Islamic Economic

The Prohibition of Gharar and Maysir.

Commercial activities are permitted under Islam, but they are subject to the ban on riba (interest). They are also subject to another restriction: the ban on gharar and maysir. Gharar is risk, uncertainty, and maysir is gambling or speculation......

Commercial activities are permitted under Islam, but they are subject to the ban on riba (interest). They are also subject to another restriction: the ban on gharar and maysir. Gharar is risk, uncertainty, and maysir is gambling or speculation.

The ban on gharar implies that commercial partners should know exactly the countervalue that is offered in a transaction. The word ‘gharar’ in the Arabic language means risk. It also has the connotation of deception and delusion. Of course, risk can never be totally avoided, certainly not by entrepreneurs, and no productive or commercial activities would be possible without a certain degree of risk and uncertainty. Only conditions of excessive risk have to be avoided. The ban on gharar stands for transparency and fairness. In order to avoid gharar the parties to a contract must:

  • Make sure that both the subject and prices of the sale exist, and that parties are able to deliver.
  • Specify the characteristics and the amounts of the countervalues.
  • Define the quantity, quality and date of future delivery, if any.

The prohibition of gharar is found in a hadith forbidding as gharar the sale of such things as ‘the birds in the sky or the fish in the water’, ‘the catch of the diver’, the ‘unborn calf in its mother’s womb’. These are all cases where the object of the transaction is uncertain. One may not buy tomorrow’s catch of a diver, but one may hire a diver for a certain number of hours tomorrow.

Also selling goods without specifying the price, such as selling at the ‘going price’, is haram, as is selling goods without allowing the buyer to properly examine the goods.

Gambling, maysir, is banned in the Quran (refer surah 2: verse 219 and surah 5: verse 90). Speculation is seen as a case of maysir.

The ban on gharar and maysir, though less well-known than the ban on riba, has consequences that are hardly less far-reaching. There are many contracts that do not stipulate the exact nature, date or value of what is received in exchange. This is especially the case with insurance and on financial markets. Hard and fast rules are difficult to discern, as it is not a priori clear when there is a case of gharar.

Risk and uncertainty can hardly ever be fully excluded. If we follow to see the entrepreneur as the creator of new combinations, as an innovator, risk and uncertainty, especially uncertainty in the sense are part and parcel of entrepreneurial activities. Gharar and maysir, therefore, do not cover each and every manifestation of risk and uncertainty, but only cases that can reasonably be avoided. But where to draw the line?

Not surprisingly, interpretations of exactly under what circumstances the bans on gharar and maysir apply vary. Hanbalis school of thought, for instance, have allowed obligations from a contract to arise before the sale price is precisely known. Also, sales concluded at market prices are for the most part seen as valid even when at the time of offer and acceptance the exact market price is not known. But does the ban on gharar also means that one may not sell agricultural products before they are harvested or picked? After all, it is not certain what the harvest will look like and the buyer is unable to examine the goods at the time of purchase.

Sure enough, the different schools of thought have come up with diverging rulings. But in general, futures, forwards and other derivatives are seen as gharar, as there is no certainty that the object of the sale will exist at the time the trade is to be executed. We shall see, though, that some exceptions are made and that Islamic banks do not hesitate to try and stretch the limits of what is deemed acceptable by sharia boards.

There seems to be a consensus among Muslim scholars that gharar and maysir make a contract null and void. A distinction between null and void, on the one hand, and defective or voidable, on the other hand, is, however, not always made in Islamic law.

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