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The Law (Shari'aa) Prohibits Deceptive and Speculative Activities in Business Transactions (Gharar)

Another strictly prohibited condition of sales transactions is gharar, or deception. In fact, calling a transaction riba free or RF implies that it is also gharar free. The word is derived from the Arabic root word ghoroor, meaning arrogance and deception. Gharar results in dissatisfaction of one of the parties involved in the transaction when it is discovered and then revealed; it includes defrauding people and improperly taking away people's money and properties[1] (which is haram, meaning divinely prohibited). Another definition that is more attuned to modern economics was given by the late Professor Mustafa Al-Zarqaa. He defined the forbidden gharar sale as “the sale of probable items whose existence or characteristics are not certain, the risky nature of which makes the transaction akin to gambling.”[2] The Qur'aan lays the foundations for fair business dealings, stipulating that contracts must fully disclose all aspects and specifications of the items involved in the transaction and such contracts must be fully and clearly documented and must be closed in the presence of qualified witnesses:

6:159 ... give measure and weight with (full) justice; — no burden do We place on any soul, but that which it can bear; — whenever ye speak, speak justly, even if a near relative is concerned; and fulfill the covenant of God. Thus doth He command you that ye may remember.

17:35 Give full measure when ye measure, and weigh with a balance that is straight: that is the most fitting and the most advantageous in the final determination.

83:1-6 Woe to those that deal in fraud — Those who, when they have to receive by measure from men, exact full measure — But when they have to give by measure or weight to men, give less than due. — Do they not think that they will be called to account? — On a Mighty Day,

A Day when (all) mankind will stand before the Lord of the Worlds?

Professor Elgamal[2] concludes that the meaning of gharar is conceptually “trading in risk, which cannot be defined.” Examples are naked stock and commodity (speculating on future market price movements without owning the physical item) options, financial futures, and derivatives that are not backed by a tangible and verifiable asset. Examples are the sale of the catch of a fisherman before he goes fishing or of a calf before it is born.

In conclusion, the Judeo-Christian-Islamic Shari'aa law in consumer and business transactions prohibits both riba and gharar. The RF system advocated in this book should have been in fact labeled a riba- and gharar- free system, but we use the term RF for short. The prohibition of riba, in fact, implies that the transaction must also be gharar-free.

  • [1] Mahmoud Elgamal, Islamic Finance: Law, Economics and Practice (Cambridge, England: Cambridge University Press), 58. Professor Elgamal's book details the conditions of sale and the types of deceptive practices that are major and minor. This book is a wonderful and very useful reference for those who are interested in the legal Shari'aa aspects of the prohibition of riba and gharar.
  • [2] Ibid.
  • [3] Ibid.
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