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The Arabic root for gharar means deception - but in practice the term is used quite widely.  Gharar encompasses: uncertainty, risk, hazard and deceit. 

According to Al-Qarafi, the definition of gharar is "that which has a pleasant appearance and a hated essence". The origin of gharar can be divided into two categories, namely: tadlis (cheating in business) and ghabn (to deceive), as noted by the Encyclopedia of Jurisprudence (vol.21, CDROM version, Cairo: Harf, 1998).

All businesses involves some level of risk, therefore unlike riba, gharar is a relative concept when it comes to uncertainty, risk and hazard - with a certain level of uncertainty being tolerated. However, when it comes to deceit or fraud, gharar is an absolute concept.

Nature of Gharar

We already understand the seriousness of riba (interest) within Islam - with anyone dealing in such an activity facing war from God and his messenger (pbuh). Two of the main reason Ibn Juzay (Maliki scholar) provides for gharar are as follows:

1. Uncertainty over subject matter: sale of stray animal or "unborn calf in the mother's womb"
2. Uncertainty over price: the sale of X at time t+1, where the price will also be determined at t+1

Hadiths and Gharar

Scholars have cited numerous examples of hadiths, where gharar is prohibited. According to a strong hadith, narrated by Muslim, 'Ahmad, 'Abu Dawud, Al Tirmidhi, Al Nasa'i, Al Darami and 'Ibn Majah on the authority of 'Abu Hurayra ""the Prophet (pbuh) prohibited the pebble sale and the gharar sale".

Other examples include:

• selling "the birds in the sky or the fish in the water",
• "the catch of the diver", "unborn calf in its mother's womb",
• "the sperm and/or unfertilized eggs of camels"

Cost benefit analysis and Gharar

We already understand that the probation of gharar is relative, another way of looking at gharar is from a cost benefit analysis, i.e. if there is a greater benefit (positive externality) then cost (negative externality), then the contract would be considered as valid. This point is reinforced by ‘Ibn Taymiya (1998, vol. 4):

In this regard, the corrupting factor in gharar is the fact that it leads to (kawnuhu mat.iyyat)  dispute, hatred, and devouring others' wealth wrongfully. However, it is known that this corrupting factor would be overruled if it is opposed by a greater benefit (al-mas. lah. Ah al-rajih. ah).

Schools of thought

As noted, scholars have faced many challenges in defining gharar, with Al-Zuhaylı (1997, vol.5, pp.2408-3411): providing a good overview:

Al-Sarakhsi (Hanafi school): "gharar is that whose consequences are hidden".

Al-Shıraazı (Shafi'i school): "gharar is that whose nature and consequences are hidden"

Ibn Taymiya (Hanbali school): "gharar is that whose consequences are unknown"

Once reviewing the above definitions, Al-Zuhayly's commented: "gharar sale is any contract which incorporates a risk which affects one or more of the parties, and may result in loss of property."

Notes:

Al-Qarafı, A. n.d. Al-Furuq. Beirut: ‘Alam Al-Kutub.

Al-Zuhaylı, W. 1997. Al-Fiqh Al-'Islamı wa 'Adillatuh. Damascus: Dar Al-Fikr. Fourth revised edition.

'Ibn Taymiya, A. 1998. Al-Fatawa Al-Kubra. Cairo: Harf (reprod.): Dar Al-Kutub Al-‘Ilmiyyah. in Encyclopedia of Islamic Jurisprudence (CDROM).

M A El-Gamal, 2001 "An Economic Explication of the Prohibition of Gharar in Classical Islamic Jurisprudence": http://www.ruf.rice.edu/~elgamal/files/gharar.pdf