Gharar: What exactly is it and how to avoid it?

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Funding Souq Editorial Team
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Dec 14, 2024
Funding Souq’s editorial team comprises experienced finance and investment professionals that are on a mission to fuel SME growth, create jobs, and drive the economy forward. They aim to share their extensive experience and industry know-how to empower entrepreneurs and investors alike.
Dec 14, 2024
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Many of the articles and topics discussed here mention gharar, and how many of the halal investments and assets explored avoid it.

 

While we’ve generally defined gharar as any type of transaction, business arrangement, investment or asset that is overly speculative, this is an oversimplification.

 

Gharar, in practice, is a complicated subject in Islamic jurisprudence with a broad definition that most Islamic scholars cannot pinpoint in a singular, all-encompassing definition.

 

That said, it does have a basic definition, fundamental principles and guidelines, which we will attempt to explore today.

 

Definitions of gharar in hadith and Quran

 

Rooted in Arabic word for deception, in finance, gharar is broadly defined as uncertainty and excessive risk with the underlying connotation being the uncertainty derived from deception and underhandedness.

 

Often described as "the sale of what is not yet present," based on a hadith from the Prophet Mohamed (PBUH) as forbidden the purchase of the unborn animal in the mother's womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver. 

 

In the Quran, there are two verses which describe actions that can be considered gharar: “Do not consume your property wrongfully, nor use it to bribe judges, intending sinfully and knowingly to consume parts of other people’s property.” [2:188]

 

“You who believe, do not wrongfully consume each other’s wealth but trade by mutual consent. Do not kill each other, for God is merciful to you.” [4:29]

 

Definitions of gharar in fiqh

 

While Islamic finance researchers cannot agree on a singular definition of gharar, most school of thought within Islamic jurisprudence do not disagree on its broad principles, according to the acting head of slamic Development Bank Institute (IsDBI) Dr Sami Al Suweilem.

 

 Al Suwelem writes that the Hanafi and Shafi schools define it as any transaction whose outcomes are hidden.

 

The Hanbali school defines it as "that which is undeliverable, whether it exists or not," while the Zahiri schools defines it as a transaction “where the buyer does not know what he bought, or the seller does not know what he sold." 

 

Characteristics of gharar

 

Based on the aforementioned qualifiers, there are some general characteristics of gharar that can be extrapolated:

 

Uncertainty

 

When the existence, quality, and specifications of a product or commodity is unclear and undefined, then it considered gharar.

 

Lack of clarity

 

When the terms of a contract or trade is not clear or transparent, then this also falls under the definition of gharar.

 

 Ownership

 

 When the owner of a commodity in a trade is also unknown, and when / if it will be delivered is uncertain then this too falls under gharar. At least one of those two conditions must be met for a transaction to not be considered gharar.

 

Risk

 

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.


Excessive speculation 

 

Engaging in any transaction with an excessive amount of speculation without an underlying value not only places it in gharar territory, but also might constitute gambling, which is also forbidden. 

 

Examples of gharar

 

Notable examples of gharar include:

 

·      1- Derivatives such as futures and options

·    2- Short-selling

·    3-  Sale of undefined goods or services – such as selling a car without noting its condition, mileage, etc. – or where the delivery of a good is uncertain.

 

Not all gharar are created equal

 

By casting such a wide net, it can sometimes be difficult to assess whether a transaction can fall under gharar or not, especially as all business involves some kind of risk with uncertain outcomes.

 

As such, Islamic scholars in recent years have begun to delineate between certain types of gharar, which are acceptable, and others that are not, writes East Delta University Professor Dr. Md. Akther Uddin.

 

These are gharar fahesh (excessive gharar), which blatently falls into the characteristics outlined above, and gharar yasser (light gharar), who’s impact is negligible. 

 

How to avoid gharar?

 

Islamic finance contracts are designed in many ways to avoid the characteristics of gharar. These are done by generally following these principles:

 

Clarity

 

All terms and conditions must be clearly stated and outlined leaving no room for ambiguity or interpretation.


Transparency

 

All information pertinent to the transaction must be clearly disclosed.

 

Ownership and possession

 

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.

 

Timeline

 

The contract must specify and timeline for delivery and the payment method.

 

Consultation

 

It never hurts to bring a transaction to an Islamic scholar to ensure that it is halal.

 

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Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.

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