The Philosophical Aspects of Islamic finance

Salient features and sources of Islamic finance

Islamic principles are based on the Qur’an, the Muslim holy book, and the Sunnah, the actions and sayings of Prophet Muhammad. If something is expressly forbidden in the Qur’an, such as gambling or taking advantage of orphans’ property, the Islamic principles are as stated in the Qur’an. There are matters on which the Qur’an and Sunnah do not elaborate in detail although there is always some relevant guiding principle in the Qur’an or Sunnah.

In the absence of a direct ruling from the Qur’an or Sunnah, scholars will resort to ijtihad. Ijtihad is the making of a decision in Islamic law (sharia) by personal effort of the scholar. In simple word, ijtihad is the view of the scholar but the view should be consistent with the spirit found in the Quran and Sunnah. For example, the Quran is silent on the position of genetically-engineered food, whether it is permissible or prohibited in Islam. There is some guidance from the Sunnah but not comprehensive enough.[1] In such situation, the people will ask the opinion of a scholar who will have to decide after analyzing the matter in detail. Are there any known side-effects that are harmful from such foods? Can the introduction of such food be properly regulated? What should be the legal and regulatory framework to ensure that the interest of the community is protected? All these must be considered.

Below are some elaborations on the aforementioned Islamic sources:

1. The Qur’an

The Qur'an was revealed over 1400 years ago to the prophet Muhammad (peace be upon him) in the early 7th century AD. It was revealed over a period of 23 years, with the first revelation being sent down when the Prophet (peace be upon him) was 40 years of age. The first revelation came to him when he was in a cave on mount Hira, situated east of the holy city of Mecca.

After the revelation the Prophet (peace be upon him) began to spread the message of The Qur'an to the people around him. Whenever he used to receive a revelation (usually through angel Gabriel), he used to first memorise it.

After memorising, he used to recite it in a company of his companions who then memorised it under the supervision of the Prophet (peace be upon him). The Prophet would then order them to write it down on scribes (shoulder blade bones, leaves, slate etc - whatever was available at the time) and he used to personally verify them. As the prophet didn't know how to read and write, the companions would first write it down and then read aloud what they had written. The prophet would point out any mistakes and correct them.

The Qur’an is the primary source of guidance in Islam. For Muslims, it is direct proof from God of the truthfulness of the teachings of Islam as revealed to the illiterate Prophet Muhammad. The Qur’an is not merely a legal document and only a small portion is composed of legal sanctions because the Qur’an is meant as guidance for all of humankind. The present-day Qur’an is the same as that revealed during the time of Prophet Muhammad:

During the lifetime of the Prophet, the text of the Quran was preserved not only in memories, but also in inscriptions on such available materials as flat stones, wood and bones, which would explain why it could not have been compiled in a bound volume. Initially, the first Caliph, Abu Bakr, collected the Quran soon after the Battle of Yamamah which led to the death of at least seventy of the memorisers of the Quran. Zayd b. Thabit, the scribe of the Prophet, was employed on the task of compiling the text which he accomplished between 11 and 14 Hijrah.[2]

At the time of the third Caliph Othman however, a companion named Hudhayfah ibn Al-Yaman noted that the people of the regions of present-day Syria and Iraq had begun disputing over various pronunciations of some of the words of the Qur’an, while new Muslims in provinces outside Arabia were unsure which dialect should be learned. He therefore requested Hafsa to send him the manuscript of the Qur’an which was in her safekeeping, and ordered the production of several bounded copies of it using the Quraysh dialect (the dialect of the Prophet himself and in which the Qur'an had commenced being revealed in). This task was entrusted to several of the Companions.

To meet the high standard of intellectual integrity obtaining at the time, 'Uthman ordered that all the copies which were made should be read aloud, one by one, from beginning to end in the Prophet's mosque.

Othman returned the original manuscript to Hafsa and sent the copies to the major Islamic provinces to replace other materials that were in circulation. He also ordered that all other extracts or copies of the Qur’an which differed from that undoubted “official” copy (including incomplete manuscripts and those with additional personal notes) be burnt so that the Qur’an would not suffer the same fate of alterations, uncertainty of authenticity and contradictory versions which characterized prior religious scriptures.

All the copies of The Holy Qur'an which have come down to this generation from the first century of the Hijra (Muslim calendar) are the same as the six copies sent to different capitals by Uthman. Some of those copies are still preserved today and are proven to be identical to all modern Qur’ans. Some of the references include: The Tashqand Museum, Topkapi Museum of Istanbul, India office library and several other places, with digital scans available for download from certain copies.

Muslims believe that the Qur’an is the divine word of God, as revealed to and transmitted by the last of the prophets, Prophet Muhammad. As the primary source of Islamic law, all other sources must be considered alongside the Qur’an and are referred to only when a matter is not clarified in detail in the Qur’an. The Qur’an consists of more than 6,000 verses (in 114 chapters) that were gradually revealed over twenty-two years. The first verse is ‘Read in the name of your Lord’ (al-Alaq (96:5) and the last verse is ‘This day We have perfected for you your religion and I have completed my bounties and I am pleased with the Religion of Peace’ (al-Maidah 5:3).

Muslims believe that previous holy books like Bible (the holy book for Christians) and Torah (the holy book for followers of Judaism) were revealed by the same God but have been modified and changed by their followers in the course of time. On the other hand, the authenticity of Quran is guaranteed and history has shown that the Quran used nowadays is the same with the one used in the time of the Prophet, more than 1,400 years ago.  

2. The Sunnah

Muslims do not have any dispute about the Qur'an, as it is accepted by Muslims as the only preserved and direct revelation from Allah. However, such agreement does not exist about hadith.

The Sunnah is the sayings, actions or tacit approval of Prophet Muhammad. Some of the Prophet Muhammad’s counsel was recorded in the Hadith literature. Hadith is a recorded collection of the sayings, actions or tacit approval of Prophet Muhammad. Muslim scholars unanimously agree that the Sunnah and the Hadith are fundamental to understanding the Qur’an. The detailed and comprehensive tenets recorded in the Hadith are mostly from the eighth and ninth centuries. The six major Hadith collections are: (1) Sahih Bukhari, collected by Imam Bukhari, which includes 7,275 hadiths; (2) Sahih Muslim, collected by Imam Muslim, which includes 9,200 hadiths; (3) Sunan al-Sughra, collected by al-Nasa’i, which has about 5,270 hadiths; (4) Sunan Abu Dawood, collected by Imam Abu Dawood, which has 4,800 hadiths; (5) Jami al-Tirmidhi, collected by al-Tirmidhi, which has 3,956 hadiths; and (6) Sunan ibn Majah, collected by Ibn Majah, which has over 4,000 hadiths.

At one position is the orthodox or general position, which holds that the Qur'an and hadith are two complementary primary sources of Islamic guidance. There might be problems with hadith as a body of information, with the way it was collected and compiled. However, hadith experts and scholars have been successfully able to separate the presumably authentic (sahih) ones from the ones that are not. Despite any remaining problems, hadith is an essential and generally reliable foundational source of Islam. Certain hadith collections as a whole are regarded as generally authentic (sahih), while many other collections are also recognized as sources containing additional authentic hadith, mixed with unauthentic (sahih), weak (da'if) or even spurious (maudu) hadith.

For Muslims, the sunnah and ahadith are not to be taken as the wise sayings of ancient sages and philosophers or the verdicts of rulers and leaders. One should believe with full conviction that the words and actions of the Prophet represent the will of God, and thus one has to follow and obey them in each and every circumstance of life.

At the other extreme are those who reject the hadith literature altogether. Rejection of hadith in totality as a valid source is very serious and the rejectors are not considered Muslims anymore. This is because Quran and Sunnah supplement each other. For example, praying is commanded in the Quran but the details are only provided in the Sunnah. Rejection of hadith and sunnah will make it impossible to perform the commanded praying.

3. Ijma’ (consensus)

Ijma’ can be defined as the unanimous agreement of the Muslim community for any period, following the demise of the Prophet Muhammad, on any given matter and once once an ijma’ is established, it tends to become an authority in its own right.[3]

Some scholars argue that the consensus of all Islamic scholars is considered as one of the sources of Islamic law because Prophet Muhammad explained that the Muslim community would not be in consensus regarding something wrongful.

One of the purposes of ijma' is to limit differences and to prevent them from disintegrating the Muslim society. This role of ijma' is comparable to the role of the Pope in Catholicism. But ijma' has not been as effective in ensuring cohesion of the society and in providing answers to new questions. This is partly because ijma' is itself subject to differences of view. Furthermore, it is often extremely difficult to know whether or not ijma' on a matter has taken place, so much so that Imam Ahmad bin Hambal reportedly used to say that anyone claiming ijma' (after the age of sahaba/the companions) is a liar. In other words, we do not know exactly what ijma' is or what it is saying. In contrast, those who believe in papacy can know both who the Pope is and what he is saying.

This, of course, does not mean that Muslims should adopt something like the institution of papacy. The idea of a priestly hierarchy having an exclusive right to define religious doctrines and rules and given obedience as infallible is totally against the grain of Islam and is apparently condemned as shirk in the Qur'an:

"And (Jews and Christians) take their ahbar (priests) and ruhban (monks, saints) as lords besides God" (9:31)

During the time of Prophet Muhammad, the Christians and Jews community came to meet Prophet Muhammad and complained that they have never worshipped their priests and saints. Prophet Muhammad explained that when God forbid them from doing something and the priest permit it, they follow the priest. When God permitted something but the priest prohibits it, they also follow the priest. The prophet explained that this is equivalent to worshipping the priest.

In Islam, there cannot be any ijma’ when something is contrary to Quran or Sunnah.

4. Qiyas (analogy)

Qiyas is a method that uses analogy – comparison – to derive Islamic legal rulings for new developments. If a matter is not directly mentioned in the two major sources of Islamic law, analogy can be used as the next source of law. For example, drinking wine is prohibited in the Qur’an because drinking wine can lead to intoxication. Therefore, drinking beer is also prohibited by way of extension. The shared cause for the prohibition here is the intoxication factor.

Another example is on the whether murderer can receive bequest from the person he or she killed. There is a hadith from the Prophet (p.b.u.h.) that says: “The murderer will not inherit.”

This hadith prohibits the granting of inheritance to an heir who kills his predecessor from whom he is to inherit. The punishment for such an offender, in addition to the punishment for his crime, is deprivation from inheritance. What about a bequest (Wasiyah)? The hadith mentions inheritance alone and not bequest. Supposing a legatee murders the testator, who has bequeathed his property to the legatee in his will. The offending legatee will be prevented from taking the bequeathed property on the basis of Qiyas, because the ‘illah (or the reason for the prohibition) in the two cases is similar, which is “hastening the benefit prior to its appointed time through a criminal act.”

Analogy in Islamic fiqh denotes the connection of something without a text to its judgment by another textual matter with a judgement by virtue of a shared cause between the two. It is part of submitting to the principle of similarity between matters which obliges similarity in its judgements because sameness in the cause obliges similarity in judgement. Thus analogy is natural and logical because of the logical connection based on similarity. When the similarity is complete, then it must be connected to the same judgement.

Secondary Sources:

Although some scholars agree that the items in the following list are the secondary sources of Islamic law, there are others who question their applications. Hence, these secondary sources are not unanimously accepted by Muslim scholars.

1. Istihsan (juristic preference): Istihsan (استحسان) is an Arabic term for juristic "preference". In its literal sense it means "to consider something good". Muslim scholars may use it to express their preference for particular judgements in Islamic law over other possibilities. It is one of the principles of legal thought underlying personal interpretation or ijtihad.

An example of istihsan is when someone dies leaving a husband, and two siblings by the mother and two full siblings. Under Islamic law of inheritance, the application of analogy to this question would demand that the husband inherits a half, the mother a sixth and the brothers have a third, and there is nothing for the full siblings although they are the children of the mother. So it is strange that they do not take anything while the maternal half-siblings alone receive a third. That is why 'Umar made them share in the third by the consideration that they are the sons of the mother. That is an excellent istihsan on his part. That establishes the sunna of istihsan to establish justice which averts distress.

Imam Shafi'I (Imam Malik's pupil), objected against his teacher on this matter and said that istihsan amounted to abandoning the evidence for benefit which was tantamount to adopting the principle of benefit alone without attempting to rely on the texts. He criticised that and said that it was wrong and wrote a chapter on that in al-Umm called, "The Chapter of the Invalidation of Istihsan."

Sarakhsi points out that some jurists have criticised Istihsan on the grounds that the analogy is being given up for personal opinion, something prohibited in Islam. He refutes this understanding as incomprehensible, as no jurist would give up an authority for something that lacked evidence

2. Urf (custom): To be recognized in an Islamic society, urf must be compatible with the Sharia law. Urf is a source of rulings where there are not explicit primary texts of the Qur'an and Sunnah specifying the ruling. `Urf can also specify something generally established in the primary texts.

Among the evidence for the recognition of custom in Islamic Law is the following hadith related by `A'ishah:

Hind, the mother of Mu`âwiyah, said to the Prophet (peace be upon him): “Abû Sufyân (Hind's husband) is a tight-fisted man. Is there anything wrong if I take money from him secretly?” The Prophet (peace be upon him) said: “Take for yourself and your children to suffice your needs according to what is customary.” [Sahîh al-Bukhârî]

3. Masalih al-Mursalah (consideration of public interest:

Those who claim that Al Masalih Al Mursalah is a legal source of Shari'ah claimed that the Illah (reasoning) of the entire Shari'ah is to ensure benefit and to prevent harm, and they subsequently claimed that this Illah also serves as an Illah for legislating each Hukm Shari'. Some of those who hold this opinion established a condition that a legal text must exist to validate any Maslahah, whether the specific Maslahah (benefit) is mentioned explicitly by name or the category of Maslahah is approved in general by the text. Others did not make these conditions and considered maslahah as a legal source itself, even if these benefits do not emanate from any legal text. This view stems from the general idea that the Shari'ah was revealed to ensure benefit and prevent harm.

4. Sadd al-Dharai (blocking/preventing (evil):

The concept of Sadd al-Dharai is founded on the idea of prevention of evil before it materializes. There are examples of Sadd al-Dharai in the Quran (for instance, 6:108;  2:104). The means must conform to the ends (objectives of Shariah) and ends must prevail over the means. If the means violate the purpose of Shariah, these must be blocked. The purpose (Maqasid) of Shariah are identifiable from the texts.

Ibnu Arabi and Abu Zahra are in favour of moderation in its use. People of extremist tendencies can use sadd al-Dharai to restrict human freedom granted by Allah and the Prophet(SM) which is not good for the Ummah.

5. Amal ahl al-Madinah (the practice of the people of Madinah)

For Imam Malik there is another source which is as important as other sources - and that is the ‘amal, or "practice", of the people of Madina.

The correct hierarchy of the sources of Islamic principles can be seen in the following hadith:

Narrated Mu'adh ibn Jabal: Some companions of Mu'adh ibn Jabal said: When the Apostle of Allah (peace be upon him) intended to send Mu'adh ibn Jabal to the Yemen, he asked: How will you judge when the occasion of deciding a case arises? He replied: I shall judge in accordance with Allah's Book. He asked: (What will you do) if you do not find any guidance in Allah's Book? He replied: (I shall act) in accordance with the Sunnah of the Apostle of Allah (peace be upon him). He asked: (What will you do) if you do not find any guidance in the Sunnah of the Apostle of Allah (peace be upon him) and in Allah's Book? He replied: I shall do my best to form an opinion and I shall spare no effort. The Apostle of Allah (peace be upon him) then patted him on the chest and said: Praise be to Allah Who has helped the messenger of the Apostle of Allah to find something which pleases the Apostle of Allah.[4]

The development of Islamic law is largely a result of the effort or ijtihad of the scholars. According to Kamali:

Ijtihad is the most important source of Islamic law next to the Qur’an and the Sunnah. The main difference between ijtihad and the revealed sources of the Shariah lies in the fact that ijtihad is a continuing process of development whereas divine revelation and Prophetic tradition discontinued upon the demise of the Prophet. In this sense, ijtihad continues to be the main instrument of interpreting the divine message and relating it to the changing conditions of the Muslim community in its aspirations to attain justice, salvation and truth. Since ijtihad derives its validity from divine revelation, its propriety is measured by its harmony with the Qur’an and the Sunnah.[5]

Under Islamic law, a ruling or decision must be based on the Qur’an or the Sunnah whenever possible. When a matter is not directly mentioned, it should be decided based on the general guidelines prescribed in the two sources.These primary sources of Islamic law are akin to modern statutory provisions and legislations, while the secondary sources of Islamic law are similar to the interpretations of those provisions and legislations made by scholars and experts. Islamic teaching goes beyond law to include moral and ethical considerations as reflected in the following hadith:

Yahya related to me from Malik from HishamibnUrwa from his father from Zaynab bint Abi Salama from Umm Salama, the wife of the Prophet, may Allah bless him and grant him peace, that the Messenger of Allah, may Allah bless him and grant him peace, said, ‘I am but a man to whom you bring your disputes. Perhaps one of you is more eloquent in his proof than the other, so I give judgement according to what I have heard from him. Whatever I decide for him which is part of the right of his brother, he must not take any of it, for I am granting him a portion of the Fire’.[6]

Different perspectives are common among scholars. However, mutual respect is necessary. Even the most revered scholars, including the leaders of the main school of Islamic jurisprudence and the individual schools of thought, entertain differences of opinion. For example, Imam Shafi’i, the founder of the Shafi’i school of thought, wrote a book in which he criticized some of the views of his teacher, Imam Malik, the founder of the Mālikī school of thought.

Many scholars have written detailed and comprehensive books on various matters from faith to Islamic finance. While this literature is are very useful, on certain matters regarding financial transactions many of the recorded views suit the unique needs of the time and place in which they were written. Therefore, as long as the matter is not expressly stipulated in the Qur’an or Sunnah, the scholars of later generations are free to depart from the earlier views.  

2.2      General theory of contracts in Islamic law

The general theory of contracts under Islamic law is that every contract is valid and allowed unless those containing elements prohibited under Islam. Islamic is actually permissive in nature and the Quran was not revealed in order to make things difficult for mankind. Certain matters are prohibited under Islam for the benefit for mankind. However, whenever something is prohibited, a better alternative is usually offered. 

Encouraged elements in Islamic finance

One of the beauties of Islamic finance is its insistence on good morality and kindness. Some elements are required and binding e.g. honesty, transparency, clarity and fairness as discussed in subsequent chapters. In addition to the basic elements, other good elements are also encouraged. These elements, if used wisely, will make Islamic financial products and Islamic finance in general much more attractive. These elements include:

• Kindness in re-claiming loan
• Immediate or fast payment of salary
• Good and effective risk allocation mechanism
• Flexibility in giving and claiming loan

Prohibited elements in Islamic finance

Islam in general and Islamic finance in particular, is actually permissive in nature. The idea of Islam is not to cause hardship or burden to the people. It is stated in the Holy Quran:

We have not sent down the Qur'an unto you to cause you distress, But only as a Reminder to those who fear (God). A revelation from Him (God) Who has created the earth and high heavens.           (Chapter Ta-Ha, Holy Qur’an).

The general theory is that everything is permissible in Islam except those expressly prohibited in the primary sources of Islam. Muslims believe that only bad and evil things are prohibited in Islam. Under Islam, the final say whether an action is bad and evil or good and permissible is only with God.

Basically, the following are some of the prohibited elements in Islam:

·                  Usury: Usury is strictly prohibited in Islam. People are encouraged to make money by working, or from business, but it is prohibited to make money simply by giving loan to those in needs and then charge them interest. In other words, money should be earned by honest effort.

·      Gambling: Gambling is strictly prohibited in Islam.

·                  Excessive uncertainty: People are requested to avoid things or transactions that contain excessive uncertainty. In a way, this prohibition is an extension of the prohibition of gambling.

·                  Cheating and other deceptive practice: Cheating, deceptive practice and similar practices will cause enmity and hatred. All these practices are prohibited in Islam. 

2.3      Prohibition of riba, gharar and maysir

The prohibition of riba

Riba is forbidden in Islamic economic jurisprudence (fiqh) and considered as a major sin. Simply, unjust gains in trade or business, generally through exploitation.

There are two types of riba discussed by Islamic jurists: an increase in capital without any services provided and speculation (Maisir), which is prohibited by the Qur'an, and commodity exchanges in unequal quantities, also prohibited in the Qur'an.

Riba is an Arabic word that refers to usury. However, Quran do not define riba. The first thing one notes about the common, traditional, definition of riba is that it is not based on any explicit text in the Qur`an or on any authentic hadith. By going through the nine Qur`anic verses (2:275-280, 3:130, 4:161, 30:39) about riba, one sees that they prohibit riba in very strong language, but do not define it. The situation is similar in the case of the Hadith, if we duly bring into consideration the question of authenticity of the ahadith considered.

Below are some of the verses on riba from the Quran:

(1) Those who swallow down usury cannot arise except as one whom Shaitan has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. To whomsoever then the admonition has come from his Lord, then he desists, he shall have what has already passed, and his affair is in the hands of Allah; and whoever returns (to it)-- these arc the inmates of the fire; they shall abide in it.  (Al-Baqara, Chapter 2, Verse 275)

(2) Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner. (Al-Baqara, Chapter 2, Verse 276)

(3) O you who believe! Be careful of (your duty to) Allah and relinquish what remains (due) from usury, if you are believers. (Al-Baqara, Chapter 2, Verse 278)

(4) O you who believe! do not devour usury, making it double and redouble, and be careful of (your duty to) Allah, that you may be successful. (Aal-e-Imran, Chapter  3, Verse 130)

(5) And their taking usury though indeed they were forbidden it and their devouring the property of people falsely, and We have prepared for the unbelievers from among them a painful chastisement. (An-Nisa, Chapter 4, Verse 161)

(6) And whatever you lay out as usury, so that it may increase in the property of men, it shall not increase with Allah; and whatever you give in charity, desiring Allah's pleasure-- it is these (persons) that shall get manifold. (Ar-Room, Chapter 30, Verse 39)

The concept of usury in Islam differs from the typical Western understanding of the term. Riba’ is not merely an increase in the repayment amount involved in a loan transaction. The term riba’ represents a complicated concept that warrants a comprehensive elaboration, although the basic features are easy to understand.[7]

For simplicity, every loan in which the borrower is required to pay more than the amount borrowed is riba’. However, the prohibiton of riba’ is more than borrowing money with interest. The prohibiton of riba also cover the six commodities mentioned earlier.

Below are some of the hadith on riba:

The Prohibition of riba

1. Sahih Muslim, Book 10, Number 3881:

Jabir said that Allah's Messenger (may peace be upon him) cursed the accepter of interest and its payer, and one who records it, and the two witnesses, and he said: They are all equal.

2.     Sahih Bukhari, Muslim , Abu Dawud, Nasai

Abu Hurairah reports that the Prophet said: “Refrain from seven deadly things: The companions asked him: What are these? He said: To associate partners with Allah, sorcery; to kill a soul without valid reason in the eyes of Allah; to devour interest; to devour the property of the orphan; to flee from the battlefield; and to falsely implicate chaste, innocent, believing women of vulgarity.”

3.     Ibn Majah

From Abu Hurayrah : The Prophet, , said: "Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother."

4.     Ahmed, Ibn Majah

Hazrat Abu Hurairah radiyallahu anhu reported that the Messenger of Allah  said: I came across some people in the night in which I was taken to the heavens. Their stomachs were like houses wherein there were serpents, which could be seen from the front of the stomachs. I asked :O Gabriel! Who are these people? He replied these are those who devoured usury.

5.     Ahmed

From 'Abdallah ibn Hanzalah : The Prophet, , said: "A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times"

6. Sahih Bukhari, 2.468, Narrated Samura bin Jundab, r.a:

He speaks of in a dream related to the Prophet (SAW) that there is a river of blood and a man was in it, and another man was standing at its bank with stones in front of him,facing the man standing in the river. Whenever the man in the river wanted to come out, the other one threw a stone into his mouth and caused him to retreat back into his original position. The Prophet was told that these people in this river of blood were people who dealt in Riba (usury).

Challenges on the issue of riba’

7.     Ibn Majah

Umar is reported to have said: Three issues are such where I wish the Prophet had explained them to us in further detail. [Two of these relate to inheritance (the grandfather and kalaalah/deceased who has no ascendants or descendants] and certain chapters of Riba’.

8.     Ibn Majah

From 'Umar ibn al-Khattab : The last verse to be revealed was on riba and the Prophet, , was taken without explaining it to us; so give up not only riba but also raibah [whatever raises doubts in the mind about its rightful-ness].

What is riba’? If it is the ribawi items, it must be of equal value and on the spot. Otherwise, it will be riba’. The ribawi items/commodities are gold, silver, wheat, barley, dates, and salt.

9. Sahih Muslim, Book 10 ,Number 3850:

Malik b. Aus b. al-Hadathan reported: I came saying who was prepared to exchange dirhams (for my gold), whereupon Talha b. Ubaidullah (Allah be pleased with him) (as he was sitting with 'Umar b. Khattib) said: Show us your gold and then come to us (at a later time). When our servant would come we would give you your silver (dirhams due to you). Thereupon 'Umar b. al-Khattib (Allah be pleased with him) said: Not at all. By Allah, either give him his silver (coins), or return his gold to him, for Allah's Messenger (may peace be upon him) said: Exchange of silver for gold (has an element of) interest in it, except when (it is exchanged) on the spot; and wheat for wheat is an interest unless both are handed over on the spot: barley for barley is interest unless both are handed over on the spot; dates for dates is interest unless both are handed over on the Spot.

10. Sahih Muslim, Book 10 ,Number 3845:

Abu Salid al-Khudri reported Allah's Messenger (may peace be upon him) as saying: Do not sell gold for gold, except like for like, and don't increase something of it upon something; and don't sell silver unless like for like, and don't increase some thing of it upon something, and do not sell for ready money something to be given later.

11. Sahih Muslim, Book 10, Number 3848:

Abu Sa'id al-Khudri (Allah be pleased with him) reported Allah's Messenger (may peace be upon him) as saying: Do not sell gold for gold and silver for silver weight for weight or of the same quality.

12. Sahih Muslim, Book 10, Number 3849:

'Uthman b. 'Affan reported Allah's Messenger (may peace be upon him)as saying: Do not sell a dinar for two dinars and one dirham for two dirhams.

13. Sahih Bukhari

Narrated Ibn Shihab: that Malik bin Aus said, "I was in need of change for one-hundred Dinars. Talha bin 'Ubaid-Ullah called me and we discussed the matter, and he agreed to change (my Dinars). He took the gold pieces in his hands and fidgeted with them, and then said, "Wait till my storekeeper comes from the forest." 'Umar was listening to that and said, "By Allah! You should not separate from Talha till you get the money from him, for Allah's Apostle said, 'The selling of gold for gold is Riba (usury) except if the exchange is from hand to hand and equal in amount, and similarly, the selling of wheat for wheat is Riba (usury) unless it is from hand to hand and equal in amount, and the selling of barley for barley is usury unless it is from hand to hand and equal in amount, and dates for dates, is usury unless it is from hand to hand and equal in amount".

14. Sahih Muslim, Book 10, Number 3853:

Ubida b. al-Simit (Allah be pleased with him) reported Allah's Messenger(may peace be upon him) as saying: Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.

15. Sahih Bukhari

Narrated Abu Bakra: Allah's Apostle said, "Don't sell gold for gold unless equal in weight, nor silver for silver unless equal in weight, but you could sell gold for silver or silver for gold as you like." 

16. Sahih Muslim, Book 10, Number 3870:

Abu Huraira (Allah be pleased with him) reported that Allah's Messenger (may peace be upon him) deputed a person to collect revenue from Khaibar. He brought fine quality of dates, whereupon Allah's Messenger (may peace be upon him) said: Are all the dates of Khaibar like this)? He said: No. We got one sa' (of fine dates) for two sa's (of inferior dates), and (similarly) two sa's for three sa's. Thereupon Allah's Messenger (may peace be upon him) said: Don't do that. Rather sell the inferior quality of dates for dirhams (money), and then buy the superior quality with the help of dirhams.

17. Baihaqi

From Anas ibn Malik : The Prophet, , said: "When one of you grants a loan and the borrower offers him a dish, he should not accept it; and if the borrower offers a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favours mutually."

The prohibition of gharar and maisir

In addition to the prohibiton of riba’, Islam also prohibited transactions tainted with gharar and maisir. For simplicity, transactions tainted with gambling elements or excessive uncertainty is prohibited. To certain extent, this is consistent with English common law on contract that considered agreements tainted with uncertainty as void. For example, Mr. A offered to sell one of his houses in Kuala Lumpur (without specifying which one) for the price of $10 million to Mr. B, and Mr. B accepted his offer. The agreement is void due to uncertainty.

The word gharar comes the root verb gharar/gharra (Gh.R.R.) signifying ‘to reveal oneself and one’s property to destruction without being aware of it (ardnafswamali-hi li halak min ghayr an ya’raf)’.[8]Literally, gharar can mean to ‘deceive’ or be ‘cheated’. This is in line with gharar’s meaning as stated in the Qur’an. For example:

(1) ‘magharraka bi rabbika al-karim?’ [82:6]. The literal meaning is ‘what has deceived you from your gracious Lord?’.

(2) ‘wa la yaghurranakabiLlah al-gharur’ [35:5]. The literal meaning is ‘neither let the deceiver [the devil] deceive you concerning God’.

The general approach adopted by Islamic scholars is to define gharar as having the same meaning as khatar, which generally means ‘hazard’, ‘risk’, ‘jeopardy’, ‘danger’ or ‘peril’.

Gharar has also been defined as ‘uncertainty’, ‘speculation’ in addition to things related to the elements of gambling. Gharar as speculation or gambling is forbidden in Islam.[9] Islam encourages risk-taking in business transactions, but it prohibits speculative activity and gambling. Not all types of uncertainty are prohibited, considering that the very idea of trade involves risk and some elements of uncertainty. For example, the concept of gharar is not applicable to business risks such as making an investment in a company. However, gharar can exist when someone professionally advises a client to purchase shares in a company that is currently the subject of a takeover bid.

Any transactions involving elements of gross uncertainty and speculation, such as purchasing something that might or might not exist, are typically prohibited. For example, the sale and purchase of fish that have not yet been taken from a lake or sea (if the amounts cannot be estimated or measured) would be considered the sale of something with disputable ownership.

Gharar is also defined as the risk or jeopardy inherent in the state of being near to destruction or wreckage.[10] Generally, the definition of gharar or uncertainty under Islamic jurisprudence can be divided into the following sub-definitions: (1) gharar as uncertainty,[11] (2) gharar as ignorance[12] and (3) gharar as unknown and doubtful.[13]

Recent studies have attempted to find contemporary meanings and applications for uncertainty or gharar under Islamic commercial law. However, according to Vogel (1998),[14] jurists have been unable to clearly define the exact scope of gharar. This is not a significant issue, however, because although a specific and comprehensive meaning for gharar has not been made available, a general understanding of the features and characteristics has been sufficient for Islamic scholars and experts to derive proper rulings. There are many abstract things in life that cannot be comprehensively defined, such as love, but a lack of definitive meaning does not decrease a concept’s value.

Gharar in the Qur’an

The word gharar and its derivatives, including gharra, gharrahum, gharrathum, gharraka, gharrakum, gharratkum, yaghrurka, yaghurrannaka, yaghurannakum, taghrannakum, gharur and ghurur, occur repeatedly in the Qur’an, at least 27 times.[15] In most instances, these words are used to refer to someone being ‘deceived’ or ‘cheated’ with one party experiencing a loss as the result of the element of gharar being involved. If a win-win situation is being described, gharar will not be used.  It has been noted that the word and concept of gharar in the Qur’an is focused on matters pertaining to faith, while the word and concept of gharar in the Hadith (the second major source of Islam) deals with uncertainty in commercial matters. Therefore, the scholars of Islamic jurisprudence tend to define gharar from the Hadith perspective when constructing rulings related to commercial matters.

The following are some examples:

l  ‘Lo! the hypocrites say, and those in whose hearts is a disease: “These people,- their religion has misled them.” But if any trust in Allah, behold! Allah is Exalted in might, Wise’. [8:49]

l  ‘This because they say: “The Fire shall not touch us but for a few numbered days”: For their forgeries deceive them as to their own religion’. [3:24]

l   ‘Leave alone those who take their religion to be mere play and amusement, and are deceived by the life of this world. But proclaim (to them) this (truth): that every soul delivers itself to ruin by its own acts: it will find for itself no protector or intercessor except Allah: if it offered every ransom, (or reparation), none will be accepted: such is (the end of) those who deliver themselves to ruin by their own acts: they will have for drink (only) boiling water, and for punishment, one most grievous: for they persisted in rejecting Allah’. [6:70]

l  ‘O ye assembly of Jinns and men! came there not unto you messengers from amongst you, setting forth unto you My signs, and warning you of the meeting of this Day of yours? They will say: “We bear witness against ourselves.” It was the life of this world that deceivedthem. So against themselves will they bear witness that they rejected Faith’. [6:130]

l  ‘“Such as took their religion to be mere amusement and play, and were deceivedby the life of the world.” That day shall We forget them as they forgot the meeting of this day of theirs, and as they were wont to reject Our signs’. [7:51]

l  ‘O man! What has seduced thee from thy Lord Most Beneficent?’ [82:6]

l  ‘“This, because ye used to take the Signs of Allah in jest, and the life of the world deceived you:” (From) that Day, therefore, they shall not be taken out thence, nor shall they be received into Grace’. [45:35]

l  ‘None can dispute about the Signs of Allah but the Unbelievers. Let not, then, their strutting about through the land deceive thee’. [40:4]

l  ‘Let not the strutting about of the Unbelievers through the land deceive thee’. [3:196]

l   ‘O mankind! do your duty to your Lord, and fear (the coming of) a Day when no father can avail aught for his son, nor a son avail aught for his father. Verily, the promise of Allah is true: let not then this present life deceive you, nor let the chief Deceiver deceive you about Allah’. [31:33]

l  ‘O men! Certainly the promise of Allah is true. Let not then this present life deceive you, nor let the Chief Deceiver deceive you about Allah’. [35:5]

l  ‘Satan makes them promises, and creates in them false desires; but satan’s promises are nothing but deception’. [4:120]

l  ‘And behold! The Hypocrites and those in whose hearts is a disease (even) say: “Allah and His Messenger promised us nothing but delusion!”’ [33:12]

l  ‘“Lead to destruction those whom thou canst among them, with thy (seductive) voice; make assaults on them with thy cavalry and thy infantry; mutually share with them wealth and children; and make promises to them.” But Satan promises them nothing but deceit’. [17:64]

l  ‘Say: “Have ye seen (these) ‘Partners’ of yours whom ye call upon besides Allah? Show Me what it is they have created in the (wide) earth. Or have they a share in the heavens? Or have We given them a Book from which they (can derive) clear (evidence)? - Nay, the wrong-doers promise each other nothing but delusions”’. [35:40]

l  ‘So by deceit he brought about their fall: when they tasted of the tree, their shame became manifest to them, and they began to sew together the leaves of the garden over their bodies. And their Lord called unto them: “Did I not forbid you that tree, and tell you that Satan was an avowed enemy unto you?”’ [7:22]

l  ‘Nay, who is there that can help you, (even as) an army, besides (Allah) Most Merciful? In nothing but delusion are the Unbelievers’. [67:20]

l  ‘(Those without) will call out, “Were we not with you?” (The others) will reply, “True! but ye led yourselves into temptation; ye looked forward (to our ruin); ye doubted (Allah’s Promise); and (your false) desires deceived you; until there issued the Command of Allah. And the Deceiver deceived you in respect of Allah”’. [57:14]

l  ‘Every soul shall have a taste of death: And only on the Day of Judgment shall you be paid your full recompense. Only he who is saved far from the Fire and admitted to the Garden will have attained the object (of Life): For the life of this world is but goods and chattels of deception’. [3:185]

l  ‘Know ye (all), that the life of this world is but play and amusement, pomp and mutual boasting and multiplying, (in rivalry) among yourselves, riches and children. Here is a similitude: How rain and the growth which it brings forth, delight (the hearts of) the tillers; soon it withers; thou wilt see it grow yellow; then it becomes dry and crumbles away. But in the Hereafter is a Penalty severe (for the devotees of wrong). And Forgiveness from Allah and (His) Good Pleasure (for the devotees of Allah). And what is the life of this world, but goods and chattels of deception?’ [57:20]

In summary, these Qur’anic verses that contain the root word or equivalent of gharar address matters related to faith and belief and urge people not to be deceived by worldly matters or the devil, but to focus on their search for God. Although the word gharar in the Qur’an mainly deals with deception in matters regarding faith, the rejection of excessive speculation or gambling is also clearly mentioned in various verses of the Qur’an. For example:

l  ‘They will ask thee about intoxicants and games of chance. Say: In both there is great evil as well as some benefit for man; but the evil which they cause is greater than the benefit which they bring’. [2:219]

l  ‘By means of intoxicants and games of chance Satan seeks only to sow enmity and hatred among you, and to turn you away from the remembrance of God and from prayer. Will you not, then, desist?’ [5:90]

There is no direct prohibition on gharar in trade, or on uncertainty in the Qur’an (although gambling is clearly prohibited), but uncertainty as a type of vanity has been prohibited. For example:

‘And do not eat up your property among yourselves for vanities, nor use it as bait for the judges’. [2:188]

‘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]

Gharar in the Hadith

The Hadith is a report on the tradition or Sunnah of the Prophet. The Sunnah is the second most important source of Islam. Technically, the Sunnah is the sayings, actions or tacit approval of the Prophet. Its position is second only second to the Qur’an. In most circumstances the Sunnah provides an accurate interpretation of the Qur’an. The role the Sunnah plays in understanding the Qur’an is very important because it elaborates on the principles and prohibitions set forth in the Qur’an. For example, the Qur’an orders Muslims to avoid transactions tainted by usury or riba and encourages Muslim involvement in trade and commerce. However, the details regarding what constitutes usury are not specified in the Qur’an. Instead, they are explained in the Sunnah.

Muslims believe that the authenticity of the Qur’an is guaranteed because it is expressly mentioned in the Qur’an. In other words, the Qur’an used by present-day Muslims is the same one that was used in the time of the Prophet because the Qur’an was already preserved in writing in the time of the Prophet. However, the same cannot be said about the Sunnah. Although some of the sunnah were preserved in writing during the time of the Prophet, many were transmitted orally. Only after the demise of the Prophet were comprehensive efforts made to collect all of the hadith in a single volume. These collections of hadith or sunnah are known as Shahih. The most authentic and well-known Shahih are the Shahih Bukhari and the Shahih Muslim.

In the Shahih Muslim, the word gharar and its derivatives appear at least 23 times. However, the main benefits that can be derived from the Sunnah on matters regarding gharar are explanations of the rejection of uncertainty or speculative elements in trade. There were numerous occasions where the Prophet prohibited transactions tainted by uncertainty. For example, the Prophet prohibited mozabana[16] and mu’awama[17] transactions.

The prohibition of excessive uncertainty can be found both in the Qur’an, and in the practice of the Prophet. While the Prophet did prohibit dealings involving uncertainty or gharar on various occasions, not all gharar or uncertainty is prohibited because there will always be elements of risk and uncertainty in trade and business. Only excessive uncertainty has been prohibited. The following are some examples of excessive uncertainty prohibited in Islam:[18]

1. Selling an unborn animal without its mother

2. Selling the fetuses or embryos of animals

3. Selling fruit before its emergence

4. Selling a diver’s finds in advance

5. Selling an unborn animal (Habal-al-Habalah)

6. Selling an object of unknown identity without the buyer having the right to specify it

7. Selling an object of unknown genus

8. Deferment of a price to an unknown future date

What follows are some of the relevant hadith and their explanations:

·      It was related that Ibn Abbas said: “The Messenger of God came to Madinah while the people were paying for the fruit a year or two in advance. Then he said: Whoever pays in advance for dates should pay for a specified weight and measure.” And it was related that: “In an appointed time.”[19]

[Explanation: This confirms that the element of excessive uncertainty should be avoided in Islam. When the transaction involves a future contract, the parties are required to specify the exact terms].

l  Abu Hurairah narrated that the Messenger of Allah [Prayers & peace be upon him] forbade a transaction determined by throwing stones, and the type involving deception.[20]

[Explanation: This describes a type of transaction that way very similar to gambling. The one who threw the stone would get what the stone hit. This kind of game has become very popular].

·      Ibn Abbas narrated that the Messenger of Allah said: “He who purchases food should not sell until he takes possession of it”. (Bukhari 2136). Ibn Abbas said: Every sale is subjected to this condition.[21]

[Explanation: This transaction is prohibited due to the uncertainty in whether the seller will be able to deliver as agreed].

·      It was related that Ibn Umar said: “The people used to buy food from the caravans during the Prophet’s lifetime. The prophet (Prayers & peace be upon him) forbade them to sell it at the place they had bought it but to take it to the market where provisions were sold. Ibn Umar said: “The Prophet (Prayers & peace be upon him) also forbade the re-sale of provisions by the one who had bought it unless he had received it in exact full measure’.”^[22]

[Explanation: This is an example of how Islam encourages real trade over mere financial techniques. Although there is certainty because the seller already possesses the goods, the seller is still encouraged to make the effort to try and sell the goods at a better place. Otherwise, the sellers are just guessing that they will be able to sell their goods at higher prices than the previous sellers from whom they bought the goods, and without putting any adds-value to the commodity].

l  Sahih Muslim, Book 10, Number 3649:

Ibn Umar (Allah be pleased with them) reported that they were beaten during the lifetime of Allah’s Messenger (may peace be upon him) if they had bought foodgrains in bulk and then sold them in the spot without shifting them (to some other place).[23]

[Explanation: Another example of Islam’s preference for real trade. Re-selling the exact goods at the same place increases the selling price without bringing any extra value to the goods or other parties. The end user pays an unnecessarily high price. This concept has been popularized in present-day conventional financial systems in which parties continue selling discounted debts to others].

l  Sahih Muslim, Book 10, Number 3654:

Jabir b. Abdullah (Allah be pleased with them) is reported to have said that Allah’s Messenger (may peace be upon him) forbade the sale of a heap of dates the weight of which is unknown in accordance with the known weight of dates.[24]

[Explanation: This is an example of how transactions tainted by gross uncertainty are prohibited in Islam if they might cause injustice].

l  Sahih Muslim, Book 10, Number 3656:

Ibn Umar (Allah be pleased with them) reported Allah’s Messenger (may peace be upon him) as saying: Both parties in a business transaction have the right to annul it so long as they have not separated; except in transactions which have been made subject to the right of parties to annul them.[25]

[Explanation: This is an example of how Islam encourages mutual understanding in trade and commerce. One of the parties might realize, after signing the document, that the contractual terms are actually different from what he/she had expected. In a conventional system, acceptance is considered valid as soon as a signature has been obtained. However, the uncertain party would feel cheated because the transaction was not in line with his/her wishes. Under Islamic principles, if the parties have not left the meeting place, either party has the right to annul, which erases or at least reduces the possibility that the transaction might prove unfair. There is more certainty that the transaction reflects the commercial wishes of both parties].

l  Sahih Muslim, Book 10, Number 3663:

Abdullah b. Dinar narrated that he heard Ibn Umar (Allah be pleased with them) saying: A man mentioned to the Messenger of Allah (may peace be upon him) that he was deceived in a business transaction, whereupon Allah’s Messenger (may peace be upon him) said: When you enter into a transaction, say: There should be no attempt to deceive.[26]

[Explanation: This illustrates how Islam encourages mutual understanding in trade and commerce and shuns deception. If either party is unclear about the terms of the transaction, clarification can be demanded by either party and each has the right to remind the other of the prohibition against attempts to deceive].

l  Sahih Muslim, Book 10, Number 3675:

Abu Huraira (Allah be pleased with him) reported Allah’s Messenger (may peace be upon him) as saying: Do not sell the fruits until their good condition becomes evident.[27]

l  It was related that Anas ibn Malik said that the Messenger of God prohibited the sale of fruit until it was almost ripened. It was said to him: “How do we know when it is ripe?” He said: “When it becomes red.” The Messenger of God said: “If God fated that the fruit did not ripen, then for what would any of you take the money of his brother?”.[28]

[Explanation: This confirms that uncertainty regarding the condition and quality of the goods should be avoided].

This series of hadith on gharar highlights some important elements. Because the characteristics of gharar are not always crystal-clear and are frequently open to interpretation, jurists understandably have multiple views on its effect on trade. The following are some of the defining characteristics of gharar that have led to its prohibition:

1. The gharar can cause harm to one/some of the parties

There is no issue of gharar when all parties benefit from a transaction and no one gets hurt or suffers losses. For example, in takaful or Islamic insurance contracts, the parties are protected because the contract mutually helps all parties. If there is uncertainty regarding whether the parties will need the takaful (because the events covered by the takaful might or might not happen), jurists are in agreement that takaful is in accordance with the Shariah because the contract is valid and no one has been harmed.

2. The gharar is not necessary

If uncertainties or risks are something that must be faced by the parties due to  the nature of a specific trade, then they are permissible. For example, there is always the risk that a shipment might be damaged due to events beyond the control of either party, such as the occurrence of a tsunami. However, the involved parties are allowed to take such risks because they are in the nature of the trade and are considered necessary.

3. The gharar is a major factor

Minor or small uncertainties do not invalidate a contract under the Shariah. Only when the subject matter is something fundamental will the doctrine of gharar be invoked. Examples of something major include the existence of the subject matter, quality and deliverability.

Scholarly Views on Gharar

As long as a matter is not clearly specified in the Qur’an or the Sunnah, scholars are allowed to interpret in line with the best interests of their community at the time. Therefore, it follows that the decisions and views of the scholars, while perfectly valid at the time they were made, might not be currently suitable for literal adoption. However, in almost all situations people can benefit from the wisdom of the traditional scholars. While some of their views may need to be modified to suit modern needs, the rationale behind their views are always useful because the aim is to uphold justice and serve the best interests of the community.

Some of the Views of the Early Generation

a)    Imam Awza’i (707–774)

Imam Awza’i’s full name was Abu Amr Abd al-Rahman ibn Amr al-Awzai. He was born in 707 and founded the Awza’i school of Islamic jurisprudence. This school of thought was popular in Syria and Spain (which was a Muslim country at that time), although it was later replaced by the Mālikī school. Awza’i (d. 157H) held the view that the sale of an absent object is void under the Shariah due to the element of gharar in such contracts.[29] The lack of certainty and the ignorance of the buyer were the reason behind this prohibition.

b)   Imam Abu Hanifa

Imam Abu Hanifa’s full name is Nu’mān ibn Thābitibn Zutāibn Marzubān. He was born in 699 and founded one of the four most well-known Sunni Muslim schools of thought. Imam Abu Hanifa was born 67 years after the demise of Prophet Muhammad and it was Hanifa’s view that the sale of something whose performance is to occur at an unknown future time is invalid due to uncertainty.[30] He also believed that a contract of employment that failed to specify or estimate the time of salary payment was voidable. This confirmed that uncertainty should be avoided.

c)    Imam Malik

Imam Malik was the founder of the Mālikī school of jurisprudence, one of the four main Islamic schools of thought. His full name was Mālik ibn Anas ibn Malik ibn 'Āmr al-Asbahi. He was born in 771 and was the teacher of Imam Shafi’i, another founder of the four schools. The collections of hadith narrated by Imam Malik are highly appreciated in Islam and considered to be among the most authentic. These narrations include Imam Malik, who narrated from Nafi’, who narrated from ibn Umar, who narrated directly from Prophet Muhammad.

The prohibition of gharar was addressed systematically by Imam Malik in his famous book, the Muwatta.[31] He listed all contracts that had been prohibited due to gharar and then provided clarifications on the reasons behind these prohibitions. To summarize, gharar is prohibited due to the lack of knowledge regarding the object and the high degree of speculation involved.

d)   Imam Abu Yusuf

Imam Abu Yusuf was a famous student of Imam Abu Hanifa. His full name was Yaqub ibn Ibrahim al-Ansari. He was the Chief Judge or Grand Qadi in Baghdad and was known to be an advisor to the caliph (the head of a Muslim empire) in various matters, including the application of Islamic principles to financial matters.

One of Imam Abu Yusuf’s most interesting works on gharar addressed the permissibility of conducting transactions in which the element of gharar could be removed. For example, the Prophet clearly prohibited the sale of fish still in the water and birds still in the sky because the deliverability of the transactions was uncertain. However, Yusuf also pointed out that the sale of fish from a restricted place, such as a small tank, was allowed because the uncertainty had been removed,[32] making such a sale permissible. In other words, the doctrine on the prohibition of gharar is not absolute.

e)    Imam Shafi’i

Imam Shafi’i’s full name was Abū Abdullāh Muhammad ibn Idrīs al-Shafiī. He was born in 767 and founded the Shafi’i school of thought, one of the four most well-known schools of Islamic thought. He was also known as the founder of Islamic jurisprudence due to his efforts to devise clear and systematic ways of deducing rulings and decisions according to Islam. He authored more than 100 books, but the most famous are the al-Risala, the Kitab al-Umm and the Musnad ash-Shafi’i.

His works indicated that he held the view that gharar is prohibited partly due the possible inability of the seller to deliver as agreed.

Summary of Views

An expert in the Islamic doctrine of gharar, Buang’s work Studies in the Islamic Law of Contracts: The Prohibition of Gharar analyzes the definitions adopted by Islamic jurists from the early generation, those from the Companions and Successors, those from the formative period of the Islamic School of Law, namely Awaza’i, Abu Hanifa, Ibn Abu Layla, Malik, Abu Yusuf, Shaybani, Shafi’i, Muzani, Sahnun and Ali Ibn Zayd and the classical jurists, including the Hanafis: Saghadi, Sarakhsi, Samarqandi, Ibn Huamm, Ayni, Karlani and Afghani; the Mālikī: Ibn Abi Zayd, Khalid ibn Ishaq, Ibn Rushd, Qarafi and Sawi; the Shafi’is: Shirazi, Nawawi, Ibn Hajar, Shirbini al-Khatib and Bajuri; the Hanbali: Ibn Qudama, Ibn Taymiyya and Ibn al-Qayyim; the Sunni extinct school: the Zahiri – Ibn Hazm; the Shi’is: the Ithna Ashari, the Ismaili and the Zaydi and the Ibadi: Basyani and Shammakhi.[33] Buang concluded:

… [I]t can be suggested that there is no general comprehensive statement on what can be best described as gharar in the contracts, as far as the traditional jurist are concerned. The jurists of the early period of Islamic law did not elaborate the meaning of gharar. Their work on the prohibition of gharar was mainly the elaboration and extension of the contracts prohibited by the hadith believed for the reasons of gharar.[34]

Modern Interpretations of Gharar

After analyzing the definitions forwarded by scholars, it can be concluded that scholars generally agreed that gharar refers to unacceptable uncertainty or risk although literally, gharar should not be interpreted as speculation. However, as a concept, excessive speculative activities are prohibited. Discussion on whether excessive speculative activities fall under the prohibition of gharar or under the prohibition of gambling is theoretical in nature. On literal definition, an expert on the doctrine of gharar, Buang concluded as follow:

The literal meaning of the word gharar can be divided in two: the act of deception; and a situation of danger, risk, peril and destruction. The Qur’an appears to use the first meaning while hadith appears to use the second meaning. The lexicographers in defining the noun-word gharar seem to prefer the meaning used by the hadith. This variation in language has no difference in practical terms as both meanings eventually can lead into what can be said to be gharar.[35]

Buang’s definition seems to be the most accurate. The definition of gharar that has been adopted in the modern era, e.g. by the Hong Kong Legislative Council Secretariat, is also quite comprehensive:

Gharar refers to unacceptable uncertainty or risk caused by a lack of clarity regarding the subject matter or terms in a contract or exchange. A sale or any other business contract entailing an element of gharar is prohibited. Such prohibited activities include any transaction of probable items whose existence or characteristics are not certain at the time of contract, due to the lack of information, ignorance of essential elements in the transaction to either party, or uncertainty of the ability of one party to honour the contract. In Islamic finance, the prohibition of gharar is the basis for disallowing financial products/practices such as short selling, speculation, insurance and derivatives.[36]

Classification of Gharar

Scholars are not unanimous concerning the classification of uncertainty or gharar in contracts and financial transactions. Generally, minor uncertainty is allowed under Islamic commercial law. Major uncertainty is sometimes allowed if it is unavoidable and benefits both parties, provided that it is not contrary to other principles of Islamic law. The difficulty is classifying minor and major uncertainties. For example, according to Muslim scholar, Al-Baji, minor uncertainty is that which cannot be avoided or is barely avoidable in a contract and excessive uncertainty is that which is so great that the uncertainty characterizes the contract. Al-Baji[37]states:

…On the other hand, minor gharar does not render a sales contract defective, since no contract can be entirely free of gharar. Thus, the [legal] scholars differ in determining which contracts are defective due to differences in opinion regarding the extent of gharar inherent in each: sic. Whether it is substantial and invalidates the contract, or minor and retains the contract’s validity.

Four different rules concerning gharar have been created under Islamic commercial law:[38] (1) prohibited gharar includes voluntary and deliberate gross uncertainty that might result in enmity and hatred, (2) gharar is considered permissible when there is no general agreement between the schools of thought that the specified transactions are prohibited, (3) acceptable gharar is defined by a state in which the main sources of uncertainty are endogenous and exogenous[39] and (4) gharar is considered mandatory when the uncertainty is a prerequisite of the contract’s validity. Risk has also been divided into the following components: (1) controllable risk can be controlled and influenced by decision makers and (2) uncontrollable risk cannot be controlled by decision makers.[40]

Al-Darir listed four necessary conditions for uncertainty to invalidate a contract: (1) it must be major, (2) the contract must be commutative, ie not a gift, (3) it must affect the principal components or subject matter of the contract and (4) there must be no need met by the contract that cannot be met otherwise.[41]

Mahmud A. El-Gamal classified uncertainty into three categories: (1) ambiguity in the contract regarding the price and nature of the object for sale, (2) uncertainty regarding delivery and (3) uncertainty regarding the object being sold.[42] Previous research has also pointed to the relationship between the causality approach to decisions made under uncertainty and the prohibition of gharar.[43] It has been shown that uncertainty typically stems from the involved parties exhibiting passive behaviour and reliance on chance.

New research has been made available on the application of Islamic commercial law in modern trade, including e-business.[44] The general view shared by Muslim scholars is that modern and conventional trade is permissible as long as it does not breach the principles laid down in the Shariah and assuming that contracts are free from uncertainty and other prohibited elements.

Over the past 1,400 years, Muslim scholars have differed in their understanding of the prohibition of gharar. However, some notable features have been highlighted. First, if a transaction is tainted by uncertainty that results in one of the parties suffering an injustice, such a transaction is usually prohibited. For example, if one party agrees to purchase an agricultural commodity such as apples without first confirming their quality, and the quality of the commodity proves to be very bad, the uncertainty in the initial contract (concerning the quality of the commodity) breaches the doctrine of gharar because it results in injustice for the party that has purchased a commodity of poor quality.

Second, Islamic principles generally prohibit dealing with transactions tainted by gambling. For example, is a carrier loses a shipment of silver or gold in the ocean during a tsunami the carrier, in consideration of the payment of US$1 million from a party, agrees that the party may take the gold and silver if it is recovered. This breaches the doctrine of gharar because it includes an element of gambling. Therefore, the parties would be encouraged to adopt a different contract. For example, the party interested in the gold and silver could pay the carrier US$1 million for the right to collect it, provided that a real effort is made to discover and reclaim it. This transaction would not be construed as gambling because a real and productive effort would be made. Although there is risk, the risk is balanced by the effort.

Third, transactions must not be avoidable. In other words, if the uncertainty or risk is something that cannot be avoided, then the doctrine of gharar is not breached. For example, there is uncertainty involved in whether a shipment of goods will make it to its destined location because there is always the possibility that shipments might be lost at sea for a variety of reasons outside anyone’s control. However, such risk is inherent in maritime trade and therefore contracts for shipment are valid regardless of such risk and uncertainty.

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[1] During the time of Prophet Muhammad, the farmers in Madinah once stopped the practice of mixing the seeds of tree as they think that the Prophet disapproves such practice. The Prophet reminded them to proceed with their practice because they know their business better.

[2]Mohamad Hashim Kamali, Principles of Islamic Jurisprudence (2^ndedn, Ilmiah Publishers 2009) 17.

[3] Brian Kettell, Islamic Finance in a Nutshell (Waley 2010) 93

[4] Ahmad Hasan (translator), ‘Partial Translation of Sunan Abu Dawud, Book 18, Number 3585’

 <http://www.iium.edu.my/deed/hadith/abudawood/018_sat.html> accessed 10 January 2012.

[5] Mohamad Hashim Kamali, Principles of Islamic Jurisprudence (2^ndedn, Ilmiah Publishers 2009) 366.

[6] A'isha `Abdarahman at-Tarjumana and Ya`qub Johnson (translators), ‘Translation of Malik’s Muwatta, Book 36 Number 36.1.1’

<http://www.iium.edu.my/deed/hadith/malik/036_mmt.html>  accessed 6 January 2012.

[7] Usually, riba’ happens when there is an exchange involving one the six riba’ commodities and the exchange is not made in equal value and at the same time. Silver and gold (and by analogy, currency) are the most common forms of riba’. For example, a loan of US$100 that must be repaid at US$200 at a later stage is riba’. The exchange of one bag of high quality dates for two bags of low quality dates is also riba’. Instead of this type of exchange, it is better to convert the values into money first to avoid uncertainty. For clarity, many scholars believe that riba’ is not limited to the 6 commodities.

[8] Ibn Manzur, Lisan al-‘Arab, Egypt, 1300H., vol. vi, p.314 as quoted in Ahmad Hidayat Buang, Studies in the Islamic Law of Contracts: The Prohibition of Gharar (International Law Book Services 2000) 30.

[9]Abdus Samad, ‘Performance of Interest-Free Islamic Banks vis-à-vis Interest-Based Conventional Banks of Bahrain’ (2004) IIUM Journal of Economics and Management 12, no.2, 3-4.

[10] Abdul Rahim Al-Saati, ‘The Permissible Gharar (Risk) in Classical Islamic Jurisprudence’ (2003) J.KAU: Islamic Econ., Vol. 16, No. 2.

[11]This view is shared by the Hanafi and Shafi’i schools of thought. Islamic law is usually divided into two major schools of thought, the Sunni and Shi’i. The Sunni school of thought is divided into the Hanafi, Maliki, Shafi’i and Hanbali schools. 

[12]This view is shared by the Zahiri alone. Zahiri is a minor school of thought.

[13]This view is held by the majority of Muslim scholars.

[14] Frank E. Vogel and Samuel L. Hayes, Islamic Law and Finance: Religion, Risk and Return (Kluwer Law International 1998) 91-93

[15] Quranic verses: (8:6), (3:24), (6:70 and 130), (7:51), (82:6), (54:14), (45:35), (40:4), (3:196), (31:33), (35:5), (4:120), (33:12), (52:64), (35:40), (7:22), (67: 20), (57:14), (3:185), (57:20), (31:33) and (35:5).

[16]Mozabana is a commercial transaction that has been tainted by uncertainty in quality and number. This typically involved the exchange of fresh fruit for dry. While the exact quality and number of dry fruit was measured and fixed, there existed uncertainty regarding the quality and quantity of fresh fruit still on the trees.

[17]Mu’awama is a commercial transaction that has been tainted by uncertainty in delivery. It usually involved the sale of fruit on the tree  one or two years or more before its emergence. This was prohibited because it might cause injustice due to failure to deliver.

[18] Abdul Rahim Al-Saati, ‘The Permissible Gharar (Risk) in Classical Islamic Jurisprudence’ (2003) J.KAU: Islamic Econ., Vol. 16, No. 2.

[19] Ahmad Zidan and Dina Zidan (translators), Mokhtaser Sahih Bukhari (A.S. Nordeen 2002) 206

[20]Al-Hafiz Zakiuddin Abdul-Azim Al-Mundhiri (compiler), The Translation of the Meanings of Summarized Sahih Muslim Volume 1 (Darussalam 2000) 479

[21]Al-Hafiz Zakiuddin Abdul-Azim Al-Mundhiri (compiler), The Translation of the Meanings of Summarized Sahih Muslim Volume 1 (Darussalam 2000) 469

[22] Ahmad Zidan and Dina Zidan (translators), Mokhtaser Sahih Bukhari (A.S. Nordeen 2002) 199

[23] Abdul Hamid Siddiqui (translator), Translation of Sahih Muslim, Sahih Muslim, Book 10, Number

3649<http://www.iium.edu.my/deed/hadith/muslim/010_smt.html> accessed 10 January 2012.

[24] Abdul Hamid Siddiqui (translator), Translation of Sahih Muslim, Sahih Muslim, Book 10, Number  3654

<http://www.iium.edu.my/deed/hadith/muslim/010_smt.html> accessed 10 January 2012.

[25] Abdul Hamid Siddiqui (translator), Translation of Sahih Muslim, Sahih Muslim, Book 10, Number 3656

 <http://www.iium.edu.my/deed/hadith/muslim/010_smt.html> accessed 10 January 2012.

[26] Abdul Hamid Siddiqui (translator), Translation of Sahih Muslim, Sahih Muslim, Book 10, Number 3663

<http://www.iium.edu.my/deed/hadith/muslim/010_smt.html> accessed 10 January 2012.

[27] Abdul Hamid Siddiqui (translator), Translation of Sahih Muslim, Sahih Muslim, Book 10, Number 3675

<http://www.iium.edu.my/deed/hadith/muslim/010_smt.html> accessed 10 January 2012.

[28] Ahmad Zidan and Dina Zidan (translators), Mokhtaser Sahih Bukhari (A.S. Nordeen 2002) 203

[29] Abdullah Muhammad al-Jaburi (ed), Fiqh al-Imam Awza’I, Baghdad, 1977, vol.ii, pp.171-172 as quoted in Ahmad Hidayat Buang, Studies in the Islamic Law of Contracts: The Prohibition of Gharar (International Law Book Services 2000) 66.

[30] Abu Yusuf, Ikhtilaf, p22 as quoted in Ahmad Hidayat Buang, Studies in the Islamic Law of Contracts: The Prohibition of Gharar (International Law Book Services 2000) 67.

[31] Malik ibn Anas, al-Muwatta’, pp. 412-413 as quoted in Ahmad Hidayat Buang, Studies in the Islamic Law of Contracts: The Prohibition of Gharar (International Law Book Services 2000) 67.

[32] Abu Yusuf, Kitab al-Kharaj, Egypt, 1302H, p. 87 as quoted in Ahmad Hidayat Buang, Studies in the Islamic Law of Contracts: The Prohibition of Gharar (International Law Book Services 2000) 68.

[33] Ahmad Hidayat Buang, Studies in the Islamic Law of Contracts: The Prohibition of Gharar (International Law Book Services 2000) 63-98.

[34] Ahmad Hidayat Buang, Studies in the Islamic Law of Contracts: The Prohibition of Gharar (International Law Book Services 2000) 98.

[35]Ahmad Hidayat Buang, Studies in the Islamic Law of Contracts: The Prohibition of Gharar (International Law Book Services 2000) 60

[36] ‘Fact Sheet: Overview of Islamic Finance’ Legislative Council Secretariat

<http://www.legco.gov.hk/yr09-10/english/sec/library/0910fs19-e.pdf> accessed 8 November 2011.

[37]Al-Baji, Al-Muntaqa Sharh al-Muwatta. (Dar Al-Kutub Islamiyyah) as quoted in Mahmoud A. El-Gamal, ‘An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence’, (The 4th International Conference on Islamic Economics in Leicester, UK, 13-15 August 2000) <http://www.ruf.rice.edu/~elgamal/files/gharar.pdf> accessed 30 October 2009.

[38] Abdul Rahim Al-Saati, ‘The Permissible Gharar (Risk) in Classical Islamic Jurisprudence’ (2003) J.KAU: Islamic Econ., Vol. 16, No. 2.

[39] This is explained by the Western comprehension of uncertainty that follows.

[40] Sami Ibrahim Al-Suwailem, ‘Decision-making under uncertainty: An Islamic Perspective’ in Munawar Iqbal and David T. Llewellyn, Islamic Banking and Finance (Edward Elgar Publishing Limited 2002).

[41]Siddiq Al Dareer, Al-Gharar in Contracts and its effects on Contemporary Transactions (IRTI1997).

[42] Mahmoud A. El-Gamal, ‘An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence’ (The 4th International Conference on Islamic Economics in Leicester, United Kingdom, 13-15 August 2000) <http://www.ruf.rice.edu/~elgamal/files/gharar.pdf> accessed 30 October 2009.

[43] Sami Ibrahim Al-Suwailem, ‘Decision-making under uncertainty: An Islamic Perspective’ in Munawar Iqbal and David T. Llewellyn, Islamic Banking and Finance (UK: Edward Elgar Publishing Limited 2002).

[44] Hanudin Amin, ‘E-Business from Islamic Perspectives: Prospects and Challenges’ (2008) Journal of Internet Banking and Commerce, December, Vol. 13, no. 3.