Gharar

Gharar is an Arabic term that means "uncertainty" or "risk." In Islamic finance, gharar is considered to be a major source of financial risk and is therefore prohibited.

There are two main types of gharar:

• Explicit gharar: This is when the true nature of the transaction is not known or understood by both parties. For example, a sale of a product that is not yet in existence is considered to be an explicit gharar.
• Implicit gharar: This is when there is a high degree of uncertainty about the outcome of a transaction. For example, a sale of a product at a price that is not fixed is considered to be an implicit gharar.

Gharar is prohibited in Islamic finance because it is considered to be unfair and unjust. When both parties to a transaction do not have the same information, it can lead to one party being taken advantage of.

There are a number of ways to avoid gharar in Islamic finance. One way is to use a commodity-based contract, such as a forward contract or a futures contract. These contracts are based on the sale of a specific commodity at a fixed price in the future. This eliminates the uncertainty about the price of the commodity and therefore reduces the risk of gharar.

Another way to avoid gharar is to use a murabaha contract. A murabaha contract is a sale of a product at a cost-plus profit margin. The buyer knows the exact price of the product and the profit margin that the seller is making. This eliminates the uncertainty about the price of the product and therefore reduces the risk of gharar.

Gharar is an important concept in Islamic finance. It is considered to be a major source of financial risk and is therefore prohibited. There are a number of ways to avoid gharar in Islamic finance, such as using commodity-based contracts or murabaha contracts.