Gharar, Riba and Maisyr. The main prohibitions of Islamic finance.

In this article, I would like to talk about prohibitions in the Islamic financial system.

Islamic finance is a unique financial system that is based on the principles of Islamic law, also known as Shariah law.

One of the key features of Islamic finance is the concept of prohibitions, which refers to the restrictions placed on certain types of financial transactions. These prohibitions are designed to ensure that financial transactions are conducted in a manner that is consistent with Islamic principles.

There are different kinds of restrictions in Islamic finance, such as riba, gharar and maysir. The prohibition of interest or usury, which is considered exploitative and unjust, is known as riba. Gharar is an Islamic prohibition against speculative or uncertain financial transactions. Maysir prohibits gambling or gambling entertainment.

• Riba

Maybe the most well-known prohibition in Islamic banking is the one against riba. Usury, also known as interest, is not allowed in Islamic finance since it is considered as unfair and exploitative. As a result, neither borrowers nor lenders are permitted to charge interest on loans. Instead, the profit-sharing model used in Islamic banking divides losses between the lender and the borrower.

Examples of Riba:

Interest on a bank loan

Interest on a deposit

Coupon on a bond

Central bank borrowing by traditional commercial banks

Bank penalties for late payment

• Gharar

Prohibiting gharar is also an important feature of Islamic finance. Gharar refers to uncertainty or speculation in financial transactions. This means that contracts involving excessive risk or uncertainty are prohibited in Islamic finance. For example, insurance contracts involving excessive risk or uncertainty are forbidden.

More detailed examples of transactions related to Garar:

Sale of goods not yet in full possession of the seller or of goods not yet in stock

Sale of goods without a detailed description of all their inherent characteristics, features and qualities

The transaction without specifying the exact price of the goods as set forth in the contract

Drawing up the terms of the contract in light of an uncertain future event

Sale of goods without the purchaser’s ability to inspect the goods

• Maysir

The prohibition of maysir is another important feature of Islamic finance. Maysir refers to gambling or games of chance. This means that any financial transaction that involves gambling or games of chance is prohibited in Islamic finance. This includes activities such as betting on sports events or playing casino games.

Maysir can also include winning a lottery ticket, income obtained from playing roulette, profits from derivative transactions (futures, swaps), etc. Because of such activities, the funds are not put to productive use and therefore do not make society richer in real terms.

While there are some benefits to society from lotteries (taxes to the state, contributions to charity), the harm from them is much greater. There is no need for Muslim countries to use lotteries to accumulate funds for social needs, as Islam has other more effective sources of redistribution of wealth in society like zakat and waqf.

Conclusion

Overall, the prohibitions in Islamic finance are designed to ensure that financial transactions are conducted in a manner that is consistent with Islamic principles. These prohibitions help to promote fairness, justice, and ethical behavior in financial transactions. In addition, these prohibitions help to prevent the exploitation of vulnerable individuals and promote social justice. By promoting fairness, justice, and ethical behavior in financial transactions, these prohibitions help to create a more just and equitable society.

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