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uncertainty)
Riba (interest);
Riba and its types
Gharar (uncertainty);
Gharar and its definition and explanation;
Riba:
The word Riba literally means 'increase' or 'excess'. In terminological sense
it implies 'increase over and above the principal of loaned amount which is
without due consideration';
Riba in Arabic or 'Sood' ( ) in Urdu or interest or usuary in English give
similar meanings;
Classical and contemporary Islamic scholars define Riba as 'that increase
which a creditor (owner of the loan) receives from his debtor (user of the
loan) for giving him time to repay his debt;
So Riba is the name of every increase in lieu of which there is no
Islamically acceptable consideration;
Increase in principal may be in form of cash or kind;
The increase is declared Riba if it is stipulated or becomes customary in the
society. In case of increase as gesture of thank this increase is not Riba;
Interest Vs Riba:
The word interest" by and large, is now considered as Riba in view of big
majority of Islamic scholars; In a legal sense 'interest' implies that excess
amount which a creditor settles to receive or recover from his debtor in
consideration of giving time to the debtor for repayment of his loan;
But the word 'Riba', that was used in Qura'n, was meant for Riba al-jahiliyya
or pre-Islamic Riba. This Riba manifests when the lender asks the borrower
at maturity date if he would settle the debt or swap it for another larger
debt of longer maturity period. The difference between the maturity value of
old and new debt would be Riba;
This clearly shows that the Riba which was common in Arabs and others at
the time of Revelation was the same thing which is now practiced in modern
financial system;
Therefore, the present system of time-based compounding of debt clearly
falls in this category and no difference is there between interest and Riba;
According to this Hadees Riba al-Fadl has been explained with regard to six
defined things/commodities;
Exchange of these things (barter system of trade) should be with two
conditions:
Ifthe transacted commodities are of same nature then:
Spot delivery immediate delivery of both commodities;
Third viewpoint:
The common feature among these six commodities is that they are either food
items or they can be stored. Therefore every thing that is a food item or can be
stored is included in the same category, hence, subject to the same rule.
Forth viewpoint:
The major characteristic on the basis of which the rules of Riba are applicable
to other commodities by is 'their being in the nature of money'. Therefore,
rules of Riba would apply to anything that serves the functions of money, such
as, paper currency;
There are now two conditions for exchanging money for money:
Spot payment and delivery Hand-to-hand basis;
Rescheduling of debts:
When a debt is recheduled it should be without any increase or decrease;
Gharar:
The Arabic word Gharar ( ) means 'risk', 'uncertainty', and hazard.
Gharar is also defined by some scholars as 'any bargain in which the
result of it is hidden'. Unlike Riba, Gharar is not precisely defined by
Shari'ah. Gharar is also considered to be of lesser significance than Riba;
The prohibition of Riba is absolute but some degree of Gharar or
uncertainty is acceptable in Shari'ah. Normal Gharar (that does not lead
to conflict) is acceptable. Also Gharar is acceptable in some social
contracts;
Gharar has two ways. First, Gharar implies uncertainty. Second, it
implies deceit. Shari'ah has forbidden all business transactions, which
cause injustice in any form to any of the parties;
Gharar may be in the form of hazard or peril leading to uncertainty in
any business, or deceit or fraud or undue advantage;
Explanation of Gharar:
Inadequacy and inaccuracy of information about the essentials of the
contract;
The Gharar exist when a contract does not have clarity in its essential
elements. Such a contract becomes matter of conflict between parties and
become a way of cheating, deceiving and unjust dealing;
For example if price in a contract is not clear or the attributes of sold goods
are not clear to buyer or the time of payment is not clear to seller the
contract becomes a point of conflict between parties;
Hiring a cab without telling the deriver the destination or without agreeing
on fare is case of Gharar. Also sale with through of stick on anything is a
sale with element of Gharar;
Complexity in Contracts:
Gharar also refers to undue complexity in contracts. Shari'ah does not
permit interdependent contracts. For instance, combining two sales in one
is not permitted;
Pure Games of Chance (Al-Qimar & Al-Maisir):
The term Gharar is also used in the context of pure games of chance;
Essentials of Islamic Finance IU Gulshan Campus, Slide # 17
Gharar and its definition and explanation
Game of chance means one party's loss is confirm at the start of contract;
Contracting under conditions of uncertainty and gambling (qimar) are
examples of this;
The two words, uncertainty and gambling are not synonymous, though
related;
Uncertainty is same as Gharar and under such conditions, exchange or
contracting is reduced to a gamble;
Contemporary scholars are of the view that forwards, futures and options
contracts are financial example of this type;
They are almost always settled in price differences only. Hence, these are
used more as tools of gambling than as tools of risk management;