Finance - Gharar PDF

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OBJECTIVE The objective of this assignment is to briefly answer the following questions: a) What is Gharar? b) Why is Gharar prohibited? The discussions will be on the perspective of Islamic Finance with citations from Al Quran and Hadith.

WHAT IS GHARAR The Arabic word Gharar is a fairly broad concept that literally means deceit, risk, fraud, uncertainty or hazard that might lead to destruction or loss. Hanafi scholars have defined Gharar as “something which its consequence is undetermined.” While Shafi’i scholars have described it as “something which in its manner and its consequence is hidden. Therefore, Gharar in Islam refers to any transaction of probable objects whose existence or description are not certain, due to lack of information and knowledge of the ultimate outcome of the contract or the nature and quality of the subject matter of it.

Gharar is divided into two types: a) Gharar Yasir (light Gharar) b) Gharar fahish (excess Gharar)

All scholars agree that every transaction have some amount of Gharar in it but they start to differ when referring to the amount of Gharar contained in each. Gharar yasir, which means small in amount or trivial is the uncertainty that is always present in all contracts and conducts, thus its existence is tolerated.While Gharar fahish, is in contracts are plenty as shown by the Al - Hadith and normally is associated with the reasons why Gharar sales are prohibited.

There is no specific evidence from the Quran which connotes Gharar, however, Allah (s.w.t) mention “Eat not your property among yourselves unjustly by falsehood and deception, except it be a trade amongst you by mutual consent (Al-Bakarah, 2:188; Al - Nisa, 4:29). The Quran Page |1

has categorically prohibited gambling (Al-Bakarah, 2:219 and Al- Maidah, 5:93). Many scohalrs argue that Gharar is one of the branches of gambling (Rahman, 2010; p.71).

WHY IS GHARAR PROHIBITED? The beloved Prophet (S.a.w.) on many occasions forbade many transactions which included Gharar. protecting the different parties from deceit and ignorance by forbidding Gharar in any commercial exchange contracts that are not free from hazard, risk or speculation about the essential elements in the transaction to either party, or uncertainty of the ability of one party to honour its rights and obligations. It requires that all Islamic financial and business transactions must be based on transparency, accuracy, and disclosure of all necessary information so that no one party has advantages over the other party.

Instead, the Shari’ah promotes the principle of profit-loss sharing between banks and entrepreneurs as an approach to encourage the spirit of brotherhood and cooperation in business relationships. Mutual risk-sharing could help absorbing the weight of loss by sharing it equitably between all parties. However, risk and uncertainty are conditioned by enough adequacy and accuracy of information to make reasonable estimates of the outcomes. Tolerable risk and uncertainties cannot exist in contractual obligations.

CONCLUSION As discussed above, the rationale behind the prohibition of Gharar is to ensure full consent and satisfaction of the parties in a contract. Full consent can only be achieved in full disclosure and transparency and through perfect knowledge from contracting parties of the counter values intended to be exchanged. The prohibition of Gharar protects against unexpected losses and the possible disagreements regarding qualities or incompleteness of information.

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