Concept of Gharar in Financial Transactions

Introduction

Gharar(uncertainty) has become an underlying problem faced by the global economy today. This has encouraged governments to legislate more regulations and laws to reduce the negative impact of this problem on the economy. On the other hand, gharar is considered a major prohibited element in Islamic finance. This essay aims to illustrate the key points relating to the concept of gharar, which are the definition, types, and the impact it has on the contract.

Definition of Gharar

Despite that the gharar is a key principle in Islamic finance law as Al Riba, there is some controversy over its definition between shariah scholars. This is because the prohibition of gharar is not explicit as Riba. While many express provisions prohibit the riba, just a few Hadiths prohibit certain contracts that involve the mean of gharar. Acutely, these hadiths did not mention the term of gharar, but shariah scholars have concluded that the main reason(Illah) behind this prohibition is the gharar element.

As a result, the definitions of gharar have divided into three directions (Al-Dhareer 1997); First, gharar means unknown, in which both parties of a contract or one does not know all or one of these contract elements; the subject matter, existence of subject matter, features of subject matter, and how the subject matter will be delivered. Second, gharar means uncertainty. Accordingly, this definition applies in the case when all parties or one of them do not know whether the contract will take place or not. Third, gharar contains both the above meanings; unknown and uncertainty. This definition is adopted by the majority of jurists, as it accommodates all meanings that might cause disputes between contracting parties, which is the main reason behind the prohibition of gharar.

It is noticed that some recent researches tend to define gharar as a risk, considering the term of risk as it is defined in economics. AL-SAATI in his research on gharar says ''In the Islamic context jurists define Gharar to mean risk, and some of them tend to prohibit all risks and Gharar, but we found that only gambling and gambling-like activities are prohibited. In this context risk and uncertainty are considered synonyms to Gharar'' (2003,p.14). This means that any contract or transaction that includes the element of risk will be prohibited from the shariah perspective, which is not accurate at all. The main reason behind this confusion is that many jurists have defined the gharar as a risk. But, the term of risk in these definitions is not meant as it is defined in economics today. It does not mean the risk that arises from entering the contract or from the probability of not getting profits from this contract or market risks. On the contrary, these kinds of risks are strongly encouraged in Islamic finance.? Alternatively, the term of risk in these definitions means the risk that arises from the ignorance of the existence or features or delivery of the subject matter, which represents the key elements that the contract is based on.???????????????

??Types of gharar

Based on the definitions of gharar as well as the specified contracts that have been prohibited by the hadiths because they have gharar element, the scholars divided the gharar into many types. This division depends on which pillar of contract that the gharar element has related. As is known, the contract in Islamic finance consists of four main pillars; the seller, the buyer, the language of the contract, and the subject matter(Zu?aylī 2001). Accordingly, the gharar could be in the parties to contract or in the terms that used to establish the contract or in the object of the contract.

?Gharar on the language of the contract

Gharar occurrence in the language of contract means that the terms are used in contract formation involve ignorance or uncertainty (Al-Dhareer 1997). For example, if the seller said ‘ I will sell you this car if I pass the exam’ and the buyer said ‘I accept’. This contract form entails a gharar element, in which no one of the parties to the contract knows whether the seller will pass the exam or not, so the consequence is unknown. In addition, it is noted that the gharar in this contract relates just to the contract form, and it does not relate to the rest of the contract pillars. Based on that, the contracts that have gharar in contract form could be classified as follows(Al-Dhareer 1997):

?1- ? Two sales in one

This contract has been prohibited by the hadith. Generally, it means combining two contracts into one contract. Although the majority of jurists have agreed on the prohibition of this contract, they have differed in defining the exact meaning of it. The most common interpretations for this contract are two. First, it means when the seller says ‘ I sell this car at $100 in cash and $110 a year hence’, and the buyer says ‘ I accept’, and then the contract is signed without identifying the price that the contract is based on. Second, when the seller says ‘ I will sell you my car if you sell me your home’

?2-? Arbun sale

Arbun sale is also considered as gharar sale according to the majority of jurists, and many hadiths have prohibited this sale. Arbun sale means ‘‘that a person buys an item and pays a certain amount of money to the seller on the understanding that if he did take the item the amount will be part of the total price but if he did not, he would forfeit this money and the seller would keep it’’ (Al-Dhareer 1997,p.16). The mean of gharar in this sale is in the form of the contract, in which there is uncertainty in implementing the contract.

?3-? Suspended sale

The suspended sale is a contract that a conditional language is used in its form. For example, the seller says ‘I will sell this car if my brother passed the exam’. This form contains uncertainty, in which no one of the contracting parties knows whether the condition will be attained or not.

4-? Future sale

Future sale is concluded contract between two parties, but the execution of the contract will be in identified date in the future. For example, the seller says ‘ I sell you my car at the beginning of next year’, and the buyer says ‘ I accept’. The gharar in this sale lies in the language of the contract, in which it will be implemented in the future, and this might lead to uncertainty and disputes between the parties of the contract.

Gharar on the object of sale

Gharar also might lie in the subject matter of contract in terms of many aspects. First, in the existence of subject matter. Second, in the delivery of subject matter. Third, in the feature of subject matter. Accordingly, the gharar in the object of sale might be classified as follows(Al-Dhareer 1997);

1-? Uncertainty in the existence of subject matter

2-? Ignorance in genus or species or characteristics of subject matter.

3-? Uncertainty of the subject matter delivery.

4-? Ignorance in the quantity of the subject matter.

5-? Ignorance in the identity of the object of sale.

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?Impact of gharar on the contract

When it comes to the impact of gharar on contract, we should talk about many aspects in this context:

?First, the amount of gharar

Ignorance that might occur in the contract is varying. In which some of it leads to extreme risk, while other has slight and acceptable risk. Accordingly, the legitimacy of the contract depends on how much gharar that the contract has. Based on that, the gharar could be divided into three categories(Ayub 2007);

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1-? ? Excessive gharar, which occurs when the subject matter of contract or price is completely unknown or doubtful. For example, selling an unborn animal, or selling what the diver will find, or selling what is an unknown genus or species or features. Some jurists append this kind of gharar to gambling, as the consequences in both are completely unknown(AL-SAATI 2003). This gharar is unanimously prohibited, and the contract that involves this gharar is considered invalid.

2-? Slight gharar, which is unavoidable gharar, and it always leads to affordable risk. For example, buying a house without knowing the quality and kind of materials that have been used to build the foundations of the house.? There is consensus between scholars that the slight gharar is not prohibited, as it usually does not lead to a dispute between parties to the contract.

3-? Average gharar,? which falls between the excessive one and the slight. There is a wide controversy between scholars in defining this gharar, and the contracts that fall in this category are disputed. The shariah rule, in this case, depends on which category will the contract be classified. For the scholars who categorize it as an excessive gharar then it is prohibited, and for scholars who consider it as a slight gharar will be permissible.?????????

?Second, the impact of gharar on contract

As it is known, in Islamic finance there are two types of void contract. First, invalid contract, which is a contract that at least one of its pillars is missing. This contract can not be corrected by fulfilling the missing cornerstone, as it has not primarily concluded. So, it needs to be concluded once again. Second, defective contract, which is lacked at least one of the contract conditions. This contract could be corrected by fulfilling the missing condition without the need to be concluded again.??

Based on that, some scholars consider the contract that has gharar pertains to one of the contract pillars as invalid as if the existence of the subject matter is unknown. However, if the gharar pertains to the conditions of contract, as if the features of the object of sale are unknown, so the contract is defective(Zu?aylī 2001).?

To sum up, there is a difference between scholars in defining the concept of gharar. The majority of scholars define gharar as uncertainty and ignorance that might relate to one of the contract pillars, leading to an anonymous consequence. Also, the concept of gharar does not mean the term of risk as it is defined in economics, in contrast, generally, taking risk is strongly encouraged in Islamic finance.? In addition, gharar could occur in the language of contract as well as the subject matter. The impact of gharar on the contract depends on the amount of it involved in the contract, as the gharar based on that is divided into three categories: excessive, slight, and average gharar. Only excessive gharar could invalidate or corrupt a contract, while slight gharar is allowed, and the average gharar is disputed whether it is prohibited or not.

References

?Al-Dhareer, S. (1997). Al Gharar in Contracts and Its Effect on Contemporary Transactions. JEDDAH, KINGDOM OF SAUDI ARABIA: ISLAMIC RESEARCH AND TRAINING INSTITUTE, ISLAMIC DEVELOPMENT BANK The.

AL-SAATI, A.-R. (2003). The Permissible Gharar ( Risk ) in Classical Islamic Jurisprudence. Journal of King Abdulaziz University-Islamic Economics, vol. 16(2), pp. 3–19.

Ayub, M. (2007). Understanding Islamic Finance. England. John Wiley & Sons Ltd.

Habib, S. (2018). Fundamentals of Islamic Finance and Banking. 1st edn. Chichester, West Sussex, United Kingdom, John Wiley & Sons Ltd.

Obaidullah, M. (2016). ISLAMIC FINANCIAL.

Zu?aylī, W. (2001). Al-Fiqh Al-Islam wa ’Adillatuh (Islamic Jurisprudence and Its Proofs). Damascus: Dˉar Al-Fikr.