Principles of Islamic banking and finance/PIBF201/Rationale for Islamic finance/Rationale Behind Prohibition of ''Gharar'' and ''Mysir''

The Prohibition of Gharar in the Sources of Shari`ah

There is no specific verse in the Qur’an that proscribes gharar explicitly. However, the vanity (albatil) is forbidden in many of its verses. For example, in one occasion Allah says in the Qur’an: “And do not eat up your property among yourselves for vanities, nor use it as bait for the judges” (2:188). While in another place it mentions: “O ye who believe! Eat not up your property among yourselves in vanities; but let these be amongst you traffic and trade by mutual good will” (4:161).

There is a consensus among those interpreted three verses that Gharar is vanity. Ibn Al-Arabi explains that vanity (al-batil) is unlawful because it is prohibited by Sharia`h such as riba and gharar. While Al-Tabari considers vanity as eating up other’s property in a manner which was not permitted by Shari`ah, Zamakhshari considers the act which was forbidden by Shari`ah as vanity such as theft, dishonesty, gambling and Gharar contracts. The Quran explicitly forbids gambling (maysir) and usury, while the Sunnah forbids gharar sale, and there are many transactions which can be considered vanities yet not mentioned explicitly in the Qur’an and Hadith but left to pious Muslim’s judgment to consider it.

Reliable sources have reported through a number of the Prophet’s companions that the Prophet (pbuh) has forbidden gharar in trading. The Hadith is considered as one of the cardinal principles of sale's law and the ground norm of all rules governing gharar contract. This Hadith gives rise to three juristic consequences:

a) The prohibition of gharar sale, this is the outcome of general consensus of Sharia`h scholars. b) The invalidity of gharar contract as it is considered null and void by the consensus of Shari`ah scholars. c) The prohibition extends to all forms of gharar.

The Rationale Behind the Prohibition of Gharar

The rationale for the Prohibition of gharar is to ensure full consent and satisfaction of the parties in a contract. Without full consent, a contract may not be valid. Full consent can only be achieved through certainty, full knowledge, full disclosure and transparency. In financial contracts gharar may lead to injustice, exploitation and enmity among contracting parties. The jurists have identified several rationales for the prohibition of gharar sale. Some of them were related to fraud since such a sale amounts to obtaining the property of others by selling unavailable goods and also the contract may lead to disputes and disagreements between the parties in the contract. While in Islamic law, an agreement must bring an immediate and certain obligation. In the following discussion, we will summarize those rationales for prohibition of gharar. The aim of such prohibition of gharar by the lawgiver in Islam was:

1. To avoid badly anticipated losses and disputes with reference to quantities and qualities of goods as well as due payments. 2. To avoid inequity in exchange. 3. To protect the weak against exploitation by the strong. 4. To ensure that the commercial partners exactly know the counter value which is offered in a transaction since gharar stands for not knowing the value of a purchased good. 5. To ensure that one party does not have unfair advantage over the other as Islam seeks to ensure justice, equity and fair play in all business dealings. 8. Not to cause a vendor to consume or erode the property of others unlawfully especially if it is supposed that the purchaser cannot take possession of the transacted goods. 6. To avoid enmity, in which case a broad scope of risky transactions becomes valid. 7. To avoid ignorance or non-existence. This implies a restrictive scope of valid transactions. 8. To avoid contracts involving fraud and deception. This may subsequently lead to disagreements between the parties.

Pure Games of Chance (Al-Mysir)

The following Quranic verses form the basis of prohibition of contracting under conditions of games of chance.

o ye who believe! intoxicants and gambling, sacrificing to stones, and (divination by arrows, are an abomination, - of Satan’s handiwork: eschew such (abomination), that ye may prosper. (3:90)

o Satan’s plan is (but) to excite enmity and hatred between you, with intoxicants and gambling, and hinder you from the remembrance of Allah, and from prayer: will ye not then abstain? (3:91)

o They ask thee concerning wine and gambling. Say: `In them is great sin and some profit, for men; but the sin is greater than the profit.’ They ask thee how much they are to spend; say: `what is beyond your needs’. Thus doth Allah make clear to you His signs: in that ye may consider. (4:219)

From the above, it is clear that the Quran prohibits contracting under conditions of uncertainty and gambling (qimar). The two words, uncertainty and gambling are not synonymous, though related. Uncertainty is same as gharar and under such conditions, exchange or contracting is reduced to a gamble. It is interesting to note here that a major objection of contemporary scholars against forwards, futures and options contracts is that these are almost always settled in price differences only. Hence, these are used more as tools of gambling than as tools of risk management. The former two are also supposed to involve settlement risk.

However, note that settlement risk is significant only in case of forwards. Modern futures and options markets involve little settlement risk. Interestingly, the classical istisna contract is also a forward contract but is held permissible. The reason seems to be that this contract with the manufacturer of the product by a buyer involves insignificant settlement risk, as the contract is with the manufacturer himself. It cannot be used for gambling too.