This is a complete Islamic guide on what is Gharar in Islam.
In this guide we’ll look at the definition, types and examples of gharar. Explained in simple terms so anyone can understand the concept of Gharar in Islam.
We’ll also look at why gharar is prohibited (haram) in Islam with evidence from the Qur’an and sound Hadith.
Definition of Gharar – What is the Meaning of the word Gharar in Islam?
Gharar is an Arabic word which means a high level of uncertainty and risk in monetary transactions. An unambiguous sale. A transaction where the outcome is unknown. Gharar transactions are high risk and hazardous transactions such as insurance.
What is Gharar (Uncertainty) in Islam? – (Read This First!)
Gharar means uncertainty. In Islamic finance gharar is seen as a deceptive practice. Where someone is either buying or selling something that is unknown. Any transaction where the price and/or receivables of the item/service is not known in full at the point of sale is gharar (uncertain/unknown).
By the unanimous consensus of all the scholars of Islam. From all the four main schools of thought; Hanafi, Shafi’i, Maliki and Hanbali. All contracts of gharar are forbidden (haram) in Islam and considered null and void.
Therefore, in Islamic banking Bai’ al-Gharar (sale of uncertainty) is prohibited.
Examples of Gharar
Examples of Gharar include;
- If someone sells you a can of food that does not have a label and so you are uncertain what you are buying. This is Gharar (uncertainty).
- If someone sells you crops that have not yet harvested.
- If someone tried to sell you fish in the sea that has not been caught or an animal that has not yet been born.
- Selling milk that is still in the udders of the animal and not yet extracted out.
- Futures and Options Contracts
In the sharia all such transactions are known as Gharar (uncertain/unknown).
The Prophet (peace be upon him) forbade all transactions that have a high level of uncertainty (Gharar). He also gave us explicit examples of what constitutes gharar:
It was narrated that Abu Sa’eed Al-Khudri (may Allah be pleased with him) said:“The Messenger of Allah (peace be upon) forbade selling what is in the wombs of cattle until they give birth. And selling what is in their udders unless it is measured out. And selling a slave who has fled. And selling spoils of war until it has been distributed. And selling Sadaqah until it has been received. And what a diver is going to bring up (i.e the catch from the sea).”
[Sunan Ibn Majah • Book 12, Hadith 60 • Graded Reliable (Hasan)]
Examples of Gharar in Daily Transactions
Here are a few examples of how gharar (uncertainty) can take place in different contracts in our everyday life.
Examples of gharar in daily transactions could include;
- Conventional Insurance Contracts (e.g. Life insurance, Car Insurance)
- Derivative transactions (e.g. Forwards, Futures and Options Contracts)
- Short selling and speculation in the stock market (e.g. where a seller is trying to sell an asset which they do not own)
- Forex trading
All of the above cases create unnecessary risk and fall under fraud, deceit, hazard or uncertainty that may lead to loss or destruction.
This is why in Islamic banking and finance gharar is one of the prohibited elements.
Evidence of the Prohibition of Gharar in the Quran
There are two verses in the Qur’an where scholars say that Allah has prohibited the concept of Gharar (uncertainty):
“Do not consume one another’s wealth unjustly. Nor deliberately bribe authorities in order to devour a portion of others’ property, knowing that it is a sin.” – [Quran 2:188]
Islamic jurists explain one of the meanings of the first part of this verse is referencing gharar. This is because Gharar is an unjust predatory practice of consuming people’s wealth. And Allah has prohibited such practices of devouring people’s wealth unjustly and deceptively.
“O you who have believed, do not consume one another’s wealth unjustly but only (in lawful) business by mutual consent.” – [Qur’an 4:29]
In the above verse Allah emphasizes two essential conditions of Islamic finance. Firstly that the terms must be just and fair to both parties and secondly mutual consent from both sides. If either of the conditions is missing then the contract is prohibited (haram).
Gharar by its nature is unjust and deceptive. Therefore even if someone were to agree to a contract containing Gharar out of compulsion the contract is still prohibited. This is because it does not fulfil the first condition of justice and fairness. This is why Islam prohibts Gharar.
Evidence of the Prohibition of Gharar in Hadith (You MUST read this!)
The evidence of the prohibition of gharar is mentioned in the hadith of the Prophet (peace be upon him) mentioned in Sahih Muslim.
Narrated on the authority of Abu Huraira that the Messenger of Allah (peace be upon him) forbade a transaction determined by throwing stones, and the type which involves some gharar (uncertainty).
[Sahih Muslim • Book 21, Hadith 8 • Graded Authentic (Sahih)]
What are transactions determined by throwing stones? – At the time of the Prophet (peace be upon him) there was a practice among the Jahiliya pagan Arabs. Where throwing stones would determine the sale.
The seller would have all his merchandise out in different piles. Then a buyer would give a high amount of money to the seller and throw a stone in hopes to get the higher valued pile. Whichever pile his stone lands on will be his purchase for the amount given.
Similarly throwing stones was also used to determine the sale of land. The buyer would throw his stone and as far as his stone landed would be his purchase.
Naturally the one with the strong throw will get more than the buyer with the weak throw. This uncertainty where the buyer nor the seller knows what the clear-cut sale will be is gharar.
The Prophet (peace be upon him) strictly forbade such practises. And forbade all transactions that include high levels of uncertainty (gharar).
Note: At no point did the Prophet (peace be upon him) say that if both the buyer and seller have agreed on the sale through means of gharar then it’s okay. Or that if the buyer and seller agree not to dispute about it later if one loses out and other gains more then the transaction is valid.
The Prophet (peace be upon him) unambiguously and unequivocally forbade all transactions of gharar. Regardless if the buyer and seller agreed to the terms or not.
So even if someone was to say. That they are okay with the high level of uncertainty in insurance contracts because the benefits outweigh the harm in their eyes. This is besides the point. The Prophet (peace be upon him) forbade high levels of uncertainty (gharar) – PERIOD.
Types of Gharar
There are two types of Gharar:
- Gharar Yasir (light or minor uncertainty)
- Gharar Fahish (excessive or major uncertainty).
Both forms of gharar are not haram. Gharar Fahish is the haram kind of Gharar. Gharar Yasir is under the halal class of Gharar.
What is Gharar Fahish (Major or Excessive Gharar)?
Gharar Fahish (excessive gharar) is an excessive amount of uncertainty or ambiguity. The amount of uncertainty is so high that the sharia considers it unjust and predatory. Gharar Fahish is therefore prohibited (haram) in Islam.
Example of Gharar Fahish (Major or Excessive Gharar)
An example of Gharar Fahish is conventional insurance contracts. Insurance contracts are highly ambiguous and predatory in nature. You could pay towards your insurance policy for decades and get nothing. Or you could end up in an accident tomorrow and get a huge lump sum.
This level of high risk and uncertainty in conventional insurance contracts Gharar Fahish. And Gharar Fahish is haram in Islam.
Another example is futures and options contracts which have a high level of ambiguity or excessive uncertainty.
What is Gharar Yasir (Minor or Light Gharar)? – The Halal type of Gharar!
Gharar Yasir (light or minor gharar) is a trivial amount of uncertainty that is present in all transactions. The amount of uncertainty is so small that the sharia considers it negligible. Gharar Yasir is therefore NOT haram. It is just mild or moderate uncertainty that cannot be avoided.
Example of Gharar Yasir (Minor or Light Gharar)
An example of Gharar Yasir is when you buy a house. Later you discover that one of the light switches is not working. But you didn’t know about this when you bought the house. This is Gharar Yasir/Yaseer.
Evidently you bought the house based on the overall general condition of the house. So one or two light switches not working is negligible and not considered excessive. So your house purchase is halal.
Insurance and futures and options contracts fall under Gharar Fahish (excessive uncertainty). Therefore they are haram. But a small scratch on a car that the buyer did not check before buying. Or a light switch not working in a house purchase is Gharar Yasir (little uncertainty). Gharar Yasir is NOT haram.
Why is Gharar Haram (Prohibited) in Islam? – Explained!
Gharar is haram (prohibited) in Islam to prevent injustice and deceit. Any transaction where the outcome is not known can lead to disputes and injustice. Islamic finance is built on the premise of openness, certainty and justice. Gharar (uncertainty) defies the very purpose of Islamic finance.
The effects of gharar may not be seen straight away. But they can have a huge impact on a person’s finances in the future. This is why one of the foundational premises in Islamic economics is the prohibition of Gharar.
All transactions where the outcome of the deliverable is not known at the point of sale are not permissible in Islam. Even if both parties agree to the terms it is still not allowed. This is why many Islamic banks ban contracts of gharar.
Gharar runs counter to the notion of openness and certainty in business dealings. This is why it is forbidden for Muslims to deal in transactions with Gharar. Just like it is haram to make payment of interest, financial derivatives and futures. All these are haram in Islam and Islam prohibits all of the above and treats such contracts as void transactions.
Gharar in Insurance
Gharar in insurance is that you do not know for certain what you will get in the end. As part of your insurance contract you may pay premiums for months/years but if no misfortune happens you get nothing.
On the other hand, you may pay towards your insurance for a few months and within that time you have an accident and get a large sum of money. This notion is gharar in insurance and gharar is haram (prohibited).
Conventional insurance contracts also deal with interest (riba) and gambling or speculation (maysir/qimar).
For more details on gharar in insurance with all evidences please refer to this guide.
What is the difference between Riba (Interest) and Gharar (Uncertainty)?
The main difference between Riba and Gharar is that Riba (interest) is an increase added on the exchange of money for money transactions. While Gharar (uncertainty) is where someone is either buying or selling something that is uncertain/unknown.
Example of Riba: If someone gives you $100 and they ask $110 for lending you the $100. The $10 increase is Riba (interest/usury).
Example of Gharar: If you give someone $100 but it is uncertain what you will or will not get in return. This is Gharar (uncertain/ambiguous/unknown).
This is the distinction between riba and gharar. Both these types of transactions are prohibited (haram) elements in Islamic finance.
Gharar (uncertainty) is one of the prohibited elements in Islamic finance. The other two being riba (interest) and qimar/maysir (gambling). These three together form the unholy trinity of Islamic Finance.
It is haram (prohibited) for a Muslim to deal in transactions of Gharar Fahish (major uncertainty). It is halal (permissible) to deal in transactions of Gharar Yasir (minor gharar).
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And Allah the Most Wise and Most Knowledgeable knows best.