The related Quran verse and Hadith is as

The four prohibited elements
in Islamic Finance/ Islamic Capital Market are riba’ (usury), gharar
(uncertainty), maisir (gambling) and activities prohibited in Islam (for
example, produce non-halal products and immoral activities). The explanation
for each of the elements are as follows:

 

1. Riba’ (Usury)

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The prohibitions of
practising riba’, gharar, maisir and activities prohibited in Islam in our life
is mentioned whether in the Quran, hadith or ijtihad/ ijma’. For riba’, the
related Quran verse and Hadith is as follows:

 

The
Quran has warned that those who practice riba’ “are at war with God and His
Apostle” (2:279). The related Hadith is which was reported by ‘Ubadah biun
Samit that the Prophet (p.b.u.h.) said:  “Gold for gold, silver for
silver, wheat for wheat, barley for barley, dates for dates and salt for salt,
like for like, equal for equal and hand to hand, if the commodities differ,
then you may sell as you wish provided that the exchange is hand to hand (Sahih
al- Muslim).

 

Rib’a can be
defined as an excess or an increase which accrues to the owner in an exchange
or sale of a commodity or in loan arrangement which do not provide equivalent
value to the other party. There are two categories of riba’ which are riba’ qurudh (riba al-nasiyyah) and riba’ buyu`(
riba’ al fadhl).

 

(a) Riba’ on credit / riba al-nasiyyah / riba’
qurudh

Riba’ al-nasiyyah is
occurs through loans. The increase or excess is being fixed on top of the loan
and the debtor agrees to pay creditor over agreed time. In another words, it
relates to any fixed or predetermined rate of return tied to the maturity and
the amount of principal (for instance, guaranteed returns regardless of the
performance of the investment). The practice of charging an additional amount
irrespective of the future outcome is unjust. The pre-determine rate of returns
also can disrupt the cooperation spirit and eventually can leads economic and
financial crisis.

 

(b) Riba’ in cash / riba’ al fadhl / riba’ buyu`

Fadhl also brings a
means of an excess or surplus. Riba’
al-fadhl occurs when the item of ribawi is being exchanged not for equal
amount or equal but not exchanged on the spot. In another words, it occurs
through the sale and purchase of six riba’s items / commodities (gold,
silver, dates, wheat, barley and salt). The transaction of riba’s items/ commodities
is required to comply to the following conditions (if not, then riba’ al fadhl situation will occurs). In
trading ribawi items / commodities, such as silver for silver or dates for
dates, two conditions need to be followed. Both commodities must be exactly
equivalent and there also must be prompt delivery (on the spot). For
instance, 10kg ajwa dates for 10kg ajwa dates (must be same grade of dates).

 

 

2. Maisir (Gambling)

The Quran verse
regarding the prohibitions of gambling is as followed:

Surah
al-Maidah verses 90-91: “O believers, wine and gambling (maysir), idols and
divination by arrows are but abominations devised by Satan; avoid them so that
you may prosper. Indeed, Satan seeks to stir up enmity and hatred among you by
means wine and gambling and to keep you up away from remembrance of Allah
(s.w.t.) and from your prayers.”

 

Gambling can be referred
as qimar or maisir in Arabic, which means any activity that
involves betting or an arrangement between two or more parties and each of whom
undertakes the risk of a loss where a loss for one means a gain for the other.
The gambling will invoke enmity in society and distracts believers from
worshipping Allah (s.w.t). The gain obtains from gambling activities will
divert the participant’s attention from finding/attending jobs and keep
pursuing wealth without effort. In relation to the above mentioned explanation,
Muslims are also prohibited from having any relation to gambling activities
including participating, investing or funding any businesses related to or
associated with the gambling companies as well as industry.

 

 

3. Gharar (Ambiguity/Uncertainty)

The prohibiton of gharar has been mentioned in various hadiths from the
Prophet (p.b.u.h.). In hadith by Abu Hurayrah narrated that the Prophet
(p.b.u.h.) prohibited all sales on gharar. The indirect prohibiting gharar in
Quran verse is from Surah al-Nisa verse 29: “O you who believer! Eat not your
property among yourself unjustly by falsehood and deception except it be a
trade amongst you, by mutual consent.” It means that Quran had clearly
prohibited all forms of business transactions which cause unjust to any of the
parties, especially people who are in weaker economic and bargaining position.

 

Gharar
can be defined as activities that
have elements of an uncertainty, ambiguity or deception. In a commercial
transaction, it refers to either the ambiguity of the goods or price of goods
or deceiving the buyer on the price of goods. As the ground rule of the prohibition
of gharar is about justice and fair dealings and thus, it will avoid future
disputes.

 

One of the example of gharar
in the financial market is in conventional insurance. The opinion of Shariah
scholars where by the conventional insurance is not Shariah compliant
due to the large element of gharar. This is simply because the policyholder
(participants of the insurance scheme) enters into an agreement to pay a
premium and in return, the insurance company guarantees to pay a certain sum of
compensation (indemnity) in the event of disaster. However, the amount of indemnity
that the insurance company will pay to the policyholder is uncertain and it is
also depending on the occurrence of specific events in the future. Ambiguity is
a sale contract that leads to unknown results/ outcomes. The policyholders might
be not knowing what could be achieved from the contract (the policy) which they
have concluded (signed for).

 

Gharar
can be categorised into three types that
are gharar fahish (excessive), which relates to important and material
information to the contract would render the contract void.  Gharar yasir (minor), which is
tolerated, unavoidable gharar due to the nature of the subject matter, without
causing considerable damage to one of the parties will not affect the validity
of the contract and gharar mutawassit (moderate) which falls between the
gharar fahish and gharar
yasir.

 

 

4. Activities that are prohibited
in Islam

Islam prohibits
earnings from businesses that conducting an immoral activity such as pornography,
prostitution, immoral entertainment and also producing as well as selling the
non-halal products / services such as pork and liquor. In this context, the Shariah
scholars also viewed that any activity relating to non-halal products and
services is including from processing, producing, marketing, supplying and until
the selling process. 

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