1

Postgraduate Diploma
in Islamic Finance Practices
October 2020.

Trainer:
Dr. Md. Habibur Rahman, CIFP
Shari’ah And Islamic Finance
Faculty Of Business And Management
University Sultan Zainal Abidin (Unisza)
Terengganu, Malaysia
hrnizamee10@gmail.com
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Unit 1
Lecture 3

MAJOR PROHIBITIONS AND BUSINESS ETHICS

IN ISLAMIC COMMERCIAL LAW:
THE CASE OF RIBA, GHARAR AND MAYSIR
3
OBJECTIVE(S)

• Be Able To Identify Major Prohibitions And Business Ethics

Related To Islamic Framework Of Business.
• To Understand The Prohibition Of Riba (Interest), Gharar
(Ambiguity) And Maysir (Gambling) In Commercial Transactions,
Along With Essentials And Applications.
4
Learning Points
Major prohibitions in Islamic commercial law
• Riba with Essentials and Applications
• Gharar with Essentials and Applications
• Maysir with Essentials and Applications.
5
Introduction

❖ There are some major prohibitions in financial contracts, such as riba,

gharar,maysir and so forth.
❖ Riba is one of the major causes of invalidity of a contract. It is associated
mostly in credit transactions and currency exchange contracts.
❖ Second major cause of invalidity of a contract is Gharar. It is an external
prohibited attribute.
6
Major Prohibition in
Islamic Framework of Business
7
Definition of riba
• Litrally, Riba means increase and
This definition consists of the followings:
addition. Technically, al-Jassas ❖ an increase over and above the principal
mentions: ❖ the excess payable is a contractual obligation
❖ the excess is against a particular period of
• It is a loan given for stipulated deferment
period with stipulated ❖ However, riba in barter transactions is
increase on the principal excluded from this definition
payable by the
loanee/borrower.
8
Cont’d

Another definition:

• Riba is an increase without any

corresponding consideration
which has been stipulated in The above definition consists of the followings:
favour of one of the two parties, 1. An excess without corresponding
in a contract of exchange. consideration
2. The increase stipulated in favour of one
party
3. In a contract of exchange
9
Various Stages in the
prohibition of riba
First Revelation (5 years before Hijrah):
And whatever you give for interest to increase
within the wealth of people will not increase with
Allah . But what you give in zakah, desiring the
countenance of Allah - those are the multipliers.
(Surah al-Rum: 39)
SECOND REVELATION
(EARLY MADINA PERIOD)
And [for] their taking of usury while they had
been forbidden from it, and their consuming of
the people's wealth unjustly. And we have
prepared for the disbelievers among them a
painful punishment. (An-Nisa:161)

10
Cont’d
• Third Revelation (After the Battle of
Uhud)
O you who have believed, do not
consume usury, doubled and
multiplied, but fear Allah that you may
be successful. (Al-Imran:130)
Fourth Revelation
(Shortly after the third revelation)
• Those who consume interest cannot stand [on the Day of
Resurrection] except as one stands who is being beaten
by Satan into insanity. That is because they say, "Trade is
[just] like interest." But Allah has permitted trade and
has forbidden interest. So whoever has received an
admonition from his Lord and desists may have what is
past, and his affair rests with Allah . But whoever returns
to [dealing in interest or usury] - those are the
companions of the Fire; they will abide eternally therein.
• Allah destroys interest and gives increase for charities.
And Allah does not like every sinning disbeliever. (Al-
Baqarah: 275-276)
11
Cont’d
• Fifth Revelation (Before Farewell Pilgrimage) • O you who have believed, fear Allah and give up
what remains [due to you] of interest, if you
should be believers.

• And if you do not, then be informed of a war

[against you] from Allah and His Messenger. But
if you repent, you may have your principal -
[thus] you do no wrong, nor are you wronged.

• And if someone is in hardship, then [let there

be] postponement until [a time of] ease. But if
you give [from your right as] charity, then it is
better for you, if you only knew. (Surah al-
Baqarah: 278-280)
12 Riba in sunnah:
highlighted two categories of riba

• First: Riba in Credit Transactions • Second: Riba in Barter Transactions

Beware, all riba outstanding from the
The messenger of Allah (SAWS) said, gold for
riba prevalent during the pre-Islamic
gold, silver for silver, wheat for wheat, barely
era is void. You are entitled to your
for barley, dates for dates, salt for salt, like for
principle money. Neither shall you
like, in equal weights, from hand to hand. If
oppress nor shall you be oppressed.
those species differ, then sell as you like as
(Muslim)
long as it is from hand to hand. (Muslim)

The messenger of Allah (SAWS) cursed

the one who charges riba; he who gives
it; the one who records it; and the two
witnesses; saying that “they are all
equal” (Bukhari)
13
Types of riba
❖ Riba al-Fadl: The exchange of one ribawi item
Riba
(such as dates, wheat, etc) for the same type of
commodity but different amount or weight. E.g.
exchanging 5 k.g. of wheat for 6 kg of wheat.
Riba al-Buyu
Riba al-Duyun
(riba in sale
(riba in loan) transactions) ❖ Riba al-Nasi’ah: It is a riba by way of deferment of
completion of an exchange. It takes place when
articles of the same genera or different genera are
exchanged with deferment on one side. E.g. 5 kg of
Riba al-Fadl Riba al-Nasi’ah
(riba by way of (riba by way of
gold is exchanged for 20 kg of silver with a delay of
excess) deferment) one year.
14
Is The Riba Al-buyu (Riba In Sale Transaction)
Is Confined To The Six Item In The Hadith?
❖ Hanafi and Hanbali Schools: All
❖ Maliki School: Gold and Silver
weighable articles come under this
represent currency-value. The
ruling. E.g. if iron is exchanged for iron remaining four item represent
then they should be the same in foodstuff that can be stored.
terms of weight.
Juristic School Underlying Cause Underlying Cause
for the prohibition for the prohibition
❖ Shafi’i School: Gold and silver of Gold and Silver of Wheat, Dates,
Barley and Salt
include being prices of the things or
currency-value. E.g. US Dollar, Hanafi and Hanbali Weighable Weighable

Wheat, barley, dates and salt include Shafi’i Currency-Value Foodstuff

foodstuff.E.g.vegetables Maliki Currency-Value Foodstuff that can be
stored
15 Summary of the ruling of Riba

Category Type Exchange Quantity

Same category Same type: Spot exchange Should be equal in
Gold with gold quantity regardless of
quality
Same category Different type: Spot exchange Inequality is permitted
Gold with silver
Wheat with rice
Different category Different type: Delay is permitted Inequality is permitted
Gold with wheat
Currency with dates
Ribawi and non-ribawi items (currency with vehicles; Delay is permitted Inequality is permitted
USD with furniture)
Two non-ribawi items (cloth with bird, bricks with sand) Delay is permitted Inequality is permitted
16 Testing the understanding

• What are the rulings for the following exchanges?

1. Exchange of potato with potato
2. Tomato against potato
3. Pen with paper
4. USD with gold
5. BDT with USD
6. Gold with foodstuff
7. Cash with cheque
8. Commodity with commodity
9. Commodity with money
10. Money with money.
Wisdom for the
Prohibition of Riba

https://www.youtube.com/watch?v=aF6 Former President Obasanjo, Nigeria

YME2QmRc All that we had borrowed up to 1985 or 1986 was
around $5 billion and we have paid about $16
billion yet we are still being told that we owe
about $28 billion. That $28 billion came about
because of the injustice in the foreign creditors’
(lenders) interest rates. If you ask me what is the
worst thing in the world, I will say it is compound
interest
18 The legal maxim says:

Dangers of Riba Any Benefit provided to the

creditor by the debtor in a
❖ Injustice
debt transaction is a riba
❖ No economic gain
❖ Conflicts with the spirit of
brotherhood
❖ One of the major contributors Some doubts on Riba:
towards inflation ❖ Only compound interest is prohibited
❖ Causes depression for the debtor ❖ No riba on commercial loans
❖ A sure gain for the creditor without ❖ Riba is a basic necessity for
contemporary economy
any possibility of loss ❖ Prohibition of bank interest is a matter
❖ A monopoly in society of disagreement among the scholars
19
Gharar

❖ Second major cause of invalidity of a contract. It

is an external prohibited attribute. However,
jurists have different opinions on the essence of
gharar.
20
Definition & essence of gharar
❖ Literally, Gharar means to deceive,
fraud.
❖ Technically: According to Al-Sarakhsi:
Gharar takes place where the
consequences (of a transaction) is
unknown.
❖ Ibn Hazm: Gharar in sales occurred
where the purchaser does not know
what he has bought and the seller
does not know what he has sold.
❖ Ibn ‘Abidin: Gharar is uncertainty
about the existence of the subject
matter of sale.
21
Gharar and Jahalah (ignorance)
• Jahalah refers to the lack of Gharar Jahalah
knowledge about the specifics of Its concept is wider. It is a type of gharar. Its concept
an object, event, or action, in spit is narrower.
of knowledge about its Typically, it is associated with Usually, it relates to quantitative
occurrence. the existence or non-existence and qualitative uncertainty.
of the object of sale.

Not every gharar that However, every jahalah that

invalidates a commutative invalidates a commutative
contract is necessarily a contract is necessarily a gharar.
jahalah.
22
Types of Gharar
Immaterial gharar (gharar
yasir).
❖ This type of gharar is tolerated and will
not invalidate a contract.
❖ E.g. Using public toilet with payment,
❖ Renting a house with monthly payment,
❖ Warranty service with a purchase of car
Exorbitant gharar (gharar
fahish).
❖ This type of gharar is not
tolerated and may result in
contract voidability.
❖ E.g. selling fruits on the tree
before ripen
23
Conditions for Gharar Fahish
First: The Element of Gharar is Too
Abundant.
❖ No specific guideline
❖ It relies on the custom
❖ The element of gharar dominates
the contract or can be seen
apparently in the contract.
❖ It brings to hostility among the
contracting parties
Second: Element of Gharar in
Contracts of Exchange (uqud
mua’awadat).
❖ Maliki jurists, Ibn Taimiyah and
most of the contemporary
scholars view gharar as only
giving effect to the exchange
contract (mu’awadat).
❖ Muslim scholars unanimously
opined that gharar does not
have any effect on the will
contract (wasiyyah).
24
Conditions for Gharar Fahish

Third: Element of Gharar in the

Asl (Original) but not in the Foruth: The Contract does not Reach
Subsequences (Tabi’). the Level of Need (Hajah).

❖ Hajah is something needed by man to

❖ Scholars are unanimous that avoid mashaqqah (difficulty and
gharar in the subsequence (tabi’) hardship).
will never give effect to the
contract. ❖ E.g. hawalah, salam, istisna’, to sell a lined
❖ E.g. selling a cattle with milk in the overcoat though the lining is not seen
udder.
25
Different forms of gharar

Forms of
Gharar
Examples
1. Two sales in one sale/two offers in one sale.
Gharar Relating to 2. Contingent sale. (I sell you my house if Mr. A sold his house to me).
Sighah/format/wording 3. Contract effective from future date.

1. Genus/kind of the object (I sell you an item)

2. Unspecified attributes of the object.
Gharar Relating to 3. Not knowing the quantity of the object.
Subject Matter 4. Selling without specifying the item (selling a sheep out of a herd without
specification)
5. Time of performance is not known (sale on credit without specifying the
settlement date)
6. Uncertainty regarding the existence of the object (sale of fetus)
7. Uncertainty regarding the delivery of the object.
26
Wide scope of gharar
Actually,Gharar includes also:–
❖ Deception (khid’ah)
❖ Misrepresentation (Ghubn)
❖ Artificial price increase (Najsh) etc.
Wisdom behind the Prohibition of
Gharar:
❖ Infringe mutual consent
❖ injustice which may lead to hostility
❖ Protecting the wealth from loss
27
Applications of gharar
Classical Applications:
❖ Bay’ al-Hasat (Sale by throwing a stone)
❖ Bay’ al-munabadhah (vendor throws a
piece of clothes to the buyer)
❖ Bay’ al-mulamasah (purchase by touching
the object of a sale)
❖ Darbat al-Ghais (sale conditional to what
a diver gets)
Contemporary
Applications:
❖ Buying the item wihtout inspection or
description
❖ Selling the item without possession
❖ Covnentional Insurance
❖ Finanical Derivatives
❖ Bitcoins/ Crypto Currencies
28

Gambling (maysir)
29
Definition of maysir
❖ Maysir and Qimar are used in the Arabic Qimar means the game of chance – one
language identically to denote games of chance. gains at the cost of other(s); a person puts
his money or a part of his wealth at stake
Al-Qur’an used Maysir and the Hadith used
wherein the amount of money at risk might
Qimar. bring huge sums of money or might be lost
❖ Maysir refers to easily available wealth or or damaged.
acquisition of wealth by chance, whether or not
it deprives the other’s right.
30
Shari’ah rulings on gambling
Shari’ah Criterion for Maysir and Shari’ah texts on the Prohibition of Maysir
Qimar
First Step of Prohibition
1. Existence of the subject matter
(asset from both sides of the
gambler)
2. The winner party gains something
valuable from the loser
3. Entitlement of benefit without any They ask you about wine and gambling. Say, "In them is great
compensation (‘iwad). sin and [yet, some] benefit for people. But their sin is greater
than their benefit." And they ask you what they should spend.
Say, "The excess [beyond needs]." Thus Allah makes clear to
you the verses [of revelation] that you might give thought.
(Surah al-Baqarah: 219)
31 Cont’d

Final Step of Prohibition

The Prophet (SAWS) said: “Anyone

O you who have believed, indeed, intoxicants, gambling,
[sacrificing on] stone alters [to other than Allah ], and
divining arrows are but defilement from the work of
Satan, so avoid it that you may be successful (Surah al-
Ma’idah: 90).
who says to his friend: ‘Come here, I
will do qimar with him’, then he
should give shadaqah.” (Bukhari and
Muslim )
32
Wisdom behind the Prohibition
of Qimar and Maysir
❑ Encouragement of achieving wealth
through permissible means i.e. work, Gambling Addict Spends $1M On Lottery Tickets
business https://www.youtube.com/watch?v=F5XLmCb3y3o
❑ Loss of Wealth
❑ It distracts people from the
remembrance of Allah and from prayer. Inside the brain of a gambling addict - BBC News
❑ It creates animosity and hatred among https://www.youtube.com/watch?v=BF5SzIN63w8
the people
33
Maysir vs. gharar &
Competition (musabaqah):
Musabaqah (competition) According to Islamic Law: competition is a
contest between two or more individuals who
Gharar vs. Maysir: strive for a goal either for an award or without
an award. Therefore, competition is noticeably
related to Maysir.
❖ Gharar coincides with maysir which is the
uncertainty over gain and loss.

❖ However, gharar is usually not the purpose Competition vs. Maysir:

of a contract but incidental to it whereas
No Type of Competition Maysir
maysir is the purpose of the game.
1 Competition without a Prize X

2 Competition with a Prize provided by the third X

party i.e. government
3 Competition with a Prize provided by One of the X
Competing Parties
4 Competition with Prize Provided by Both √
Competing Parties
34
Shari’ah Principles for
a Permissible Competition

❖ For a noble/permissible purpose

❖ The means and environment are lawful
Can Islamic banks
❖ Does not involve Maysir
❖ Does not harm others i.e. human, animal
invest/ finance a
❖ Does not reveal the private parts (‘aurah) football club/ any
❖ Does not trigger evil desires kind of sports
❖ Does not distract people from religious duties activities?
35 Thus,
Commercial/ business risk=
Maysir vs. risk not maysir;
Unnecessary risk= maysir.
Risk falls into two categories.

Commercial risk, where one would buy a commodity

in order to sell it for profit, and rely on Allah for
that. This risk is necessary for merchants, and
although one might occasionally lose, but this is
the nature of commerce.

The other type of risk is that of gambling, which Investment without due
implies eating wealth for nothing. This is what diligence could be
Allah and His Messenger (SAWS) prohibited. (Ibn maysir?
Taymiyyah)
36
Maysir and Speculation
Speculation is the practice of engaging in risky
financial transactions in an attempt to profit
from short term fluctuations in the market
value of a tradable financial instrument
rather than attempting to profit from the
underlying financial attributes embodied in
the instrument such as capital gains,
dividends etc. For example,
When the share price of particular entity falls
then the speculators rush to buy by expecting
the price will increase later, when the price
goes up then speculators will sell it back to the
stock market.
37
Maysir vs. speculation
✓ Speculation and maysir may appear to be of the
same nature as speculators enter the share market The Shari’ah Advisory Council (SAC)
hoping for good luck like in maysir. of the Securities Commission (SC)
of Malaysia allowed speculation in
✓ However, speculation is different from maysir as it share market.
does not merely depend on luck and gaining at the
expense of another’s loss as speculators enter the
market with careful consideration as to the factors
of movement of the prices.
38
Maysir in Contemporay
Transactions

LOTTERY
❖ A means of raising money by selling
numbered tickets and giving prizes
to the holders of numbers drawn at
random.
❖ It is prohibited in the Shari’ah even
though serving a noble purpose
PRIZE-CARRYING SAVING ACCOUNTS
❖ The bank gives prizes from the interest
generated from the capital to the saving
accountholders by periodical draws.
❖ It is not allowed due to riba and maysir.
❖ However, it can be allowed if mudarabha
contract is used and the prize is given from
the bank’s share of the profit.
39
Cont’d
ONLINE FOREX TRADING
CONVENTIONAL INSURANCE
❖ National Fatwa Council of Malaysia
❖ In a life insurance policy, the policy
prohibited it. holder easily gains a large amount of
❖ There are elements of riba, gharar money.
and maysir in online forex trading ❖ The policyholder is betting his money
platforms. with the hope of a huge material gain.
40
Thank you.