Prohibition of Riba, Gharar and Maysir in
financial transactions is the fundamental of Islamic finance which
distinguishes it from conventional finance.

 

i.        Riba

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Riba is derived from the derivative word
“raba-wa”. It has certain meanings as to increase; to grow; to grow up, to
exceed, be more than. Riba is generally translated into English as usury or
interest but in fact it has a much broader sense under Shari’ah. Usurious
transactions were classified into two categories:

 

a)   
Riba al-fadhl (Riba on cash)

This types of riba
refers to sale of ribawi item of the same genre but different weight or measure
when the sale takes place. In simple terms, Riba Al- Fadhl arises from the
exchange between two items of the same type, but in unequal amounts, whether in
terms of quality like for like or hand to hand or in terms of delivery time
(spot). If the exchange is for different ribawi items e.g. gold with silver, or
wheat with barley, it can be unequal but spot. However, exchange between two
categories i.e. money and commodity e.g. gold with wheat can be unequal and not
at spot; and

 

b)   
Riba al-nasiyyah (Riba on credit)

This riba also known as Riba Al-Jahiliyyah (riba of the era of
ignorance). Riba Al-Nasiyyah arises in loan transactions (on the basis of
future repayment of more than the principal) as well as sale transactions (on
the basis of deferred price). Islam
prohibits the renting of money and any gain from loan transactions is usurious.
Islam recommends profit and loss sharing contracts. This riba also occurs for
ribawi items (such as gold, barley, silver, dates, salt and wheat) of the same
genre but involving a deferment in payment that is without immediate exchange. Its
prohibition essentially implies that the fixing in advance of a positive return
on a loan as a reward for waiting is not permitted in Islam.

The detailed varieties of usurious transactions
as well as such prohibition have explained and elaborated by the Sunnah. For
example, the Messenger of Allah (s.a.w.) has cursed the one who accepted Riba,
the one who paid it, the one who recorded it, and the two witnesses of it,
saying they were all alike. It is also reported that the Prophet (s.a.w.) has
said to the effect: “(Exchange) gold for
gold, silver for silver, wheat for wheat, barley for barley, dates for dates,
salt for salt, measure for measure and hand to hand. If the (exchanged)
articles belong to different genera, the exchange is without restraint provided
it takes place in a hand to hand transaction.” It is more than evident from
the above discussion that Riba i.e., interest in the modern world is
categorically prohibited in the Holy Quran and practices of the Prophet (s.a.w.).

 

Riba arises with loan such as car loan, home
loan, term loan or overdraft, hire purchase loan and personal loan; Riba in
savings and fixed deposit account; Riba in credit card.

 

ii.       Gharar
(ambiguity or uncertainty)

The Arabic word Gharar is a fairly broad
concept that literally means deceit, risk,

fraud, uncertainty or
hazard that might lead to destruction or loss. Therefore, Gharar in Islam
refers to any transaction of probable objects whose existence or description
are not certain, due to lack of information and knowledge of the ultimate
outcome of the contract or the nature and quality of the subject matter of it.
The main reason for prohibition of Gharar is the existence of vagueness in
rights and liabilities that can be exploited to deceive people into thinking
that they are getting a better deal, which in reality is not the case.

 

There is no specific evidence from the Quran
which connotes Gharar, however, Allah (s.w.t) mention “Eat not your property among yourselves unjustly by falsehood and
deception, except it be a trade amongst you by mutual consent (Al-Bakarah,
2:188; Al-Nisa, 4:29). The Quran has categorically prohibited gambling
(Al-Bakarah, 2:219 and Al-Maidah, 5:93). In addition to that tradition of the Prophet
(s.a.w.) on many occasions forbade many transactions which included Gharar. For
example, the Prophet (s.a.w.) has forbidden the purchase of the unborn animal
in the mother’s womb, the sale of the milk in the udder without measurement,
the purchase of spoils of war prior to distribution, the purchase of charities
prior to their receipt, and the purchase of the catch of a diver.

 

Gharar is divided into two types:

 

a)   
Gharar fahish (excess Gharar)

of
Gharar fahish normally is associated with the reasons why Gharar sales are
prohibited.

 

b)   
Gharar Yasir (light Gharar)

           Which means small in amount or
trivial is the uncertainty that is always present  in all contracts and conducts, thus its
existence is tolerated.

 

Gharar do contain the element of
chance or risk. Not all risk is prohibited in Islam. Allah permitted sales but
prohibited Riba because sales assumes risk taking whereas Riba is making profit
without taking or sharing the risk. Risk is different from Gharar:

a)     Gharar would lead to misleading while risk is uncertainty which is
not design to cheat;

b)     Gharar exist when information needed in decision making is not
fully disclosed, while risk exist even when all the information is all
revealed;

c)     Risk can be predicted, while Gharar cannot be predicted by
innocent people; and

d)     Gharar is directed at counter party only, while risk is faced by
all parties.

 

Ambiguity in a contract
may arise when its pillars & conditions are not clearly defined. Neither
can one sell an item of uncertain quality because the buyer and the seller do
not know the precise quality of the thing that they are trading. All parties
must have full knowledge of what is being transacted and the end result of the transaction.
In Islamic finance, the transaction should respect necessary conditions for a
valid sale to legalize the transaction as follows:

·            
the buyer and the seller must willingly agree to
all details of the transaction,

·            
both participants should be allowed to engage
in the transaction,

·            
both parties in the transaction must own the
property they are trading or have

·            
the permission of the owner to sell the asset
on behalf of him,

·            
sold goods must be permissible and should be
handed over at the time of the

·            
sale and both the goods, and

·            
the price must be something clearly known to
both participants in a sale

 

Gharar occurs in all sorts of transactions
where the subject matter, the price or the two, are not determined and fixed in
advance. Speculative activities in capital market, derivatives instruments and
short-selling contracts are bright examples of Gharar in modern finance.

 

However, if the element of gharar is small and
customarily accepted it is tolerated.

 

iii.      Maysir:

Maysir,
literally means gambling. Islam has also categorically prohibited all forms of
gambling. Maysir refer to getting something too easy or getting
profit without trying. Islam prohibits all forms of business where financial
gain is derived from trying solely or speculative fate and not from work.
Unlike Gharar that can be accepted at some level, the Maysir is not acceptable
at all.

 

As noted earlier in the Quran, Allah (s.w.t)
clearly prohibit gambling (Al-Bakarah, 2:219 and Al-Maidah, 5:93). For example,
uncertainty of the timing of benefits of a pure life insurance contract creates
an element of Maysir. Casinos are also common example of Maysir, where simply
transfer of wealth take place from losers to winner without creating a new
stock of wealth.

 

iv.         Immoral
practice to increase sales

 

Various ways
and strategies are used with the purpose to attract customers and thus increase
the sales. Islam strongly prohibits any form of fraud in business. Immoral
practice for instance heating is to do a trick for self-interest and harm
others. There are various forms of fraud that occur in businesses such as
selling counterfeit goods at high prices, deceiving customers with false
advertisements, fraudulent signals and many other fraudulent occurrences. Some
are also willing to swear by using the name of God intended to increase their
artificial sale items by stating that the item is not artificial but it is
genuine.

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