Overview

It is generally presumed that Islamic Banking means an interest-free banking. The notion arose from the fact that the business of conventional banks is based on interest while an Islamic Bank works on interest free basis. It is for this reason that whenever the concept of Islamic Banking is referred to it is presumed that it denotes to an interest-free banking.

No doubt, there is no wrong in the notion that an Islamic Bank is an interest-free bank. But the fact is that a bank can not be declared an Islamic Bank merely on the ground that its business is interest-free. In fact there are other requirements of Shariah to be complied with by the bank to become an Islamic institution. The bank is required to observe all Injunctions of Shariah with regard to Halal and Haram (permissible and not permissible) besides its being based on interest free basis.

The basic concept of the conventional banks is not acceptable in Islamic Banking. It is said about the conventional banks that: "The Banks deal with the documents only." Meaning by that the banks from the issuance of loan to the stage of its receipt works only with papers.

There are various Injunctions of Shariah covering different modes of finances, used in Islamic Banks, relate to gharar (uncertainty). It means that these Injunctions of shariah consist upon such conditions, disregard of any of them results in gharar. To avoid gharar is imperative according to shariah rules. On the basis of this principle it is necessary for an Islamic Bank to avert gharar for the purpose to keep itself away from Riba (interest).

It is also necessary to explain here that gharar does not relate only to the transactions done in an Islamic Bank, rather it is connected to all transactions we do in our daily business. Being unaware with the fact of gharar we sometimes become involved, in a business which is unlawful in Shariah. It is therefore necessary to fully understand the implications of gharar in our day to day transactions, so that we can do the business fully in accordance to Shariah rules.

       What is Gharar?

In Arabic Language gharar means to cheat, to tempt and to cause uncertainty.

According to Islamic Jurisprudence gharar means:
A contract which consists upon some risk to the compensation of one of the parties and this risk relates to the actual ingredients of the contract.

Risk of one of the parties pertaining to compensation, which relates to the ingredients of the contract. A good translation of Gharar is “risk” or “uncertainty”.

It could also be defined as:
Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling.

Keeping in view Ahadith and the work of Islamic Jurists, Gharar can be defined as follows:
“The uncertainty that is present in the Basic elements of an Agreement: Wording, Subject Matter, Consideration and the Liabilities”.

Many classical examples of Gharar were provided explicitly in the Hadıth. They include the sale of fish in the sea, birds in the sky, an unborn calf in its mother’s womb, a runaway animal, the semen and unfertilized eggs of camels, un-ripened fruits on the tree, etc. All such cases involve the sale of an item which may or may not exist. In such circumstances, to mention but a few, the fish in the sea may never be caught, the calf may be still-born, and the fruits may never ripen.

In all such cases, it is in the best interest of the trading parties to be very specific about what is being sold and for what price.

       Prohibition of Gharar in Hadith

Ahmad and Ibn Majah narrated on the authority of Abu-Saıd AlKhudriy (RAW):
The Prophet (PBUH) has forbidden the purchase of the unborn animal in its mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.

The last prohibition in this Hadıth pertains to a person paying a fixed price for whatever a diver may catch on his next dive. In this case, he does not know what he is paying for. On the other hand, paying a fixed price to hire the diver for a fixed period of time (where whatever he catches belongs to the buyer) is permitted. In this case the object of sale (the diver’s labor for say one hour) is well defined.

       Examples

In many cases, Gharar can be eliminated from contracts by carefully stating the object of sale and the price to eliminate unnecessary ambiguities.

In contemporary financial transactions, the two areas where Gharar most profoundly affects common practice are insurance and financial derivatives. Jurists often argue against the financial insurance contract, where premia are paid regularly to the insurance company, and the insured receives compensation for any insured losses in the event of a loss. In this case, the jurists argue that the insured may collect a large sum of money after paying only one monthly premium. On the other hand, the insured may also make many monthly payments without ever collecting any money from the insurance company. Since “insurance” or “security” itself cannot be considered an object of sale, this contract is rendered invalid because of the forbidden Gharar. Of course, conventional insurance also suffers from prohibition due to Riba since insurance companies tend to invest significant portions of their funds in government bonds which earn them Riba.

The other set of relevant contracts which are rendered invalid because of Gharar are forwards, futures, options, and other derivative securities. Forwards and futures involve Gharar since the object of the sale may not exist at the time the trade is to be executed. As we are going to see, Islamic Law permits certain exceptions to this rule through the contracts of salam and istisna. However, the conditions of those contracts make it very clear that contemporary forwards and futures are not permitted under Islamic law.

Classical jurists called such contracts where both the price and the goods were to be delivered at a future date al-bay al-mud e.g.

“I sell you this car for so-much at the beginning of the next month”,

and considered them non-concluded and thus invalid. Contemporary options were also discussed by traditional jurists, e.g.

“I sell you my house for so-much if my father returns”,

and called it a suspended conditional sale (al-bay‘ al-mu‘allaq). They have also rendered such sales invalid due to Gharar
 

       Kinds of Gharar

In fact there are only two ingredients of the contract; subject matter and price. A state of a contract comprising upon an uncertainty with regard to both of the two or to anyone of them will be considered as gharar.

If we ponder upon a sale-contract we can realize that the contract can consist upon six types of gharar i.e.
1. Uncertainty relating to the existence of thing-sold.
2. Uncertainty relating to the possession of thing-sold
3. Uncertainty relating to the thing-sold itself.
4. Uncertainty relating to the price itself.
5. Uncertainty relating to the payment of price.
6. Uncertainty relating to both thing-sold and price.

It appears by a thorough examination of all these six categories that gharar is available in the last four kinds, either in both thing-sold and price or in one of them, a: all of them consisted upon jihalat (ignorance). Therefore, we can say that there are three reasons of gharar.
1. Uncertainty in the existence of thing-sold.
2. Uncertainty in the possession of thing-sold.
3. Jihalat (ignorance).

Jihalat (ignorance) is further divided into four kinds:
1. Ignorance in thing-sold.
2. Ignorance in the price.
3. Ignorance in the period.
4. Ignorance in the contract.