What is Gharar? Up to what Extent Islam allow Gharar in business?

 

What is Gharar? Does Islam allow light gharar?

 We all know how much Islam emphasis on social development that means not one person or a group should take all the benefit. Same as the case in Islamic finance that encourages transparency and foster ethical values. To achieve this, Islamic banks have to make sure every single contract is lined up as per Sharia laws and principles.

To put it straight, Usury is strictly forbidden even Muhammad (PBUH) had declared war against the person who is involved in Riba based matters. Gharar is another element that should be avoided. Unlike interest, some scholars are agreeing on this point that Gharar is allowed to some extent unless it should not lead to fraud or total deceit to any of the parties involved in an agreement.

 This blog is all about gharar, we will focus on the meaning, types and explain it in detail through numerous examples. So, let get down to the details:

What is Gharar

Islamic way of trading holds five basic values; better to call them pillars of Islamic financing. These are prohibition of riba that is not allowed in any case, Gharar, maysar, sharing of profit and loss and only halal trade activities or businesses.  If a transaction is not executed as per these five pillars, it will be called void. And will be more similar to conventional financing.

So, Islamic banks and financial institutions have to make sure everything should comply with sharia standards from beginning to end of any operations.

Moving on with the definition, Gharar is an Arabic word, in English, it means uncertainty, risk and hazard. It’s simple to understand the objectivity and purpose behind it. And the meaning of gharar is summed up in a few lines:

Anything that is highly uncertain relating to the subject matter, price, and delivery of the goods, payments, or any part of the contract will fall under the category of Gharar. Besides, this uncertainty should not lead to fraud or total loss of any party in an agreement

Further explanation with some examples

Let make the definition more clear with the help of some examples:

1.       In a single contract where the owner gives all the rights to one party. This type of contract will have gharar if there is offer and acceptance from both parties without disclosing the price to the buyer.

However, some scholars like Malaki accept this kind of gharar if indenture is not binding and not subject to legal status.

2.       In Bai-Al-Arbun where the buyer makes a nominal down payment to complete the sale in future. This type of bai (sale) will be subject to risk if the down payment is made and there is no obligation on the part of the buyer to buy the product.

Acceptability of gharar is allowed in the bai arbun in some cases like if the prevision of not completing the sale is agreed among the parties; the structure of the product allows this and no other alternative available.

3.       Conditional sale:  High risk will be present when the sale is tied to some uncertain event like I will buy this land if you sell my car first.

 

Hazard can be acceptable if both parties’ benefits from this condition and deals are executed as per Sharia law.

 

What are the different types?

The fact is in the trading of goods; particularly in export and import business involve some risks like late delivery of the goods due to any uncertain event or currency devaluation due to economic breakdown. If financial institutions are handling the risk that will result in benefit and don’t involve doubling dealing then gharar is acceptable and can be tolerated.

However, Islamic banks and other financial institutions can’t allow their employees or any department to involve in unfair dealing unless it is fair and does not have any ambiguity.  

In this part of the blog, we will focus on the kinds that will give a better understanding of the topic. There are three basic forms, but not limited to. One is the gharar Yasir, second is the gharar Fasih and the third is Mutawassit. We will discuss these types in detail

Gharar Yasir(minor)

It depends on the nature of the instrument; any risk or hazard that does not affect the subject matter or other sections of the contract in a great deal and considered to be very minor; thus permissible. 

An example of light gharar is: in the Ijarah contract (Islamic leasing) where the rent is paid monthly and the number of days varies every month like 30, 31, or 28 days in February.  In that case, the calculation might vary and create some confusion among the counterparties.  

Gharar Fasih

 According to Islamic finance guidelines, this form is totally prohibited and excessively practiced by conventional banks. However, the Islamic bank avoids to make a fair deal and don’t belittle to its reputation. 

For instance, charging excessive fees and service costs to maximize the profit margin is gharar fasih. Sometimes, the customer is not aware of miscellaneous deductions and is held liable for the expenses.  Another example is; if a contract is subject to some condition and that conditions result in total loss of one party: as mentioned in the conditional sale.

Gharar Mutawassat

It falls in between Fasih and Yasir. It can only be acceptable if lined with fundamental concepts like profit sharing and no involvement in any illegal trade activity that is not allowed in Islam.

Some other Types

 We will discuss some more types that are subject to the basic elements of the contract. However, every possible measure should be taken to avoid uncertainty or to keep it to the lowest level.

Gharar-fi-al-Ajal: Uncertainty about the time of the delivery of the goods, and it’s quite common in international trade but should not involve any negligence that is deliberately created.

Gharar-fi-al-Miqdar: Risk associated with the quantity of the goods that can be in the case of Salam

Gharar-fi-al-Taslim: Any hazard linked with the place of the delivery of goods.

Gharar-fil-Sifah: linked to the features of the goods