What is Gharar?
Gharar is an Arabic word that is associated with uncertainty, deception,and risk. It has been described as "the sale of what is not yet present," such as crops not yet harvested or fish not yet netted.
Key Takeaways
- The word gharar means uncertainty, hazards, or risk.
- In Islamic finance, gharar is prohibited because it runs counter to the notion of certainty and openness in business dealings.
- Gharar can arise when the claim of ownership is unclear or suspicious.
- Examples of gharar in modern finance include futures and options contracts, which have dates of delivery in the future.
Gharar is a significant concept in Islamic finance and is used to measure the legitimacy of a risky investment pertaining to short selling, gambling, the selling of goods or assets of uncertain quality,or to any contract that is not drawn out in clear terms.
Understanding Gharar
The word gharar has become somewhat of a general term in the modern lexicon. Sales or financial transactions considered as gharar are judged relative to the level of misunderstanding that might exist between parties and the level of uncertainty that the goods or payment can be delivered. Gharar is generally prohibited under Islam because there are a set of strict rules in Islamic finance against transactions that are highly uncertain or that may cause any injustice or deceit against any of the parties.
The justification and guidance for forbidding contracts or transactions considered as gharar comes from the hadith, a revered book in Islam. It contains the sayings of the Prophet Muhammad, who spoke against the selling of the birds in the sky, the fish in the water, or the unborn calf in the mother's womb, saying, "Sell not what is not with you." Therefore, questions of gharar arise when a claim of ownership is unclear or suspicious.
Clarity of the intended meaning of gharar also comes in the Quran, where it states, "And do not eat up your property among yourselves for vanities," which is interpreted as the prohibition of predatory business practices because such practices do not benefit the whole of society.
Examples of Gharar
In finance, gharar is observed within derivative transactions, such as forwards, futures and options, as well as in short selling and other forms of speculation. In Islamic finance, most derivative contracts are forbidden and considered invalid because of the uncertainty involved in the future delivery of the underlying asset.
Scholars differentiate between minor and substantial gharar, and while most derivative products are prohibited due to excessive uncertainty, other practices considered as gharar, such as commercial insurance, are vital parts of economic life. It is also permissible for a seller to short-sell fungible items, such as wheat and other commodities, to be delivered at a later date to a buyer.
Meanwhile, the sale without physical possession is not necessarily condemned, but the promise of delivery by either party without credibility is a violation. Also, transactions and contracts are considered as gharar when excessive risks or uncertainty are combined with one party taking advantage of the property of the other, or one party only benefiting by the other party's loss. For that reason, Islamic finance also strictly prohibits extending loans with interest, which it considers usury.
FAQs
Gharar: Examples
Gharar: the sale is made conditional on another uncertain event (e.g. I will buy you car, if I sell my car first). Acceptable Gharar: Ibn Taymiyah notes that this form of sale is acceptable provided both parties benefit and it does not contradict the Qu'ran or Sunnah.
How do you describe gharar? ›
The word gharar means uncertainty, hazards, or risk. In Islamic finance, gharar is prohibited because it runs counter to the notion of certainty and openness in business dealings. Gharar can arise when the claim of ownership is unclear or suspicious.
What is a practical example of modern gharar? ›
Some examples of transactions where Gharar might exist include short selling, forwards, speculation and in futures and options. Most of these types of derivative contracts in Islamic finance are considered to be forbidden, and so they are considered to be invalid simply because of the uncertainty that is involved.
What is the meaning of gharar in Arabic? ›
Gharar (Arabic: غرر) literally means uncertainty, hazard, chance or risk. It is a negative element in mu'amalat fiqh (transactional Islamic jurisprudence), like riba (usury) and maysir (gambling).
What is an example of gharar uncertainty? ›
Understanding of Gharar
Uncertainty of existence and future outcome of the transaction. For example, you want to buy birds in the sky from this seller A. The existence of the bird is uncertain in the future. So, it is excessive uncertainty.
What is gharar in the Quran and Hadith? ›
The word Gharar simply refers to lack of knowledge or uncertainty. Prophet Muhammad (Peace be upon Him) prohibited business and transactions that involve Gharar. In a Hadith the Prophet Muhammad (Peace be upon Him) said: “Whoever sells a defective commodity without disclosing it remains in Allah's wrath”.
What is an example of gharar in daily transaction? ›
Some examples of gharar are: a) Sale of an item that is yet to be owned and is difficult to be acquired by the seller, such as selling a horse that has escaped, or a lost car that is yet to be retrieved. b) c) d) Sale of an item that is not described properly. Sale of an item where the price has not been finalized.
What are the effects of gharar? ›
All Muslim jurists agree that excessive gharar will affect any contract including commercial contract thus making it unlawful from Shariah perspective, for example insurance contract which gharar (uncertainty on future loss) is made as the subject matter of the contract.
What is the effect of gharar on a contract? ›
Gharar in contract means the element of uncertainty in thesubject matter of a contract or as regards the price of the goods, or anyspeculative risk. 3 The presence of gharar in a commercial transactionor in the related contract enables one party to earn material gain at theexpense of the other party.
What are the two types of gharar? ›
However, the table 1.0 shows that jurisprudence define Gharar differently as it is defined as uncertainty which is divided into two categories excessive and minor Gharar the later is permissible as argued by many scholars based on its nature that exist in all contract whereas the excessive Gharar is restricted based on ...
His ruling emphasizes that the speculative nature of Bitcoin introduces significant levels of Gharar, or uncertainty, which is strictly prohibited in Islamic finance. Allam elaborates on the potential for Bitcoin to be used in fraudulent schemes and illegal activities due to its anonymity.
What is gambling called in Islam? ›
In Islam, gambling (Arabic: ميسر, romanized: maisîr, maysir, maisira or قمار qimâr) is forbidden (Arabic: haraam).
What are the prohibited transactions in Islam? ›
The Prophet (PBUH), therefore, prohibited the sale of what is still in the loins of the male, or sale of whatever is in the womb of a female camel, or sale of birds in the air, or the sale of fish in the water and any transaction that involves Gharar. (i.e., anything that involves deception).
Is gharar also called Qimar? ›
ON THE OTHER HAND, 'QIMAR' MEANS RECEIPT OF MONEY, BENEFIT AT THE COST OF OTHERS OR BY RESORTING TO CHANCE. GAMBLING IS A FORM OF GHARAR AND AT THE SAME TIME FORM OF QIMAR BECAUSE THE GAMBLER IS IGNORANT OF THE RESULT OF THE GAMBLE.
What is an example of maysir? ›
Maysir means gambling. Islam has also categorically prohibited all forms of gambling. Maysir refers to the easy acquisition of wealth by chance, whether or not it deprives the other's right. For example, the uncertainty of the timing of benefits of a pure life insurance contract creates an element of Maysir.
What is an example of Istihsan in Islamic finance? ›
One example of this is loans. A loan might be considered to be usury because a dirham is exchanged for a dirham for a period of time but it is permissible under the principle of istihsan because of the way people are helped by it. If loans had remained forbidden they might have suffered great hardship.
What are the different types of gharar in Islamic banking? ›
However, the table 1.0 shows that jurisprudence define Gharar differently as it is defined as uncertainty which is divided into two categories excessive and minor Gharar the later is permissible as argued by many scholars based on its nature that exist in all contract whereas the excessive Gharar is restricted based on ...
What is haram with example? ›
The religious term haram, based on the Quran, is applied to: Actions, such as cursing, fornication, murder, and disrespecting one's parents. Policies, such as riba (usury, interest) Certain food and drinks, such as pork and alcohol.
