Riba' and Gharar

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Prohibition of Riba’
Generally Riba’ means that prohibition on any interest. In Islamic Finance system, investors and lenders are strictly disallowed to charge or receive interest.  In the Shari’ah, “riba” technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity.  According to Chapra (2006), term of riba is used in the Shari‘ah in two senses. The first is riba al-nasi’ah and the second is riba al-fadl..The term nasi’ah comes from the root nasa’a which means to postpone, defer, or wait, and refers to the time that is allowed to the borrower to repay the loan in return for the ‘addition’ or the ‘premium’. Hence riba al-nasi’ah is equivalent to the interest charged on loans While, prohibition of riba al-nasi’ah implies that the fixing in advance of a positive rate of return on a loan as a reward for waiting and no difference whether the rate of return is small or big, or a fixed or variable per cent of the principal. It is important to note that, according to the Shari‘ah, the waiting involved in the repayment of a loan does not by itself justify a positive reward. Gharar is known as unacceptable risk taking which is another fundamental principle of Islamic finance central to the structuring transactions. It also can be considered some level of risk remains a fundamental aspect of commercial life and risk allocation a necessary component of Islamic finance; only disproportionate risk, speculative trading and transactions meeting exceeding limitations. According to Tabari (2011) gharar may rise from unacceptable levels of settlement risk, inadequate or inaccurate information and complex contracts where multiple transactions are not identifiable with multiple independent contracts. Besides, according to Iqbal (1999) Gharar in a contract arises where there is a lack of knowledge or there is a reasonable doubt about the control of either party to...
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