Towards an Objective Measure of Gharar in Exchange

Although the legal aspects of gharar are well established in Islamic jurisprudence, researchers in Islamic finance constantly face the dilemma of defining the concept and its precise meaning. For example, Zaki Badawi (1998, p. 16) writes: “The precise meaning of Gharar is itself uncertain. The literature does not give us an agreed definition and scholars rely more on enumerating individual instances of Gharar as substitute for a precise definition of the term.” Frank Vogel (1998, p. 64) expresses a similar tone: “As with riba, fiqh scholars have been unable to define the exact scope of gharar.” These claims might well be exaggerating, but they point to the need for further contemporary formulation of the subject.

This paper is an attempt to develop an objective criterion to identify and measure gharar in exchange. It is shown that a gharar transaction is equivalent to a zero-sum game with uncertain payoffs. The measure helps economists view gharar within an integrated theory of exchange under uncertainty, so that it can be easily communicated to non-Muslim economists. Further, it provides a quantitative measure of gharar that can potentially be applied to innovative risky transactions. A Shari’ah-based measure is also developed, and the two criteria are shown to coincide and integrate each other.

The Islamic principle behind most illegal contracts is eating others’ money for nothing. A zero-sum exchange reflects precisely this concept: It is an exchange in which one party gains by taking away from the other party’s payoff, leading to a win-lose outcome. However, a rational agent will not accept to engage into a certainly losing game; only if loss is uncertain and gain is probable, that such game is played. Hence uncertainty or risk is what tempts rational agents to engage into an exchange which they know in advance that only one will gain from it while the other must lose. This temptation is best described by the term gharar, which means deception and delusion. It follows that a gharar contract is characterized as a zero-sum game with uncertain payoffs. This paper argues that such measure well

defines gharar transactions.

The paper also develops a Shari’ah based measure derived from the hadith: Liability justifies return or utility. It is shown the these two measures coincide and integrate each other. A quantitative formula is developed to examine gharar in nonzero-sum games, which helps formalizing conditions of unacceptable risk or excessive gharar mentioned by fiqh scholars. An examination of well known gharar contracts shows how the zero-sum measure is satisfied. The measure helps explaining why fuqaha take different positions on controversial nonzero-sum contracts, while unanimously prohibit strictly zero-sum contracts. Extending the measure to modern applications generates interesting results on how a certain contract, like the option contract, might or might not be gharar, depending on the structure of payoffs for the two players.

The economic significance of the zero-sum measure provides insights into the Islamic view of economic behavior. Elimination of zero-sum arrangements can be viewed as a paradigm governing Islamic principles of exchange. Not only this paradigm is internally consistent, it is also consistent with rationality as defined by Neoclassical economics. Consequently, modern analytical tools are readily available for Muslim economists without compromising Islamic principles There is much to be studied and analyzed, and I hope that this paper presents a proper starting point for building a coherent theory of exchange in Islamic economics.

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Shari‘a and Politics (Islamic Law?)

Islam, as religion, consists of belief and belonging, and the two in practice interact. In this interaction the social and political life of Muslims is defined differentially among Muslims themselves. The interpretation of the concept of shari‘a is crucial. It means “the path or road leading to water, i.e. a way to the very source of life.” (Rahman, 1979, 100). The very source of life in this context is God Himself. Rahman (1979, 100-01) speaks more technically about shari‘a as “religious values, expressed functionally and in concrete terms, to direct man’s life.... The Way, ordained by God, wherein man is to conduct his life in order to realize the Divine Will. ... It includes all behavior – spiritual, mental, and physical. Thus it comprehends both faith and practice.”

This definition of shari‘a fits the approach to religion as the interaction between belief and belonging. There is, however, severe disagreement among Muslim scholars about the meaning and scope of shari‘a. Muslims commonly believe that the first source of the shari‘a is the Qur’an. A question immediately arises as to the extent to which the Qur’an covers all legal issues related to Muslim behavior in a changing society. Rahman (1979, 68) argues that “the strictly legislative portion of the Qur'an is relatively quite small,” and therefore not sufficient to direct Muslim behavior. Muhammad Sa‘id al-`Ashmawi, a Chief Judge of Egypt, more specifically states about shari‘a as follows:

“The term Shari‘a appears as such only once in the Qur’an ... (Sura 45, Verse 18), but one finds there three other terms from the same root (Sura 42, Verse 13; Sura 5, Verse 48; Sura 42, Verse 41). In all these places Shari‘a signifies not judicial norms but the route or the way.” (Al-`Ashmawi, 1998, 50).

This limitation of the Qur’an is resolved through the inclusion of the Sunna as preserved in the Hadith, which is the record of the Prophet’s life in his community. The Hadith is believed to be the second source of the shari‘a. It encompasses a broader range of social and political interaction in the Muslim community. The absolute importance of Sunna as the second source of the shari‘a, according to Rahman (1979, 69), has been legitimated since the Prophet passed away by a doctrine of infallibility or sinlessness of the Prophet.

After the Prophet passed away, and the Muslim community had grown much larger, beyond Arabia, the Sunna itself was felt insufficient to direct Muslim behavior. A controversy emerged, in which one group of scholars, called the ahl al-hadith, claimed that the true Islam or shar‘a manifested in a community should imitate “the Sunna community,” i.e. the community of Muslims under the authority of the Prophet in Medina. Any influence from the non-Sunna community is claimed to deviate from the model and is supposedly intolerable.

Another group of the ‘ulama’ argued that it is true that the Sunna was never wrong in its historical context, but when this context changed, as normally happens in any community, the Sunna in fact became insufficient to direct Muslim behavior. This change strengthened the personal role of the ‘ulama' on the basis of his understanding of the Qur'an and Hadith. This personal opinion (fiqh), is opened to falsification. The ahl al-hadith cannot accept this argument, and always imagines the Sunna community as the true model for the Muslim community regardless of historical change.

The two different beliefs about the nature of shari‘a shaped the way contemporary ‘ulama’ or activists imagine the Muslim community, including their perceptions about the relationship between religion and politics. To simplify, I will sketch the debates about the relationship between Islam and politics among some leading contemporary Muslim intellectuals or ‘ulama’, and place the Muslim masses’ attitude and behavior in the context of this debate. Their antagonistic views about shari‘a, and its relations with politics, may shape the attitude and behavior of the Muslim masses.

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