Understanding Riba and Gharar in Islamic Finance

Abstract

The philosophical and conceptual foundations behind the prohibition on riba (interest) and gharar (uncertainty) can be derived through the Shuratic process in discursive interpretation of the Qu’ran and Sunnah. Riba (interest) is in fact just a form of gharar (uncertainty). Gharar (uncertainty) opens the door for speculation, ruthless greed, immorality, and social decay. Both riba (interest) and gharar (uncertainty) result in social harm in the form of inflation, unemployment, volatility, instability, and environmental degradation. Riba (interest) and gharar (uncertainty) are both prohibited under Shari’ah as their harm outweighs any benefit, however, gharar (uncertainty) is allowed in instances where the benefit outweighs the harm.