DEFINITION of 'Gharar'

Gharar is an Arabic word that is associated with uncertainty, deception and risk. It is a significant concept in Islamic finance and is used to measure the legitimacy of a hazardous sale or risky investment pertaining to either short selling, the selling of goods or assets of uncertain quality or delivery, gambling or contracts that are not drawn out in clear terms. Gharar is generally prohibited under Islam; there are strict rules in Islamic finance against transactions that are highly uncertain or that may cause any injustice or deceit against any of the parties.

In finance, gharar is observed within derivative transactions such as forwards, futures and options, as well as in short selling and in speculation. In Islamic finance, most derivative contracts are forbidden and considered invalid because of the uncertainty involved in the future delivery of the underlying asset. Islamic finance also strictly prohibits extending loans with interest, which it considers usury.


The word "gharar" is somewhat of a general term in the modern lexicon. Sales or financial transactions considered as gharar are judged relative to the level of misunderstanding that exists between parties and the level of uncertainty that the goods or payment can be delivered. Scholars differentiate between minor and substantial gharar, and while most derivative products are prohibited due to excessive uncertainty, other practices considered as gharar, such as commercial insurance, are vital parts of economic life. It is also permissible for a seller to short-sell fungible items, such as wheat and other commodities, to be delivered at a later date to a buyer.

A sale without physical possession is not necessarily condemned, but the promise of delivery by either party without credibility creates the violation. Transactions and contracts are considered as gharar when excessive risk or uncertainty is combined with one party taking advantage of the property of the other, or one party only benefiting by the other party's loss.

Origins of Gharar

The justification and guidance for forbidding contracts or transactions considered as gharar comes from the hadith, a revered book in Islam. It contains the sayings of the Prophet Muhammad, who spoke against the selling of the birds in the sky, the fish in the water, or the unborn calf in the mother's womb, saying, "Sell not what is not with you." Therefore, questions of gharar arise when a claim of ownership is unclear or suspicious. Clarity of the intended meaning of gharar also comes in the Quran, where it states, "And do not eat up your property among yourselves for vanities," which is interpreted as the prohibition of predatory business practices.

  1. Islamic Financial Services Board ...

    The Islamic Financial Services Board sets global standards and ...
  2. Riba

    Riba is a concept in Islamic banking that refers to and forbids ...
  3. Derivative

    A derivative is a security with a price that is dependent upon ...
  4. Takaful

    Takaful is a type of Islamic insurance, where members contribute ...
  5. Usury Rate

    A usury rate is a rate of interest that is usually considerably ...
  6. Clearing Corporation

    A clearing corporation is an organization associated with an ...
Related Articles
  1. Trading

    An Overview Of Futures, Derivatives, and Liquidity

    Gain an understanding of futures and derivatives, and how these instruments are meant to mitigate market risk.
  2. Investing

    How to Invest in Uncertain Times

    Learn about the challenges of investing in uncertain times. Find out how to protect your money with future events being difficult for investors to predict.
  3. Investing

    A Guide to Faith-Based Investing

    If you've wondered how to invest in a way that reflects your faith, we've got the answers for you.
  4. Investing

    How To Talk Like An Investor

    Learn the lingo to start talking like an informed investor and make wise investment decisions in financial markets. Find out terms used in stock trading.
  5. Forward Contracts: The Foundation Of All Derivatives

    An investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward contract to generate risk-free returns.
  6. Insights

    The 3 Most Dangerous Terrorist Organizations

    A brief look at the Islamic State, Al Qaeda and Boko Haram. What are they? What do they want? Where did they come from?
  7. Personal Finance

    4 Derivative Sales Career Paths

    Discover some sell-side career paths of derivatives markets that offer some unique opportunities for career seekers in this article.
  8. Small Business

    How to Master the Art of Negotiation

    Negotiation is all about coming to an agreement, learn the tactics that good negotiators use to help you get what you want in any negotiation.
  1. What is the difference between derivatives and options?

    A derivative is a financial contract that gets its value from an underlying asset. Options offer one type of common derivative. Read Answer >>
  2. How do cash on delivery and delivery versus payment differ?

    Cash on delivery is a payment made when a good or service is received. Delivery versus payment is a payment for securities ... Read Answer >>
Trading Center