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Glossary

Gharar

Category — Islamic Finance
"Gharar" means "hazard" in Arabic. Gharar means uncertainty, contingency or ambiguity in a contract that is prohibited under the Sharia law. Gharar is defined as "the sale of what is not yet present" such as crops not yet harvested.

The idea of Gharar is to prevent fraud, injustice and the subsequent disagreement of the parties.

In finance, instruments involving extreme uncertainty are prohibited. For example, swaps, options, futures, short transactions on the stock market. At the same time, Sharia law prohibits extreme uncertainty, i. e. only those assets that pose the highest risk. Therefore, a distinction is made between a nominal gharar and an excess gharar. For example, commercial insurance is a vital part of economic life.

Thus, transactions and contracts are deemed a gharar if there are excessive risks or uncertainty or one party benefits only from the other party’s losses.

Accordingly, Islamic finance also strictly prohibits interest-bearing loans, regarded as usury.
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