Literarily, the term Gharar refers to fraudulence, uncertainty, risk or hazard. Technically, Gharar is the unknown surrounding a financial transaction.
Muslims scholars have identified two categories of Gharar, the first category is excessive and totally forbidden to deal with in Islamic transactions. The second category is minor, thus Shariah scholars tolerate this kind of Gharar.
The excessive Gharar was ruled as haram by many Hadiths, for example, Abu-Huraira reported that:
“The Prophet has forbidden the pebble sale and the Gharar sale”.
Gharar can take place in the contract itself or, under the contract subject matter. Firstly, Gharar can occur in the contract when the contracting parties do not discern if the investment will take place.
Secondly, the Gharar in the contract subject matter will arise when there is an ignorance of the goods sold, or the product characteristics such as the sort, amount, and identity are not identified. Gharar can also occur when there is uncertainty in the subject matter delivery or the sale of non-existent goods
Due to the Gharar prohibition, Muslim investors are not allowed to invest in derivatives, forwards and options sales since these transactions involve price differences, without real subject matter delivery. For instance, gharar occurs when a person tells another “I would sell you this house of mine at such price if a third person sold me his” and the buyer accepts the offer. It is a gharar sale because its consequence is not explicit.
However, gharar here does not relate to the object of the contract but to the contract itself because both the buyer and the seller do not know whether the sale will be concluded or not. This is due to the manner in which the contract has been concluded, namely, making it conditional upon a matter that may or may not obtain.