Gharar is another fundamental prohibition in Islamic banking and finance. The word gharar simply refers to a lack of knowledge, uncertainty and hazard. Technically, there are various definitions of gharar given by different scholars. What is gharar exactly, and why is it prohibited from transactions?
The famous jurist Ibn-Qayyim defines gharar as a sale in which the seller is not in the position to hand over the subject-matter. The contemporary scholar Dr. Zuhayli has explained gharar as follows:
“A contract which contains a risk to any one of the parties which could lead to his loss of properties”.
Fairness in Business Transactions
It’s important to note that no verse from the Quran could be found which directly prohibits gharar as it is the case of riba. Riba is clearly prohibited by a number of verses of the Quran. However, it’s very clear that Quran prohibits all types of business transactions and contracts which cause injustice and inequality for any of the contracting parties. Especially, if it happens with the party who has weaker position in bargaining, then it would be worst.
For instance, the Quran says in Surah al-Nisa:
“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]
Lack of Clarity on Price or Obligation
Gharar can be simplified as an uncertainty which caused due to lack of clarity regarding the subject matter or the price or the obligations of the parties. In other words, gharar means a lack of clarity and ambiguity in the basic elements of a contract.
There are various forms of gharar. For instance, the delivery of one item is not in the control of the relevant party or the payment of price is unknown.
Prohibited in Many Ahadith (sayings)
The Prophet Muhammad (peace be upon him) has explicitly prohibited gharar in various ahadith (sayings). The famous companion Abu Hurayrah narrated that Prophet Muhammad ﷺ has prohibited gharar in all business and sale transactions. It’s also reported in hadith books that Prophet Muhammad ﷺ has forbidden two types of contracts namely al-mulamasah and al-munabadha.
Al-Mulamasah and Al-Munabadha
Basically, these transactions were being practiced in Arab society. Al-mulamasah refers to a sale which become binding on seller if he just touches the object. Likewise, al-munabadha refers to a sale which is considered complete if one party just throw his garment to another party. The reason of prohibiting these two sales is gharar and uncertainty in subject matter.
Based on these evidences from the Quran and hadith of the Prophet Muhammad ﷺ, the jurists and Shariah scholars agreed that gharar is prohibited and haram (impermissable) in financial transactions and if it is found, it would render the contract void and null.
However, it should be noted that prohibition of gharar is based on the rule of fairness and justice for every party in the contract. If anyone from the contracting parties is unaware from material information of the contract, this would be injustice and oppression for him and he might take unexpected responsibility and commitment. This would later result in dispute between the contracting parties.
Minor Uncertainty Is Okay; Major Is Not
It should also be kept in mind that uncertainty cannot be removed from the business transactions totally. Therefore, Shariah scholars have differentiated between major and minor gharar. The minor gharar which is not avoidable in financial transactions, would not affect the validity of contract. However, the major gharar is not tolerated which cause dispute among parties.
Examples of Major Gharar
- Selling goods which are not in the control of seller and he is not be able to deliver them - for example: you are a fisherman and you sell 100 KG of fish that you haven't caught yet.
- Making a contract conditional on an unknown event - for example, I sell you my business if my business does more than $1 million in sales by the end of the year.
- Gharar due to complexity of contract - this happens sometimes when two or more contracts are combined together and they become dependent on one another. An example of this is the is mentioned and further explained in our coming article on Diminishing Musharakah.
- Future sale - meaning doing a transaction now but the item(s) of sale and the price with both be delivered at a future time