English
One of the key characteristics of gharar is that it aims to prevent “excessive” risk and excessive uncertainty.
However, all business and investment activity involve some kind of risk and uncertainty. Whenever anyone makes an investment, there are risking money, time and effort on the assumption that there will be a higher return on that investment – higher, but unguaranteed return.
So the question then becomes to what extent should there be risk for a business to not be considered gharar?
Read more about: What is Gharar & How to avoid it?
Islam permits business risk that can arise naturally in trade, investment and entrepreneurship. It actually encourages taking calculated risks for legitimate gain. These include:
These are the risk factors and metrics involved in reading the wider economy and its health. These include everything from GDP, GDP per capita, inflation, the exchange rate, monetary and fiscal policy of a state, as well as its unemployment figures and the credit ratings.
These are any types of risk that arise from market fluctuations. These include things such as consumer demand (which can also be impacted by the aforementioned macroeconomic risks), as well as supply and supply chain factors.
On the ground level, a business or project runs through its own forms of risk, including securing the necessary permits, cost overruns, ensuring consistent supply of talent and inputs, as well the abilities and capabilities of a business partner.
These are the type of unforeseen circumstances that could impact the operations of a business or project – an “act of God.” A major example of this can be natural disasters (such as the pandemic). Contracts usually contain clauses that highlight the types of actions to take in the event of such circumstances.
When the existence, quality, and specifications of a product or commodity is unclear and undefined, then it considered gharar.
When the terms of a contract or trade is not clear or transparent, then this also falls under the definition of gharar.
When the person you are doing business with is unknown and unclear, and whether or not they are able to deliver on the transaction is not really known.
When the risk profile of a deal favors one side entirely, then this is also considered gharar, as risk-sharing in a transaction is a core principle of Islamic finance.
Engaging in any transaction with an excessive amount of speculation without an underlying value being factored in.
One of the key metrics to delineate between acceptable business risk and speculation that could enter gharar territory is whether the transaction entered into is built on creating value for the real economy or is it purely a speculative play.
The greater the emphasis is on creating real economic value for the market or contractual parties, the less risky and beneficial the investment is. Gharar often lacks tangible economic activity, while acceptable financial practices involve real value and productive outcomes, that can be measured and accounted for to some degree.
Creating value involves work, whether that is investing on productivity and expending time and effort on a business.
Speculation on the other hand involves very little work, and if any work is done it usually built on intangibles such as group behavior and psychology.
While these can be measured to a certain extent, they are highly unpredictable. Speculative investors often ride a wave or bubble, where an asset price is over inflated without any real economic benefit or productivity arising from it.
These investors will be hurt when the inevitable bubble bursts. There is often very little separating over speculation and gambling.
The starting point to entering any transaction or financial arrangement is conducting the appropriate research.
When it comes to a business and project, the investor needs to know the fundamentals of that business, including the market dynamics, historical performance, trends (both long term and short term), costs and the credentials and reputation of the business partner.
Similarly, when it comes to a financial investment, the fundamentals of that financial product needs to be assessed in terms of productivity and long term value.
Technical analysis and similar forms of stock market research look at the short-term and often encourage speculation.
Islamic contracts are designed to minimize the risks associated with gharar. they do this by adhering to certain measures that could benefit any types of contract. These include:
All terms and conditions must be clearly stated and outlined leaving no room for ambiguity or interpretation.
All information pertinent to the transaction must be clearly disclosed.
The seller of a good must be the owner of the item being transacted and in possession of said item. If not, then they must adhere to a strict timeline for delivery.
Contracts that distribute the risks among all parties involved is fundamental to Islamic financial transactions through such things as profit and loss sharing.
The contract must specify and timeline for delivery and the payment method.
It never hurts to bring a transaction to an Islamic scholar to ensure that it is halal.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
