Key Takeaways
- Gharar means uncertainty, deceit, risk, and hazard.
- Islam promotes openness and certainty in business transactions therefore gharar is prohibited in Islam.
- There are two types of gharar: gharar yasir (minor uncertainty) and gharar fahish (extreme uncertainty). Gharar yasir in a financial contract is permissible but contracts involving gharar fahish are haram.
- In some instances, avoiding gharar is not possible. In such cases, Islamic scholars believe that contracts involving gharar are permissible. For instance, if the law of the state requires you to get third-party insurance.
Gharar is an Arabic word that refers to a broad concept in Islam. Gharar means uncertainty, deceit, risk, and hazard. Formerly, any transaction that did not clearly define the ownership of an asset represented gharar.
Today, the best example of gharar in finance is options and futures which involve extreme risks and resemble gambling. The ownership of stocks (for which options or futures are sold) depends on how the stocks will perform in the future. Any transaction that involves high levels of uncertainty of any form is an example of gharar.
What is Gharar in Islam?
Gharar is a key concept in Islamic finance as it is used to measure the riskiness of an investment. Muslims should avoid investing in ventures that involve gharar, as much as possible. But how much risk or uncertainty is gharar?
Ibn Qayyim al-Jawziyya, a famous Muslim jurist, defined gharar as a sale in which the seller is unable to hand over the material that is being sold. Another contemporary scholar Wahbah al-Zuhayli described gharar in a contract as a risk that leads to loss of property for one of the parties involved.
In modern finance, gharar has become a general term that refers to extreme risk and is used by Muslim scholars. Understanding gharar is also difficult for a layperson because checking whether a transaction involves gharar or not requires an in-depth understanding of Shariah rules and the financial market.
There are strict rules in Shariah regarding gharar and the guidance for avoiding gharar in the transaction is also present in the Quran and hadith. Here are some examples from Quran and hadith:
Prophet Muhammad (SAW) said: “Do not sell what is not with you.”
The hadith narrated by Ibn Majah on the authority of Abu Hurayra is that; Prophet Muhammad (SAW) prohibited the sale of the birds in the sky, fish in the water, the catch of the diver, the unborn calf in the mother’s womb, sperm or unfertilized eggs of camels.
This hadith clearly forbids the sale of property that has not arrived yet or hasn’t become one’s ownership. Gharar exists in a claim of ownership that is uncertain and suspicious.
Allah (SWT) says in the Quran: “O you who believe, do not devour each other’s property by false means or unjustly unless it is trade conducted with your mutual consent. Do not kill one another. Indeed, Allah has been Very-Merciful to you.” [4: 29]
Quran prohibits all types of transactions and business activity that cause injustice and inequality for any of the parties involved in a contract.
The Quran says in Surah al-Nisa: “And do not eat up your property among yourselves for vanities,”
[2:188]
This verse is interpreted as the prohibition of property transactions that satisfy the greed of some and harm society.
Allah (SWT) emphasized that two conditions must be met for business activity. The first one is that the terms of the deal must be clear, fair, and just. And the second one is the mutual consent of both parties. If these two conditions are missing in a financial contract, then the contract is deemed haram.
These hadiths and Quranic verses show that Muslims must only get involved in contracts that are clear, fair, just, and based on the mutual consent of both parties. Meaning that gharar which refers to deception, risk, uncertainty, and fraud is not allowed under Shariah finance.
This also means that if one party agrees to a contract because it was compelled to do so by the other party, the contract will become impermissible. For a contract to be permissible, it must meet the conditions of justice and fairness for both parties and the greater good.
Types of Gharar
Muslim scholars have classified gharar into two types to further explain it. The two types of gharar are:
Gharar Yasir
Gharar yasir or gharar yaseer is the minor or low uncertainty that exists in most types of transactions. A negligible amount of uncertainty in a transaction is not haram because it may not harm any of the parties involved. For example, if you buy a car and the car has a faulty wiper blade, you can get it replaced for just a few dollars. Your car, which is your asset, is safe and sound and a small fault won’t affect its worth at all.
This type of moderate uncertainty in a financial contract does not make the contract haram. At times you won’t know about the negligible risks that exist in your contracts and there is no way to avoid them. For instance, when you are buying a house, there could be small risks of bulbs not working or a minor plumbing problem.
Gharar Fahish
Gharar Fahish is the extreme or major uncertainty, and it is the type of gharar which is haram in Islam. Gharar is a high amount of uncertainty in a contract that harms one party financially. Because Muslims should keep their transactions fair and just, extremely risky contracts must be avoided.
Any contract that has excessive levels of ambiguity is, therefore, haram in Islam. Shariah considers such contracts exploitative and unfair.
The best examples of gharar fahish are options and future contracts that are deemed haram by most Islamic scholars. In an option contract, only one party involved benefits at the end of the term and the other party suffers a loss.
How to Differentiate Gharar Fahish from Gharar Yasir?
Differentiating gharar fahish from gharar yasir can be difficult. Fortunately, Islamic scholars provide immense knowledge and direction on how to avoid gharar in financial contracts and investing.
Commonly, when dealing with situations in your day-to-day life where you cannot find a scholarly opinion, you’ll have to recognize the type of gharar on your own. You should keep in mind that minor uncertainty cannot be removed from contracts and business transactions. So, minor gharar is permissible and such contracts that involve gharar yasir are valid in Islam.
The other type of gharar, known as gharar fahish is impermissible. Gharar fahish is the extreme level of uncertainty in a contract. For example, let’s look at two situations.
Situation 1: You are buying a used car, but the car has a few scratches on its body.
Situation 2: You are buying a used car and the car’s documents are missing and the car has an altered chassis number.
In the first situation, the financial transaction will be valid because minor scratches do not pose a serious risk and count as gharar yasir. In the second situation, the car with missing documents and an altered chassis number is highly risky, because it might be a stolen car. If the car turns out to be stolen not only will all your money get wasted but you might also get in trouble. Therefore, gharar fahish is not permissible in Islam.
As discussed earlier, gharar in the light of hadith is selling what does not belong to the seller yet. Such as: Fish that has not been caught, camel’s baby that has not been born yet, and milk in the lactose glands of cattle.
Examples of Gharar in Modern Finance
Gharar is present in derivatives such as futures, options, swaps, and short sales. Derivative contracts are therefore forbidden in Islam. Most derivatives are speculative and result in financial harm to one of the parties involved, therefore, they are not permissible in Islam.
But gharar fahish in some instances can be unavoidable. Scholars suggest that gharar is permissible if the law of the land requires you to enter such a contract or if it becomes a necessity. For instance, traditional insurance is deemed haram unanimously by all Muslim scholars. But living in a predominantly Muslim country, you might have to pay for third-party auto insurance.
This type of gharar cannot be avoided and is considered permissible in Islam because it is the law of the land and Muslims are obliged to follow such laws.
Similarly, short sales of fruits or vegetables produce are permissible. Buyers of fruits buy them beforehand to make sure they receive the fruits at a predetermined date which makes it easier to sell the fruits promptly to avoid loss from spoilage.
Conclusion
Gharar in a contract must be avoided for the benefit of both parties. Islam condemns unfair and exploitative means to satisfy personal desires therefore highly risky investments such as options and futures are deemed haram. Islam promotes equality, fairness, and mutual consent in business dealings.