Definition of gharar

An Arabic word meaning risk, uncertainty, or hazard.

Financial products where details concerning the conditions of sale are unknown or uncertain are generally prohibited under Islamic law. Thus, all contracts should be devoid of uncertainty and speculation and parties must have perfect knowledge of the terms of exchange. In particular, the identification of the owner of the goods must be disclosed.

"You cannot sell what you do not possess" is the main rationale behind the prohibition of short selling. In modern terms, it means that derivative products should be prohibited because the buyer pays in advance for something he is not guaranteed to receive.

Conversely, some kind of gharar is accepted when it comes to forward contracts provided that payment and actual delivery are secured. The istina contract would be used for the purchase in advance (usually in instalments) of commodities on the ground of necessity, while the salam contracts would have the same utility but the payment must be fully paid in advance and price, quality, quantity and period of delivery are specified at the time of transaction in order to avoid uncertainty.[1]

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