ISLAMIC BANKING AND FINANCE LAW UIB2612

T4
Yasmin Humaira Binti Aszaham (1181100141)
Praveena Visvanathan (1191100353)

TUTORIAL 3
1) Gharar and its rulings
Gharar is an Arabic word that is associated with uncertainty, deception and risk.
It is a significant concept in Islamic finance and is used to measure the legitimacy of a
hazardous sale or risky investment pertaining to either short selling, the selling of goods
or assets of uncertain quality or delivery, gambling, or contracts that are not drawn out
in clear terms. Gharar is generally prohibited under Islam, as there are strict rules in
Islamic finance against transactions that are highly uncertain or that may cause any
injustice or deceit against any of the parties.
All scholars agree that every transaction has some amount of Gharar in it but
they start to differ when referring to the amount of Gharar contained in each. Gharar
yasir, which means small in amount or trivial is the uncertainty that is always present in
all contracts and conducts, thus its existence is tolerated. While Gharar fahish, is in
contracts plenty as shown by the Al - Hadith and normally is associated with the reasons
why Gharar sales are prohibited.
There is no specific evidence from the Quran which connotes Gharar, however,
Allah (s.w.t) mentions “Eat not your property among yourselves unjustly by falsehood
and deception, except it be a trade amongst you by mutual consent (Al-Bakarah, 2:188;
Al - Nisa, 4:29). The Quran has categorically prohibited gambling (Al-Bakarah, 2:219 and
Al- Maidah, 5:93). Many scholars argue that Gharar is one of the branches of gambling
(Rahman, 2010; p.71)
The beloved Prophet (S.A.W.) on many occasions forbade many transactions
which included Gharar. protecting the different parties from deceit and ignorance by
forbidding Gharar in any commercial exchange contracts that are not free from hazard,
risk or speculation about the essential elements in the transaction to either party or
uncertainty of the ability of one party to honour its rights and obligations. It requires
that all Islamic financial and business transactions must be based on transparency,
accuracy, and disclosure of all necessary information so that no one party has
advantages over the other party.
Instead, the Shari’ah promotes the principle of profit-loss sharing between
banks and entrepreneurs as an approach to encourage the spirit of brotherhood and
cooperation in business relationships. Mutual risk-sharing could help absorbing the
weight of loss by sharing it equitably between all parties. However, risk and uncertainty
are conditioned by enough adequacy and accuracy of information to make reasonable
 estimates of the outcomes. Tolerable risks and uncertainties cannot exist in contractual
obligations.
As discussed above, the rationale behind the prohibition of Gharar is to ensure
full consent and satisfaction of the parties in a contract. Full consent can only be
achieved in full disclosure and transparency and through perfect knowledge from
contracting parties of the counter values intended to be exchanged. The prohibition of
Gharar protects against unexpected losses and possible disagreements regarding
qualities or incompleteness of information.

2) Trade Riba vs. Debt Riba

1. Trade riba
● known as Riba al-Buyu
● defined as a sale transaction in which a commodity is exchanged for an unequal
amount of the same commodity and delivery is delayed.
● Hadith Bukhari and ‘Ubadah bin al-Samit after the Prophet who said: “Gold for
gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for
salt; exactly equivalent for equivalent, hand to hand. You are free to trade objects
as long as they differ and are traded hand to hand”.
● It means that the quantity of the exchanged goods must match and the exchange
must be simultaneous.
● types of trade riba: Riba al-Fadl and Riba al-Nasiah

- Riba al-Fadl
- riba in loans
- any additional quantity or inequality in the exchange of goods
from the similar type of the ribawi items.

- Riba al-Nasiah
- riba in excess
- refers to any delay in the exchange of the ribawi items from the
same type and category.
- Unlike Riba al-Fadl, it is of time factor.
-
2. Debt riba
● Known as Riba al-Dayn
● Quranic verse (2:275): “Those who devour usury will not stand except as stands
one whom the Evil One by his touch hath driven to madness. That is because they
say: “Trade is like usury but God hath permitted trade and forbidden usury. Those
who after receiving direction from their lord desist shall be pardoned for the past;
their case is for God (to judge); but those who repeat (the offence) are
companions of the fire: they will abide therein (forever).”
● two types of debt riba: Riba Qardh and Riba Jahiliyyah.
 o Riba Qardh
▪ the debtor will need to fulfil any predetermined benefit of the
owner of the debt stated in the contract.
o Riba Jahiliyyah
▪ Meaning: the riba used during the age of ignorance and paganism.

▪ If the debt was not paid within a stipulated time, the creditor would
levy an additional sum as a penalty in order to agree to prolong the
payment term through debt restructuring to the debtor.
▪ The premium paid is made to the lender in return for his lending. It
also means the giving or taking of every excess amount in
exchange of a loan at an agreed rate irrespective of whether it is
low or high.
▪ a form of real and primary riba

3) How Riba in loan transaction happens?

The basis for the prohibition of riba in loan transactions as a result of delay in
time is the Quranic verse which is Al-Baqarah 2:275 that "Those who consume interest
will stand on Judgment Day" like those driven to madness by Satan's touch. That is
because they say, "Trade is no different than interest." But Allah has permitted trading
and forbidden interest. Whoever refrains after having received a warning from their Lord
may keep their previous gains, and their case is left to Allah. As for those who persist, it
is they who will be the residents of the Fire. They will be there forever."

In loan transactions, riba will occur if the three elements are involved in which
there is excess or surplus over and above the loan capital, the determination of this
surplus in relation to time and In modern banking, riba may occur as a result of many
factors, such as delay in time and excess in quantity. The examples of applications are
that the interest charges for bank loans is called Riba al-Qardh; while the second
example is that the delay in the credit card repayment is called Riba Al Jahiliah.

Riba al- Duyun (riba in loan transactions) can be classified into two types. The
first type is Riba Qardh in which any predetermined benefit for the owner of debt is
stated in the contract, which the debtor needs to fulfil. An example would be the
interest stated in the loan contract. The second type is Riba Jahiliyyah. It is a form of
interest, which is charged above the original debt as a penalty to the debtor due to his
inability to service the loan repayment within the stipulated time. It is a real and primary
form of riba. It would be the premium paid to the lender in return for his waiting. Giving
 or taking of every excess amount in exchange of a loan at an agreed rate irrespective of
whether it is low or high. This form of riba could be viewed in credit card transactions
where, the delay of repayment of the debt by the debtor will result in the debtor to pay
an additional or surplus amount to the creditor.

4) Requirements of Zakat in Islam

Zakat is obligatory if an individual possesses wealth to the value of the Nisab
(minimum threshold). According to Sharia, such a person is deemed to be rich. Zakat is
imposed by both the Qur’an and the Sunnah and the Prophet S.A.W listed Zakatable
items and monetary rates to be charged on each of them. The Prophet S.A.W also gave
us exemptions and regimented criteria of Zakat, Zakatable items and general
Zakatability. Everything has been written for and given to us and it is our role as pious
Muslims to adhere to what we have been commanded to do.
The requirement of Zakat to be obligatory on wealth is complete ownership, the
wealth has the ability to grow and increase, the wealth has reached the Nisab and a
whole lunar year passes after possessing the Nisab.
Zakat is meant to help relieve the poor without impoverishing the rich. Once you
have reached the Nisab threshold you are only required to give 2.5% of your Zakatable
assets. In essence, we are required to give a little from a lot and in doing so, not do
ourselves any financial damage whilst providing security for those in need.

5) Types of Zakat and its beneficiaries

There are two types of zakat which are Zakat al Fitr and Zakat al Mal. Zakat al Fitr
also known as the zakat of the body (Fitrah) which is a small levy that must be paid by all
Muslimevery year without fail regardless of age, gender or wealth. In Malaysia, the rate
for Zakat Fitrah is equivalent to the value of a bushel of rice weighing 2.7 kilograms.
Usually, Muslims will settle their Zakat Fitrah during the holy month of Ramadhan as
there are compulsory to pay it before the start of Eid prayers. In Saudi Arabia, the
concept of paying Zakat Fitrah in cash is not advisable because they believe that paying
in cash to the needy is against Islamic Shariah teachings. According to Sheikh Abdul Aziz
Al-Asheikh the Grand Mufti of Saudi Arabia, the zakat should be in the form of food so
that the poor and needy can enjoy Eid AlFitr like other Muslims. Same as in Malaysia,
Zakat should be paid out before Eid prayers.
Zakat al Mal also known as the zakat of wealth where Muslims are required to
pay it once a year if meet the minimum requirements to do so. There are several types
of zakat of wealth which are zakat on earnings, business, savings, gold and silver, farming
and livestock. The minimum amount is called nisab while Muslims who meet the nisab’s
requirements are mandated to contribute 2.5% of their income as zakat. In Malaysia,
the amount of nisab is equivalent to 85 grams of gold and differs from state to state on a
periodical basis. So, they need to pay the zakat if the wealth is more than the nisab
amount. Zakat al Mal is deducted from the bank accounts of the customers annually in
Pakistan unless they present the certificate for exemption. The practice of zakat
management will be different from country to country with respect to their locality. Not
everyone is entitled to receive the contribution of zakat. The recipients consist of the
following eight groups mentioned in Surah al-Tawba, verse 60 the poor, the needy,
collectors of zakat (Amil), those whose hearts are to be reconciled (Muallaf), slaves,
debtors, travellers and people in the cause of Allah s.w.t.