A brief note before beginning this week’s article. A couple of readers have said it would be a good idea to hold a meetup in London at some point. By ‘meetup’ I think they mean ‘go to the pub and potentially do business’ and by ‘good idea’ I think they mean, ‘will you (David) organise the whole thing’.
To hear is to obey, as the saying goes. If anyone is interested in going to the pub with fellow CFDs Weekly readers at some point in the near future then please let me know. The location is likely to be somewhere in the City around Cannon Street / Liverpool Street.
And now on to this week’s article…
Anyone that has spent time in a Muslim majority country will know that Islam is a religion of rules. And unlike the depressingly secular ‘developed’ world, lots of Muslims still take their religion seriously and adhere to them.
In Saudi Arabia, for example, they can cut your hand off if you’re caught stealing. This makes it very easy to identify FX/CFD broker employees, who you can spot walking around Jeddah with two stumps where their hands used to be. If their company is regulated in St Vincent & the Grenadines they may have their feet missing as well.
One of the main problems that Muslims face today when dealing with financial services companies is interest. Paying to borrow money or earning an income from the practice is forbidden in mainstream Islam. There is a whole industry dedicated to finding ways of lending in line with these restrictions, including some interesting startups in the UK.
But for CFD brokers these religious laws pose something of a challenge. Leverage is a key selling point for companies in the OTC derivatives world, something that obviously involves borrowing money and paying interest on it.
This can make life tough when doing business in the Middle East and North Africa, a place that lots of brokers have found attractive given the relatively high deposit sizes for customers in certain parts of the region.
A simple option is to offer Islamic accounts. These mean the customer doesn’t have to pay any interest fees on their account. However, this can quickly lead to the broker losing money if the costs involved are too high.
“What you see is that a lot of people open one of these accounts and then open long-term positions on products that already aren’t very profitable,” said an executive at one broker. “If someone opens a 5x leveraged share position and keeps it open for a few days, the fees can easily be more than anything the company will make on the trade. So you can end up bleeding money with [Islamic] accounts, especially if you are only doing A book trades.”
Beyond these practical problems, some brokers have also noted that Islamic accounts can become subject to some less honest behaviour. Not paying any rollover fees, for example, is likely to appeal to most traders, who may feel a sudden burst of religious zeal as a result – even if they aren’t Muslims.
An executive at one CFD provider that I spoke to claimed that he would have clients with suspiciously non-Muslim sounding names applying for Islamic accounts. There are always exceptions but you probably aren’t going to find too many people with a name akin to John Smith performing fajr every day and scrupulously avoiding alcoholic drinks. As a result, it’s relatively easy to deny these people access to the benefits of an Islamic account by just asking them for proof that they’re Muslim. More problematic are people who are Muslim but who clearly just want to game the benefits that they accrue by opening an Islamic account.
“You will often get clients who are happy to take any interest on the balance of their account,” said the broker executive. “But if the reverse happens and they notice, they’ll start saying they can’t pay the interest as they’re Muslim. If you then point out that they’ll lose any payments to their account, they then start complaining that isn’t fair either. Some of these people are high value clients that we meet in person and we know aren’t religious at all, they just don’t want to pay any fees.”
There appear to be a few ways around these problems. One is to simply not offer the accounts. This may sound like a cop out but from speaking to one broker that stopped offering them a few years ago, it seems like it has had no impact on their bottom line or ability to attract Muslim clients.
“A lot of people just don’t care about these accounts that much and the problems only arise when you offer them,” said one executive at the broker. “If you have them, people will end up asking for them. But if they aren’t on offer they’ll open an account with you anyway.”
Other brokers still offer the accounts but make their clients pay a flat fee to cover rollover costs. IC Markets, for example, charges clients a fee on a per lot basis, with costs varying depending on the instrument they decide to trade. There is still a level of risk to this, given that costs may still exceed the amount charged, but it’s more efficient than charging nothing.
The only other option that brokers seem to have is to try and pressure their clients into trading more frequently or blocking them from holding positions overnight. I am unaware of any broker doing the latter and it is hard to see how one would go about doing the former, at least if you are regulated in a respectable jurisdiction.
The most sensible option to me seems to be the IC Markets route. You can set up a contract with the account saying that you’ll block or cancel access to it if it’s abused and then work out a system to manage costs efficiently via flat fees.
Not offering them may work but it’s hard to tell how many people didn’t open an account with you, and thus gauge how much business you lost as a result. The reality is lots of Muslims won’t do business with you if they have to pay interest and, given they make up a sizeable chunk of the world’s population, it’s probably worth catering to their needs as a business.