Understanding Islamic Finance - Doha Academy of Tertiary Studies

Islamic Law of Contracts and Business Transactions 111compensatory or commutative contracts. In noncompensatory contracts, like gifts, someuncertainty is affordable. Gharar conveys the meaning of uncertainty about the ultimateoutcome of the contract, which may lead to dispute and litigation. Examples of transactionsbased on Gharar are the sale of fish in water, fruits of trees at the beginning of the seasonwhen their quality cannot be established or the future sale of not fully defined or specifiedproducts of a factory which is still under construction. 18In order to avoid uncertainty, valid sales require that the commodity being traded mustexist at the time of sale; the seller should have acquired the ownership of that commodityand it must be in the physical or constructive possession of the seller. Salam or Salaf andIstisna‘a are the only two exceptions to this principle in Sharī´ah and exemption has beengranted by creating such conditions for their validity that Gharar is removed and there islittle chance of dispute or exploitation of any of the parties. These conditions relate to theprecise determination of quality, quantity, price and the time and place of delivery of theSalam goods.Another relevant example of avoiding uncertainty is that of the sale of debt, which, perse, is not allowed even at the face value, because the subject matter or the amount of debtis not there and if the debtor defaults in payment, the debt purchaser will lose. Therefore,discounting of bills is not allowed as per Sharī´ah rules. However, subjecting it to the rulesof Hawalah (assignment of debt) will validate the transaction, because under the rules ofHawalah, the purchaser of debt (if it is on the face value) will have recourse to the originaldebtor and Gharar is removed.Other examples of Gharar-based invalid transactions are short-selling of shares, the saleof conventional derivatives and the insurance business. Futures sales of shares, in whichdelivery of the shares is not given and taken and only a difference in price is adjusted, tradingin shares of provisionally listed companies or speculation in shares and Forex business, inwhich only the difference is netted and delivery does not take place, are other examples ofGharar-based transactions.However, speculation per se, which means sale/purchase keeping in mind possible changein prices in the future, is not prohibited. It is only such sales that may involve the sale ofnonexistent and not owned goods/shares and Maisir/Qimār that are prohibited. 195.5.3 Avoiding RibaAs discussed in detail in previous chapters, Riba is an increase that has no correspondingconsideration in an exchange of an asset for another asset. The increase without correspondingconsideration could be either in exchange or loan transactions. As Islamic banks and financialinstitutions are involved in real sector trading activities as well as the creation of debt as aresult of credit transactions, they must give special consideration to avoiding Riba lest theirincome might go to the Charity Account due to non-Sharī´ah compliance. In the conventionalsense, the cost of funds amounts to Riba and they have to make profit by way of pricing thegoods or usufruct of assets and not by lending.18 Already discussed in detail in Chapter 3.19 Usmani, 1999, pp. 74, 75, 89–91.