What is Gharar?
Gharar means ‘uncertainty’ and is associated with deception involving uncertainty and risk. It is rooted in the Arabic word ‘to deceive’ (gharra).
Gharar is a broad concept, involving scenarios including:
When the claim of ownership is unclear or suspicious.
When the existence, quality or characteristics of the commodity are not certain.
Pure speculation where an outcome depends on excessive uncertainty and this risk is not shared.
Where consequences are concealed due to lack of openness between parties or a lack of information of the contract or the nature and quality of the subject matter or where a deal is made based on a misunderstanding.
To clarify- selling something without physical possession is not inherently gharar so long as the promise of delivery carries some credibility.
Gharar can include:
Contracts not drawn out in clear terms.
Derivative transactions (such as forwards, futures, options, and forms of speculation such as short selling).
Selling something of uncertain quality.
Evidence and explanation
In the Quran we are told:
“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]
The reference of ‘not consuming property wrongfully’ (al-batil) is interpreted as gharar and other predatory business practices.
Abu Hurairah (ra) narrated: “The Messenger of Allah (saw) prohibited the gharar sale, and the hasah sale.” [Tirmidhi]
Why is gharar bad?
Gharar dealings are harmful to certainty and openness in business dealings.
The prohibition of gharar protects businesses against transactions that involve high uncertainty or deceit as they have the scope to cause injustice and involve risk being asymmetrically shouldered (such that will result in a one-sided loss or a gain at the other’s expense). It also ensures genuine consent in dealings as genuine consent can only be achieved through transparency.
The prohibition of gharar protects against unexpected losses, disagreements, misunderstandings and distrust and consequently promote satisfaction in business dealings.
This article is part of the Islamic Finance Definitions Series.