Riba / Gharar - ijaraCDC

Riba / Gharar

What is Riba?

  • Ribâ is generally defined as Interest
  • Semantically ribâ means an excess or an addition

There are two types of Ribâ:

  • Ribâ An-Nasia – Interest on lent money. Ultimately, the concept of Riba depends on the specific financial institution following Shariah. Some believe that any interest is Riba, while others only believe it is unlawful if it is sneaky or done in a evil way to hurt someone. Most Islamic finance lessors believe that Riba can be charged up to the current value of inflation in the country the loan is completed in. This is believed because the person asking for a loan should return the time value of the money they receive. This doesn’t allow the lessor to earn an excessive amount of money, but is an act of good faith. Riba An-Nasia is ultimately interest paid on money that was loaned to someone.
  • Ribâ Al-Fadl – Taking a superior thing of the same kind of goods by giving more of the same kind of goods of inferior quality, eg.,dates of superior quality for dates of inferior quality in great amounts.  Ultimately, during an exchange of goods or agreement, it is unlawful for an uneven number of items or items at a different quality to be exchanged. This means if the borrower or buyer wants to give the seller something a little extra, even if it’s at a different quality, it’s forbidden. Most of these type of transactions are considered barter; thus many believe that this practice is acceptable.

The IjaraTM transaction avoids not only both types of Riba but also Gharar

What is Gharar?

Gharar is defined as unfair practices or essentially any element of absolute or excessive uncertainty in a business dealing or contract.  The IjaraTM transaction avoids not only both types of Riba but also Gharar.

In the world of Islamic finance, there are a lot of specific terms and concepts that you are going to need to know and understand in order to be beneficial in this arena. Whether you are a borrower or a lender, understanding the ins and outs of Islamic finance is absolutely essential. One of the terms that you are going to want to be aware of when it comes to Islamic finance is Gharar. This is an Islamic term that is designed to refer to any sale is risky or hazardous in that the details about the item being offered up for sale are either uncertain or outright unknown.

Generally speaking, under the Islamic rules of law, Gharar is a practice that is completely prohibited. The reason for this is because under Islamic law, it is explicitly forbidden for people to engage in any trades where it is perceived that an excessive amount of risk exists. If there is an uncertain amount of risk surrounding a particular type of sale or trade due to uncertainty, then the sale or trade is going to be ruled forbidden.

There are a number of strict rules that apply to Islamic finance in order to protect people against transactions that are particularly unknown or uncertain or that might cause deceit or injustice against one or more of the involved parties. In the world of finance, Gharar is particularly observed when it comes to derivative transactions. Some examples of transactions where Gharar might exist include short selling, forwards, speculation and in futures and options. Most of these types of derivative contracts in Islamic finance are considered to be forbidden, and so they are considered to be invalid simply because of the uncertainty that is involved. What this means is that because there is some uncertainty as to the future delivery of whatever asset is underlying in the transaction, these types of speculative investments are not considered to be valid.

Whether you are an investment company or a lender operating in the world of Islamic finance, or a borrower or investor, these types of concepts must be understood properly in order to benefit you. If you want to make sure that you are buying, selling or trading on the “up and up,” then you need to make sure you understand the Islamic rules of finance, also known as Shariah, and specifically how they are going to apply to you.

Different Types of Gharar in Regards to Shariah Law

Gharar itself is actually considered to be an element of deception. This deception can occur through ignorance of the basic type, description, and other aspects of the goods or services, or through the fact that an adequate description of such goods or services was not given.

Reputable Islamic financial institutions will not allow their employees to engage in any form of Gharar, no matter if it is Gharar fil Miqdar or Gharar fis sifah. These two forms will be explained in more detail later in this article.

This practice is not limited to the two named forms, however. Any time a part of any Islamic investment or other financial transaction becomes excessive in any way (Gahrar fahish)–for instance, charging high fees or costs for goods or services or engaging in frequent increasing of fees or prices, this is considered deception. Under Sharia and other laws, if this or any other type of deception occurs during a transaction, it is forbidden.

If Gharar fil Miqdar is the form of deception involved, this means that it has not been made clear, or that a deceptive change has been made, in the quantity of goods that were promised. This can include currency as well as actual goods or even services rendered.

When Gharar fis sifah occurs, there is ambiguity or deception in the areas of price, or time or place of delivery, among others. While it is understood that sometimes delays are unavoidable, the deliberate ignoring of or sudden changes in those circumstances mentioned, as well as others, constitutes this particular form of deceptive practice.

Deceptive practices do not have to fall under one or the other of the two categories mentioned in order to be considered forbidden under this form of law. Unfortunately, some types of this practice are tolerated. This is referred to as Gharar yasir (meaning minor deception).  For example, gambling is considered to be Gharar yasir.

Still other forms of deception are considered Gharar mutawassit (moderate deception.) Our company does not engage in Gharar of any type in any transaction, whether it is an Islamic investment transaction or general business transaction.

Again, reputable Islamic financial institutions will not participate in this. When you choose our company, you can be assured that terms, conditions, and other aspects of the transaction will be spelled out clearly. We welcome questions from our customers if there are any areas that need further clarification or explanation. Earning your trust, as well as your business, is very important to us.