SS 31 · General

SS 31: Controls on Gharar in Financial Transactions

What this standard is about

Gharar (excessive uncertainty) is the uncertainty that exists when concluding a deal involves an unknown: something may or may not materialize, such as whether goods will be delivered, or what exactly is being sold. This standard sets the Shariah rulings for how gharar affects the transactions of Islamic financial institutions, covering exchange-based contracts (like sales, leases, and partnerships), donation contracts (like gifts and wills), and conditions attached to contracts.

Gharar comes in degrees: excessive, medium, and minor. Not all uncertainty is fatal. A contract is only nullified by gharar when four conditions all hold: the gharar is in an exchange-based contract, it is excessive, it touches the primary subject matter of the contract rather than a minor corollary, and there is no Shariah-recognized need that justifies it.

Uncertainty in the minor corollaries of a deal is forgiven. The standard cites the fiqh principle: what can be forgiven in corollaries is not forgiven in the main subject. Donation contracts are also unaffected by gharar, since nobody is paying for anything.

Why it exists

Islamic law bans deals that invite dispute and injustice from hidden unknowns. Clear contracts protect both sides from exploitation. The standard exists to draw a practical line: it blocks the uncertainty that creates real risk of conflict, while leaving room for the unavoidable small unknowns of everyday trade and for cases of genuine need.

The key rules, simply put

A contract or condition is impermissible in Shariah when its level of gharar could jeopardize the fulfillment of the contract.
Gharar that is minor and unavoidable does not affect a contract. Examples: buying a house without having seen its foundation, or leasing for one month when months differ in length.
Medium gharar, between excessive and minor, also does not affect the contract. Examples include ju'alah (a reward promised for a task if accomplished), guardianship, and fixed-term mudarabah.
Gharar in the price nullifies a sale: selling without mentioning the price, leaving the price to be set by one party, or paying with money taken from a bundle or pocket of unknown amount. Selling at the market price on the day of purchase is permitted.
Uncertainty about delivery nullifies the contract. Examples: selling fish still in the water, or selling goods that must be imported when it is uncertain whether an import license will be granted.
A seller must not sell what he does not possess. He must hold the commodity through actual possession (physical receipt) or constructive possession (legal control) before selling it.
A sale must state what is sold: its essence, type, quantity, and characteristics. It must also state the contract's duration. The buyer may buy on the basis of a full description or a sample.
Uncertainty tolerated in donation contracts and in documentation contracts such as rahn (mortgage) and kafalah (suretyship) is greater than what a sale allows. For example, a lost car can be pledged as security, though it cannot be sold to settle the debt until it is found.

An everyday example

A bank offers car financing. Under this standard, the contract must name the car's make, model, and condition, the price, and the repayment period. A contract that says "one of our cars, price to be set by the bank later, repayment period unspecified" is invalid because the gharar is excessive and sits in the heart of the deal.

Words to know

Gharar — excessive uncertainty about what a deal involves
'Uqud al-mu'awadat — exchange-based contracts, such as sales, leases, and partnerships
'Uqud al-tabarru'at — donation contracts, such as gifts and wills
Ju'alah — a promised reward for completing a specified task
Mudarabah — a partnership where one party provides capital and the other provides management
Rahn — a mortgage or pledge of an asset as security for a debt
Kafalah — suretyship, a guarantee of another's obligation

Source

AAOIFI Shariah Standard No. 31 — https://aaoifi.com/download/24233/?tmstv=1778305083
AAOIFI standards index — https://islamicmarkets.com/education/aaoifi-standards