TOWARDS AN OBJECTIVE MEASURE OF GHARAR IN EXCHANGE SAMI AL-SUWAILEM

TOWARDS AN OBJECTIVE MEASURE
OF GHARAR IN EXCHANGE

SAMI AL-SUWAILEM

COMMENTS: MUHAMMAD ANAS ZARQA


1. AL-SUWAILEM’S PAPER IN PERSPECTIVE

It has been rightly said that a person is better judged by the goal that he is trying to reach than by the distance he has actually covered. In this spirit, Dr. Al-Suwailem gets very high marks for aiming at a sublime and worthy goal in Islamic economics. To see this, I must digress a little into the goals of Islamic economics.

Both Conventional and Islamic economics aim at explaining economic phenomena, with the important difference that Islamic economics has two sets of observations to explain: the actual or “positive” set as in conventional economics, and the “normative” or “divinely revealed” set which consists of Shari’ah and Fiqh rulings relating to economic life.

What do we mean by explaining Fiqh rulings? We simply mean discovering a basic maxim, theme or “concept” that underlies many detailed Fiqh rulings. Muqasid al-Shari’ah (its major goals), al-quwa’id al-fiqhiyyah) fiqh maxims) and the rationale of shari’ah rules (al-hikmah) are examples of the “explanations” I have in mind. Such examples have long and distinguished history among Shari’ah scholars.

In Islamic economics we want to discover economic concepts or laws and regularities that may explain many detailed Fiqh rulings.

Dr. Suwailem tries in his paper to explain the Fiqh rulings relating to Gharar in exchange, using concepts and tools originating in the economics of uncertainty and game theory. Needless to say, this whole research area is quite difficult in both Fiqh and economics, but also quite important theoretically and practically. Its practical importance is evident to those engaged in Islamic contracting and financing. I expect it to be a major research area in Islamic economics for many years to come, along with the economics of riba and its Islamic alternatives.

The major contribution of Al-Suwailem in my view is not so much in his specific economic explanations of Fiqh rulings about the prohibited Gharar exchanges but in his building a bridge between Fiqh of Gharar and the economics of games and uncertainty.

2. THE MANY FACES OF ZERO-SUM GAME

Gambling (maysir) is prohibited in Islam and is clearly a zero-sum game with uncertain pay-offs (for short: ZSU). Can we infer the converse, namely, that any exchange that is ZSU is forbidden?

Al-Suwailem’s careful reading of many fiqh rulings leads him to answer: “Yes”.

I want about to concur but the following gave me pause: “Every constant-sum game can be converted to a zero-sum game.”1 Constant-sum games can have win-win outcomes while zero-sum games cannot.

Should we conclude that games which are equivalent in a certain mathematical sense (say, have identical solutions) need not be equivalent from a social or fiqh point of view? Or that games that are ZSU are not always prohibited? I hope that others more versant in game theory than I can give the right answers.

Al-Suwailem then moves to the most interesting question in his paper: how to identify the prohibited (=excessive) gharar in nonzero-sum games which are more prevalent in the business environment? His overall conclusion is that Shari’ah does not prohibit an exchange even if it has a win-lose outcome if it has one the saving grace of a more likely win-win outcome. He applies this refined criterion first to old contracts such as muzara’ah (sharecropping), sale of unseen fruit, sale of immature fruits, then to new contracts such as forwards and options.

There are many brilliant insights in his discussion that future researchers cannot afford to ignore. I particularly liked the fine distinctions he draws between selling a lost camel compared to offering ji’alah contract for someone finding it; between financial forwards and salam; and between options and bay’ al urboun. Nonetheless one may disagree with many points, as I did with his discussion on riba and insurance. But before arguing about this in Sec.3 below, let me mention one further comparison that I wish the author had made between permissible and prohibited rihaan (betting). An example of prohibited betting is that of two persons competing for a result (e.g., who runs faster), each puts up a sum of money. The winner takes all (he retrieves his bet and that of the other).

A permitted form is that of a one-sided bet, where A puts up a prize, for the winner and B put up nothing. Both A and B compete; if A wins he retrieves his bet, if B wins he gets the bet. Thus, a characteristic of a permissible bet is that for one participant (the non-player) it is a (win, no-win) situation. For the other (the payer of the bet) it is a (lose, no-win) situation.
3. APPLICATION OF ZERO – SUM – CRITERION TO
INSURANCE AND RIBA

The claimed similarity between insurance and riba is not convincing in the paper. It is true that in the case of insurance, one party tries to avoid uncertainty or protect itself from its adverse consequences by paying an insurance premium. In the case of a riba loan, a lender similarly avoids the possibility (uncertainty) of loss in a proposed venture by lending at interest to the equity holder. What he “pays” is the forgone opportunity of any ex post profits greater than the ex ante interest he stipulates in the loan. At this point the tenuous similarity ends and the more fundamental differences between insurance and riba appear. First, in lending at interest the goal of the insured (the lender) is to gain, to augment his wealth, whereas in insurance, the goal of the insured is to protect his wealth from a large loss, never to augment it. Secondly: insurable events are usually those subject to calculable risks (following Frank Knight) whereas in a riba loan, the lender is seeking protection against uninsurable commercial uncertainty.

Dr. Suwailem places his views about insurance solely on the bilateral aspect of the contract between the insurer and the insured. But functionally in fact modern commercial insurance is a collective rather than a purely bilateral agreement. As is well known the existence of viable commercial insurance is predicated on the existence, among other things, of a large number of individuals subject to similar risk, the insurance company being an intermediary somewhat similar to a bank. Would not these significant differences justify different judgement? After all, mutual/cooperative insurance is similar to commercial insurance except for the important difference that the intermediary does not stand to gain. If we exaggerate the “gharar” aspect of insurance per se, we may be led to disallow mutual insurance as well, where in fact the overwhelming majority of contemporary Muslim jurists find it acceptable.

4. EXPECTED VALUES IN FIQH

“Expected values” and “attitude towards risk” are two basic concepts that loom large in the economics of games and insurance. I shall digress now a little into these two topics to show, firstly that they are not alien to juristic thinking, and secondly that risk aversion (which is a major explanation of the utility to individuals of buying liability and property-loss insurance) is not inconsistent with Islamic juristic thinking.

Taking account of the effect of uncertainty and risk on asset values is quite in line with Muslim juristic thinking, as the following examples show.

According to Islamic tort (dhaman) rules, a person who causes damage to the property of another is liable to replace it if fungible or otherwise pay its fair market value. How to apply this rule, if a ship’s captain has to save his ship in adverse weather by throwing overboard some merchandise? The Hanafite jurists say that the captain liable only for the value of merchandise endangered by the risk of drowning is which is less than its normal (i.e. un-endangered) market value.

In the same spirit, they say that if a privately owned building, on the course of a raging fire, is demolished by public order to contain the spreading of fire to other buildings, the compensation due its owner is NOT its normal market value, but rather its value endangered by an approaching fire, which is clearly lower.2

We can technically express the lower value of the endangered merchandise or building in more than one way, depending on our preferred criterion for comparing probability distributions. The simplest way is to assume risk neutrality and assign a probability of say, 0