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An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence

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The forbidden bay[ al-gharar can best be translated as “trading in risk”. Any trade would involve some degree of trading in risk. Jurists disagree over whether a specific contract is forbidden or not based on their varying assessments of whether the amount of risk is substantial or small. Moreover, the prohibition can be waived in cases where clear economic benefit can only be served by a contract that includes substantial trading in risk. We show that “trading in risk” is generally inefficient relative to other forms of risk sharing. Hence, if a contract can increase economic efficiency through some form of risk transfer, the prohibition of trading in risk should be applicable. Cases where such a prohibition is moot because the risk-trading instrument is not used, do not affect this general conclusion. In cases where trading in risk is inherent in the contract, but where the contract is important to meet economic needs (e.g. salam), the analysis is still useful in two regards: (i) we can consider whether or not there is a risk sharing mechanism which can reduce part of the inherent trading in risk, and (ii) we should consider such alternatives if secondary tools for managing the resulting risk are sought.

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  • A. El-Gamal, Mahmoud, 2001. "An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 8, pages 29-58.
    • Handle: RePEc:ris:isecst:0142
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    2. J. A. Bergstra & C. A. Middelburg, 2011. "An Application Specific Informal Logic for Interest Prohibition Theory," Papers 1104.0308, arXiv.org.
    3. Chokaev, Bekhan (Чокаев, Бекхан), 2017. "Islamic Finance: Possibilities for Russian Economy [Исламские Финансы: Возможности Для Российской Экономики]," Working Papers 031719, Russian Presidential Academy of National Economy and Public Administration.
    4. J. A. Bergstra & C. A. Middelburg, 2010. "Preliminaries to an investigation of reduced product set finance," Papers 1012.4291, arXiv.org.
    5. Karbhari, Yusuf & Muye, Ibrahim & Hassan, Ahmad Fahmi S. & Elnahass, Marwa, 2018. "Governance mechanisms and efficiency: Evidence from an alternative insurance (Takaful) market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 71-92.
    6. Mohamed Wail Aaminou & Rajae Aboulaich, 2017. "Modeling Consumers’ Behavior in New Dual Banking Markets: The Case of Morocco," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(02), pages 1-24, June.
    7. Waheed Akhter & Saad Ullah Khan, 2017. "Determinants of Takāful and conventional insurance demand: A regional analysis," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1291150-129, January.
    8. Ahmed,Habib & Mohieldin,Mahmoud & Verbeek,Jos & Aboulmagd,Farida Wael, 2015. "On the sustainable development goals and the role of Islamic finance," Policy Research Working Paper Series 7266, The World Bank.
    9. Mahmoud A. El-Gamal, 2009. "A Muslim's Perspective on the Financial Crisis," The American Economist, Sage Publications, vol. 53(1), pages 31-34, March.
    10. Boudt, Kris & Raza, Muhammad Wajid & Wauters, Marjan, 2019. "Evaluating the Shariah-compliance of equity portfolios: The weighting method matters," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 406-417.
    11. Riaz, Umair & Burton, Bruce & Monk, Lissa, 2017. "Perceptions on Islamic banking in the UK—Potentialities for empowerment, challenges and the role of scholars," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 47(C), pages 39-60.
    12. Cattelan, Valentino, 2014. "In the name of God: Managing risk in Islamic finance," eabh Papers 14-07, The European Association for Banking and Financial History (EABH).
    13. Lattanzio, Gabriele, 2022. "Beyond religion and culture: The economic consequences of the institutionalization of sharia law," Emerging Markets Review, Elsevier, vol. 52(C).
    14. Jan Aldert Bergstra, 2011. "Dialectical Roots for Interest Prohibition Theory," Papers 1105.2900, arXiv.org.
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    16. J. A. Bergstra & C. A. Middelburg, 2011. "Interest prohibition and financial product innovation," Papers 1104.2471, arXiv.org.

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