Riba And Gharar Are Strictly Prohibited In Islam

Islam has forbidden both riba and gharar, riba is the extreme form of gharar. It creates uncertainty and risk in business contracts and should be avoided in business exchange contracts. Islamic sharia forbid riba and gharar it leads to exploitation and create injustice in the society.Riba is the main reason of today economic system problems which strengthen developed countries and underdeveloped countries more underdeveloped. In this documents why riba and gharar is prohibited in islam is discussed, followed by jurisprudence and economic theory to justify the arguments.
Islamic financial instruments are based on the principles that they prohibit interest (riba), not have major uncertainty (gharar).Islam is a complete code of life which believes in political, social and economic system justice and also guides human being towards the right path. An ideal society is considered which have social, economic justice qualities. The two things that make Islamic contracts unlawful are riba and gharar. According to Rahman says that why riba is prohibit or haram in Islam, Its haram due to many reasons, one of which is exploitation of the customer’s hardship. Only a financial desperate customer will go to the bank for a loan, in spite of desperate condition of the customer the bank impose interest on the loan and as we know that if they are fail to pay on instalment bank charge them compound penalty which is very oppressive riba. If a Muslim get loan and couldn’t repay it’s a big sin. Prophet Muhammad s.a.w emphasized that: ‘‘the martyr is forgiven all of his sins... except for his debt.’’ (Sahih Muslim 6/3. A sahih hadith narrated by Imam Muslim that: ‘‘Rasulullah s.a.w forbids trading activities that involves gharar.’’ (Muslim). Sami Al-suwailem says that riba and gharar are in fact two faces of the same coin, which establishes the consistency and integrity of Islamic rules of exchange. Gharar is not allowed in order to protect the welfare of both parties and guarantee a satisfactory outcome. All school of thoughts that exist in Islam unanimously agree to the prohibition of interest and gharar.
Definition of Riba and Gharar:

Riba is defined by many scholars in different ways. Dr Umar Abd Aziz al-matarak define riba as ‘‘any increment upon specific (usurious) items and increment upon debt due to the deferred payment items.’’
Riba is not only prohibited in Islam but also found in Judaism and Christianity. Riba play important role in exploitation of the society, due to its harmful effect riba is prohibited.
In jurisprudential term Gharar has many definitions which cover three headings first, gharar applies exclusively applies to cases of doubtfulness or uncertainty, the definition of Ibn Abidin that‘‘gharar is uncertainty over the existence of the subject matter of sale’’. Second gharar applies only to the unknown, to the exclusion of doubtful. Thus according to Ibn Hazm: ‘‘gharar sales occur when the purchaser does not know what he has sold’’. Third here gharar cover both condition doubtful and unknown the definition by Al-sarakhsy: ‘gharar obtains where consequences are concealed.
As from above definitions of gharar we can say that gharar affect our business contract in different form.
Why Islam prohibit interest (RIBA):
According to Yusuf al-Qaradawi (1989) gives four reasons for the Islamic prohibition of interest (riba) which are:
1. Interest taking implies, taking of another person’s property without giving him anything in return. The lender receives something for nothing
2. Reliance on interest discourages people from working hard to earn money. Money rented at interest will not be used in industry, trade or commerce, all of which need Capital, depriving society of benefits.
3. Interest permitting discourages people from doing well. If interest is Prohibited people will lend to each other with kindness expecting nothing more Back than they have loaned.
4. The lender is likely to become more wealthy and the borrower poor. The poor will be exploited by the wealthy through the charging of interest on loans.
The above four point which is discussed is clearly pointing towards the exploitation and injustice of human being and interest receiving is something for nothing. Riba based transaction has very bad effect on the society.
Arshad and Asad zaman write in their article that effects of banning interest-based loans on savers, banks, business, and government, separately some global effects which could be expected from the Islamic law a number of socially beneficial effects could result from such bans which are:
Finance for bigger Investment Projects:
Banks are effectively cut off from the outcomes of business in the system of interest-based loans, they lend on criteria different from the inherent merit of investment. If return to banks is based on investment outcome, instead of collaterals as under the Islamic law, we may expect that the drift of investment projects financed would shift towards more profitable and hence the economically more valuable projects. This high rate is partly due to the fact that banks are willing to finance poor projects if they have sufficient collateral to ensure that they will be repaid. the rate of failure of new business start-ups in the US is close to 70%.Such a high rate of failure inflicts large burden losses on society. If banks take interest in outcomes rather than collateral these losses can be reduced.
Better use of Information:
Banks finance many projects, they have potentially helpful information to share with investors. Conventional interest-based financing backed up with collateral, the bank has no real incentive to share its information due to it is guaranteed a fixed return in any case. Where Islamic system, the return to the bank depends on the return to the investor and hence the bank will have great incentive to ensure that the new investor has the best possible information for planning.
Opportunities for Poor and Better Income Distribution:
The current collateral based system for financing business put the poor out of contribution in the economic activities of the nation as a whole. By banning interest should have the effect of allowing poor population to finance, and hence lead to a better income distribution.
Maintenance of Independence and Sovereignty:
Using debt as a tool for control is very old. We see great example like Ottoman Empire was subjected to European influence by the use of the debt. In modern times, the IMF and the World Bank (WB) interfere with sovereignty of under developed countries due to debt. Pressure can be brought to bear on indebted countries to formulate policies contrary to the national interest. Simple example is Pakistan. IMF and WB all the times putting pressure on Pakistan to take steps which are against their national interest.
1.5 Prevention of Debt Crises:
Interest-based loans guide to irresponsible borrowing and lending. Which create bank crises. Such crises cause tremendous hardships and costs on all segments of society, but mainly of all on the poor. The solution for the prevention of debt crisis is pure Islamic sharia based finance. Keeping view on these above point’s riba is nothing except distraction of society.
Gharar Prohibition in Islam:
Gharar in commutative financial contracts was prohibited in number of hadith. Perhaps the strongest textual prohibition of gharar is the one narrated by Muslim(#2783; Sakhr (1995)), ’Ah.mad (#7104, ibid.), ’Abu Dawood (#2932, ibid.), Al-Tirmidhi (#1151, ibid.), Al-Nasai (#4442, ibid.), Al-Darami (#2441, ibid.) and ’Ibn Majah (#2185, ibid.) and ’Abu Hurayra (translation of the version in Muslim) “that the Prophet (pbuh) banned the pebble sale and the gharar sale”. There are a number of other hadith which forbid gharar, either by name, or by specifying one or more of its instances e.g. selling of the birds in the sky or the fish in the water, unborn calf in its mother’s womb, the sperm or unfertilized eggs of camels etc.
Any transaction contains uncertainty that leads to unfair behaviour to any of the parties is not allowed in Islam, only clean trade is permitted.
Coulson argue that the principle of gharar is not meant to discourage commercial venture , enterprise or speculation in the sense but, it’s not acceptable under the principle of gharar that any risk between the parties which is built into the contract at its start and which must result in a profit for one party and a corresponding loss of other.
Similarly seif al taq din write in his article that risk is known in Islamic jurisprudence as
An unlikeable fact of life that have to be reduced as much as possible through better market organization and relevant regulatory measures
Gharar found in every Islamic contract upto some extent, but need to verify and finish in the Islamic sharia context.
Anything that has unpleasant effect on the society is forbidden by Islam.