatory Bodies
- Thomas Papantonious on Islamic trading - Tadawul FX - World Finance Videos
Malaysia is widely regarded as a pioneer of the Islamic financial system and the Islamic interbank market, but it is only relatively recently that Islamic banking truly emerged in Malaysia. For decades, conventional banks were the only way to access the banking system.
In 1983 Bank Negara Malaysia (BNM) launched Bank Islam Malaysia Bhd (BIMB) to handle the financial needs of the country’s Muslim population.
But it wasn’t until 1993, when the Ministry of Finance introduced the Skim Perbankan Tanpa Faedah SPTF or the Interest-Free Banking Scheme, that Islamic banking became widely available as a consumer product.
The Interest-Free Banking Scheme made it a legal obligation for all conventional banks to offer Islamic banking options alongside more traditional methods.
Banks quickly developed Shari’ah-compliant subsidiaries to handle the huge demand for Islamic banking and by 1994 the BNM had approved a total of 21 Islamic financial products for domestic financial institutions.
This rapid increase in both the supply of and demand for Islamic banking products was simultaneous with the development of the Islamic interbank system, which only further boosted growth of the Islamic money market.
This explosive growth is visible in the increase of total assets of the Islamic banking sector from MYR21.6 billion in 1998 to MYR35.7 billion in 1999, an incredible growth rate of 65.8%.
Today, the nation is in the curious state of having two parallel banking systems, one conventional and the other Islamic, but both well developed and hugely profitable.
Foreign Exchange Trading in Malaysia
The key article of Islamic Mua’malat on Forex is the elimination of Riba – or interest on loans or assets.
Riba is central to conventional Forex trading, but some scholars believe that Islamic Forex transactions are not premised on the same philosophy as conventional practices, and are therefore legitimate under Shariʻah.
Islam also emphasises that when conducting business transactions, elements of uncertainty, excessive speculation and gambling should also be avoided, so it could be argued that hedging trades with Forex is also legitimate under Shari’ah.
Why is Gharar so important?
It is also widely agreed that conventional Forex transactions, if used carefully, are a very effective means of protecting banks from exposure to international risk.
In Malaysia, several brokers offer Shari’ah compliant accounts to make sure that your trading is not haram – though this does mean that there are a few differences when compared to traditional Forex accounts.
Islamic Forex Accounts Explained
Islamic Forex accounts have two underlying attributes:
Other than the above, Islamic Forex accounts usually have the same trading terms and conditions as a regular Forex account.
However, some most Forex brokers change the commercial terms of trading with them and might limit the trader from trading cryptocurrencies.
Some Forex brokers will widen their spreads on Islamic accounts to compensate for the missed revenue that would have otherwise have been generated by collecting interest.
Another practice, but is far rarer, is that some Forex brokers charge an up-front commission on trades instead of widening the spreads.
Forex Brokers Offering Islamic Swap-free Accounts
There are a variety of brokers that offer Islamic accounts tailored for Muslim traders.
There are usually no limitations on this account type – this means you can trade Forex, commodities, CFDs contracts and every financial instrument that complies with the Islamic financial regulations.
An important note: With some Forex brokers, you will need to open a real trading account which can then be converted into an Islamic account.
Very few brokers have a registration page specifically for Islamic accounts, but many brokers taking clients from predominantly Muslim countries automatically create accounts as Islamic accounts.
If you are in doubt, do not make any deposits before discussing with your account manager.
Forex Rollovers & Swap Rates Explained
In the Forex market, any position held overnight generates a rollover which will be earned or paid out depending on the currency you are trading and the direction of the market.
Rollover interest is a form of interest that can be credited or debited from your Forex trading account, and thus it is prohibited by Islamic financial regulations.
In the financial world, this rollover is also known as the swap rate. So, Islamic Forex accounts are swap-free accounts where no overnight interest is credited or debited.
Islamic Financial Regulatory Bodies
The central financial regulatory bodies in the Islamic world are the following:
Forex brokers that are registered in Muslim majority countries often have to comply with many local regulations and are required to follow the Sharia law, whereas Western Forex brokers have much more flexibility when it comes to the interest charged to their clients.
This is why only some of the brokers offer this account type.
An Islamic Forex, or swap-free, account is an optional account type that is often selected after signing up with a broker.
They are intended for use by traders of the Islamic faith, which prohibits generating income from interest payments. A majority of Forex brokers can accommodate followers of the Islamic faith by offering swap-free trading accounts that are compliant with Sharia law.