Gharar

From CEOpedia | Management online

Gharar (vulnerability, uncertainty) starts from the Arabic verb gharra/gharara, which implies to hoodwink [1].This is exposure to oneself and yours ownership to havoc without knowing about it [2]. Gharar is an important rule in Islamic finance and is utilized to degree the legitimacy of a dangerous deal or hazardous venture, can be related to dangers emerging from the lack of information about the contract ( price, time of delivery, object) incertitude of the outcome[3].

Islamic finance

Islamic finance, a total run the show based monetary framework, basics of which are begun from uncovered verses of the Holy Quran considered coordinate law from the God and the hones of Prophet Muhammad (pbuh) generally known as ahadith[4]. In spite of the fact that the concept of Islamic finance is as ancient as the religion itself but within the Middle Ages Muslims resigned from the first lessons of Islam, recently Islamic finance has begun to reemerge[5]. So, it is essential to realize the basic rules that distinguish Islamic finance diverse from its partner[6].

Rules

The rules they exist to Islamic finance are:

  • prohibition of Riba (interest)
  • Gharar (uncertainty)
  • Maysir (gambling)

These standards are based on the elemental sources and Islamic legal scholars, researchers and modern analysts uphold them in execute out the financial transactions[7]. In arrange to run a financial system agreeing to the Islamic standards, these concepts must be caught on clearly and all exchanges must be free from these rules[8].

Types of Gharar

Gharar in Islam alludes to all exchange of likely objects whose presence or depiction are not certain, due to lack of knowledge and information about of the end result of the contract or the nature and quality of the matter of it[9].

Gharar is separated into two types:

  • Gharar fahish (excess Gharar)
  • Gharar yasir (light Gharar)

Gharar fahish is related to the reasons why Gharar deals are prohibited.

Gharar yasir, which means a little or trivial uncertainty that is continuously shown in all contracts and conducts, in this way its presence is tolerated.

All researchers concur that each exchange has some of Gharar in it but they begin to vary when alluding to the amounts of Gharar in each transaction. Gharar happens in all sorts of exchanges where the subject, the cost or both, are not fixed and determined in advance [10].

Examples of Gharar in modern finance can be speculative activities in capital market, short-selling contracts and derivatives instruments. In addition, Gharar in praxis relates possibly to issues such as estimating, conveyance, quality and amount of resources that are transactional-based and would influence the quality or degree of assent of the parties to a contract[11]. For case, one cannot purchase options at a certain cost to have the proper to buy its underlying shares, as an ‘option’ isn't ascertainable and is in this way questionable[12].

Examples of Gharar

  • Gambling is a classic example of gharar, as it involves high levels of risk and uncertainty. Players do not know what the outcome of their wager will be, and this can lead to losses that are difficult to predict or anticipate.
  • Another example of gharar is the sale of a commodity before it has been produced. Since the producer cannot guarantee the quality or quantity of the item, there is a high degree of uncertainty involved in the transaction.
  • A third example of gharar is the sale of a commodity that is not in the possession of the seller. This can be a situation in which the seller offers a product that is not in their possession, or a situation in which the seller only has part of the product they are selling. In either case, there is no guarantee that the buyer will receive what they were promised.

Advantages of Gharar

Gharar can provide many advantages. It can be used to help create an environment of uncertainty and risk-taking, which can be beneficial in certain situations. Some of the potential advantages of gharar include:

  • Gharar can help to encourage innovation and creativity, as it creates a need to solve problems that arise from uncertain situations.
  • Gharar can also be used to encourage risk-taking and challenge existing norms, as it can be used to create a sense of uncertainty and encourage people to think outside the box.
  • Additionally, gharar can be used to promote collaboration and cooperation, as it can lead to a situation in which different parties must work together to solve a problem.
  • Finally, gharar can help to create a sense of social responsibility, as it can be used to ensure that everyone is held accountable for their actions.

Limitations of Gharar

Gharar is an Islamic term that describes the concept of vulnerability and uncertainty, which has been prohibited in Islamic finance. The limitations of gharar can be listed as follows:

  • In Islamic finance, gharar is a major source of concern as it can lead to uncertainty and vulnerability in contracts. This can lead to injustice and unfairness in transactions, which is not permissible in Islam.
  • Gharar also implies deception and fraud, which is strictly prohibited in Islamic finance.
  • Gharar also implies uncertainty and ambiguity, which can lead to a lack of trust and confidence between parties. This can lead to a breakdown in communication and a lack of transparency in the transaction.
  • Gharar also involves the element of chance, which can lead to gambling and speculation. This is discouraged in Islamic finance as it can lead to financial losses and risk.
  • Gharar also implies ignorance, which can lead to the exploitation of one party by the other. This is not permissible in Islamic finance and should be avoided.

Other approaches related to Gharar

Gharar is concept related to Islamic finance that refers to the risk of uncertainty and vulnerability associated with a transaction. Other approaches related to Gharar include:

  • Riba: Riba refers to the concept of usury or the charging of interest. It is prohibited in Islamic finance.
  • Maisir: Maisir refers to the concept of gambling. It is prohibited in Islamic finance.
  • Mudaarabah: Mudaarabah is a form of partnership where one party provides the capital and the other provides the labour. The profits are then shared between them according to a predetermined ratio.
  • Musharakah: Musharakah is a form of joint venture where two or more parties contribute capital to a business and the profits are shared according to a predetermined ratio.

In summary, Gharar is a concept related to Islamic finance that refers to the risk of uncertainty and vulnerability associated with a transaction. Other related concepts include Riba, Maisir, Mudaarabah, and Musharakah.


Gharar — recommended articles
Compromise — Phoenix company — Anonymous Trading — Principal agent problem — Tri party agreement — Material misrepresentation — Bid shopping — Forced sale value — Placement fee

References

Footnotes

  1. ↑ Paldi C.(red)(2014)
  2. ↑ Cizakca M.(red)(2010)
  3. ↑ Paldi C.(red)(2014)
  4. ↑ Uddin A.(red)(2015)
  5. ↑ Uddin A.(red)(2015)
  6. ↑ Uddin A.(red)(2015)
  7. ↑ Uddin, Md Akther(red)(2015)
  8. ↑ Uddin, Md Akther(red)(2015)
  9. ↑ Uddin A,(red)(2015)
  10. ↑ Uddin A,(red)(2015)
  11. ↑ Uddin A,(red)(2015)
  12. ↑ Uddin A,(red)(2015)

Author: Monika Kromka

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