The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1753-8394.htm

IMEFM
6,3 A Post-Keynesian perspective
on Islamic prohibition of Gharar
Yasushi Suzuki
200 Graduate School of Management, Ritsumeikan Asia Pacific University,
Oita, Japan

Abstract
Purpose – This paper aims to draw the wisdom of the prohibition of Gharar through the lens of
institutional and Post-Keynesian economics.
Design/methodology/approach – This research applies the theoretical contributions of the
Post-Keynesian economics and the new institutional economics to clarify the dimensions of Islamic
Gharar. This research attempts to see the divergence between theory and practice, looking at empirical
data including the information from an interview with one of Indonesian Islamic banks.
Findings – The lens of institutional and Post-Keynesian economics is useful to clarify two
dimensions of Gharar; incompleteness of contracting and fundamental uncertainty associated with
business. As for the latter dimension of Gharar, the tradition of Post-Keynesian economics can
distinguish “animal spirit in speculation” and “animal spirit in enterprise”, the latter of which should
be carefully considered. However, the interview reveals a kind of difficulty for Islamic financial
institutions to tackle “Murabaha syndrome”.
Research limitations/implications – This research supports an opinion such that Islamic financial
institutions are not necessarily discouraged to share the associated uncertainty with the small-sized
firms in the agricultural and industrial sector, so far as their “enterprise” is based on the Islamic business
ethics.
Originality/value – Despite very significant discussions in the literature on the prohibition of Gharar
as a fundamental principle of Islamic finance, less has been done to elaborate upon it through the lens of
Post-Keynesian economics which have greatly contributed to shedding analytical lights on “uncertainty”.
Keywords Animal spirit, Gharar, Islamic finance, Post-Keynesian, Uncertainty, Islam, Finance,
Uncertainty management
Paper type Research paper

1. Introduction
Why does the financial disaster periodically happen? We should learn lessons from the
past, but “it” can happen again and again – the US savings and loans crisis in the
early-1980s, Japan’s financial bubble in the late-1980s, the 2007-2008 US subprime loan
crisis and so on. The straight-forward answer from a Post-Keynesian perspective is that
the propensity to periodic disaster is due to our inability of dealing with “uncertainty”.
Since the consequences of actions extend into the future, accurate forecasting is essential
for making objectively rational choices. But in the real world, most choices take place
under conditions of uncertainty. Keynes defined what he meant by “uncertain” knowledge:
By uncertain knowledge, let me explain, I do not mean merely to distinguish what is known
International Journal of Islamic and for certain from what is only probable. The game of roulette is not subject, in this sense, to
Middle Eastern Finance and uncertainty; nor is the prospect of a Victory bond being drawn. Or again, the expectation of
Management
Vol. 6 No. 3, 2013 life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in
pp. 200-210 which I am using the term is that in which the prospect of a European war is uncertain, or the
q Emerald Group Publishing Limited
1753-8394
price of copper and the rate of interest twenty years hence, or the obsolescence of a new
DOI 10.1108/IMEFM-Sep-2012-0086 invention, or the position of private wealth owners in the social system in 1970 [note: over
 30 years later from the point in time of his writing]. About these matters there is no scientific Post-Keynesian
basis on which to form any calculable probability whatever. We simply do not know.
Nevertheless, the necessity for action and for decision compels us as practical men to do our perspective
best to overlook this awkward fact and to behave exactly as we should if we had behind us a
good Benthamite calculation of a series of prospective advantages and disadvantages, each
multiplied by its appropriate probability waiting to be summed (Keynes, 1937, pp. 213-214).
The fundamental implication of Keynes’ uncertainty is that all economically meaningful 201
behaviour derives from agents’ efforts to protect themselves from uncertainty (Dymski,
1993). How can we deal with uncertainty to minimize the ill-impact of periodic financial
disaster? To consider a direction to answering the question, this paper is concerned
about the business ethics in the Islamic mode of investment and financial
intermediation, in which excessive uncertainty (Gharar or Gharar-e-Kathir) is
prohibited (Ayub, 2007, p. 12).
Avoiding Gharar is a main principle of Islamic finance. In the Islamic mode of
investment and financial intermediation, Gharar is perceived in two dimensions; one
refers to lack of clarify in the terms and essence of the contract, the other refers to the
uncertainty in the object of the contract (Ayub, 2007, pp. 59-60; El-Gamal, 2006, p. 58).
Complete contracting is intrinsically impossible. Therefore, some measure of
uncertainty is always present in contracts. “Jurists distinguished between major or
excessive Gharar, which invalidates contracts, and minor Gharar, which is tolerated as a
necessary evil” (El-Gamal, 2006, p. 58). Also, the uncertainty in the object of the contract
cannot be avoided in any business. “The problem, however, was that the extent of
uncertainty making any transaction Haram had not been clearly defined” (Ayub, 2007,
p. 58). Ayub (2007) refers to Gharar-e-Kathir and Gharar Qalil (too much and nominal
uncertainty) and agrees that only those transactions that involve too much or excessive
uncertainty in respect of the subject matter should be prohibited. Al-Saati (2003)
suggests that the Hadith (which prohibits Gharar) does not intend to prohibit all Gharar,
but intends to prohibit Gharar which can cause dispute and cannot be tolerated.
The 2007-2008 US subprime loan crisis reveals that most of the derivatives
incorporate Gharar and support speculative activities. Islamic legal rules, particularly
the prohibition of Gharar and on the sale of debt for debt, do not allow the financial
derivatives for lack of real/productive activities. According to Bank for International
Settlements (BIS), the outstanding balance in financial derivative contracts amounted
to US$516 trillion as of June 2007. This magnitude reached to the level of around eight
times as the purchasing power parity (PPP) based world GNP of US$66 trillion in 2006
(Dore, 2011, pp. 14-15). Foreign exchange transactions on a daily basis reached to
US$3.2 trillion as of April 2007, the size of which corresponded to 100 times of the
actual demand in the daily international trade transactions with the amount of
US$32 billion (Dore, 2011, p. 15). The issued amount of collateralized debt obligation
(CDO) was estimated to around US$2 trillion as of the end of 2006, while the
underwritten outstanding of CDO reached to US$62 trillion as of the end of 2007
(Dore, 2011, p. 21).
Ayub (n.d., p. 2) mentions that study of the behaviour of the derivatives market
reveals that it has the potential to cause a serious breakdown in the financial system:
The degrees of leverage that are afforded by option contracts can be so high that large
unpredictable market moves in underlying prices may one day lead to the insolvency of a
major financial institution.
IMEFM According to him, even if Arbun (down payment; a non-refundable deposit paid by a
6,3 buyer retaining a right to confirm or cancel the sale) is accepted as valid transaction,
most of the derivatives current in the market would still be unacceptable from Shari’ah
angle due to involvement to Gharar (Ayub, n.d.). To what extent can we expect the
Islamic business ethics to propose an alternative for preventing the periodic financial
disaster? This paper aims to draw the wisdom of the prohibition of Gharar through the
202 lens of institutional and Post-Keynesian economics.

2. Incomplete contracting and opportunism

The first dimension of Gharar is related to incompleteness of contracting. The new
institutional economics and transaction cost economics have greatly contributed to
building up a theoretical framework how the incompleteness of contracting increase
the “transaction cost” of monitoring, resulting in the economic inefficiency (Arrow,
1974; North, 1981, 1990, 2005; Williamson, 1985). Incomplete contracting often brings
risks of Williamsonian “opportunism”. In general, opportunism in terms of pursuing
self-interest with guile involves subtle forms of deceit and refers to the incomplete or
distorted disclosure of information, especially to calculated efforts to mislead, distort,
disguise, obfuscate, or otherwise confuse (Williamson, 1985, p. 47). In their theoretical
framework, the transaction cost is defined as the economic equivalent of “friction” in
physical systems.
In the Islamic mode of investment and financial intermediation, Jahl – ignorance or
non-clarity about the parties or their rights and obligations, the goods or the price – is
considered as a part of Gharar (Ayub, 2007, p. 61). One should not undertake anything
or any act blindly without sufficient knowledge, or risk oneself in adventure without
knowing the outcome or the consequences (Ayub, 2007, p. 61).
Transaction cost economics tells us that “trust” may, not always but fairly often, play
the role of lubricant for making the economic system run smoothly (Arrow, 1974, p. 23).
In other words, risks of Williamsonian “opportunism” can be reduced by mutual trust.
Trust has been referred to as “attitudes and behaviour which indicate that each person
is willing to rely on the other to act fairly and to take into account the other’s welfare”,
as “solidarity”, and as “a belief in future harmonious affirmative cooperation”.
“Contract negotiations and performance will likely take place more effectively if trust is
present and is generated by the process” (Cohen and Knetsch, 1992). One of the
invaluable insights of Kenneth Arrow is to point out that trust has a large and
measurable economic value and has an important bearing on economic organization:
Ethical elements enter in some measure into every contract; without them, no market could
function. There is an element of trust in every transaction; typically, one object of value
changes hands before the other one does [. . .] (Arrow, 1974, p. 24).
In the Islamic mode of investment, Shari’ah is considered as the cornerstone of Islamic
financial products and services. In theory, if all the concerned parties in the mode share
a common belief in future harmonious affirmative cooperation (mutual trust) with
Shari’ah compliant, the transaction cost of drafting and contracting would be very low,
because it would be enough to insert a “general clause” of promising to sincerely
negotiate against any future event for mutual benefits.
Arrow insists that the efficacy of alternative modes of contracting and monitoring
would vary among cultures because of differences in trust. To some extent, cultural
factors are related to the degree of trust relations. However, we would say that the Post-Keynesian
degree of trust even in a particular culture or society could rather vary: perspective
Most of us operate in some middle realm where we admit social claims, sometimes forget
about them for long stretches of time as we go about our daily private role, sometimes rise to
an occasion, sometimes fall miserably short, as we assert our individuality in contexts that
are not totally appropriate (Arrow, 1974).
203
Operationalizing trust, no matter how it is defined, has proved inordinately difficult
(Williamson, 1985, p. 406).
From the Williamsonian “opportunism” perspective, we may say that the cooperative
mode of economic organization, where trust and good intentions are generously imputed to
the membership, has its weakness in being endowed with few organizational responses to
the debilitating effects of opportunism. “Such organization are easily invaded and exploited
by agents who do not possess those qualities” (Williamson, 1985, pp. 64-65). Transactions
that are subject to ex-post opportunism will benefit if appropriate safeguards can be
devised ex ante (Williamson, 1985, p. 48). We should note that, in other words, if safeguards
are not sufficiently devised ex ante, opportunism would possibly emerge as a troublesome
source of behavioural uncertainty in economic transactions. In my view, the first dimension
of the prohibition of Gharar in a context of encouraging the parties to pay best efforts to
clarify the terms and essences of contract in Islamic finance can be understood as an
effective institutional setting for minimizing the occurrence of ex-post opportunism.

3. Uncertainty from the Keynesian perspective

The second dimension of Gharar is related to the fundamental uncertainty associated
with investment and financial intermediation. As economies become more complex, the
screening and monitoring activities of investors and bank managers are intensified.
Fundamental uncertainty needs to be emphasized as a primary driver of this increase
in complexity.
Knight (1921) drew a famous distinction between “measurable uncertainty” or “risk”,
which may be represented by numerical probabilities and “un-measurable uncertainty”
which cannot. Numerical probabilities are in turn based on the possibility of repeated
observation of an event that allows the calculation of a statistical probability for that
event. In contrast, many events in the economic domain are not of this type. There is no
repeated observation that can give us an objective probability for the success of an
innovative process. Here, the risk involved is a subjective judgement, and this can vary
across persons making the judgement based on their experience and knowledge of
subtle and unquantifiable aspects of a situation. The formulation of subjective
probability judgements is what Knight described as decision-making under uncertainty.
Knightian uncertainty, the same as Keynesian uncertainty, emerges when:
.
stochastic variation is not governed by stable probability distributions;
.
agents lack costless information providing insight into the true state of affairs in
the economy;
.
agents cannot always determine the extent to which their own actions are
responsible for the outcomes they experience; and
.
it is impossible to preclude the possibility of systemic risk, because the economy
has no parameters (Dymski, 1993).
IMEFM Subjective probability can be distinguished from statistical or objective probability in the
6,3 sense that uncertainty cannot be reduced to measurable risks. Uncertainty may be more or
less ignored or, alternatively, subjective probabilities may be applied, together with a risk
premium to cover unspecified adverse events. Since there is no precise economic theory of
how decisions are made under uncertainty, agents tend to observe each other’s responses
and do not deviate widely from the norm regarding which factors should be taken into
204 account and how much weight should be assigned to them. But, “when the crowd is wrong
ex-post, there is the making of a financial crisis” (Davis, 1995, p. 135).
Uncertainty makes decision processes complex and volatile. Volatility stemming from
lenders’ (or investors’) uncertainty, in particular, in terms of subjective probability in credit
risk management, is a crucial factor contributing to the systemic fragility of financial
markets. Uncertainty often encourages agents to adopt “rules of thumb” because
standardization and coordination may be more effective than individual prediction
(Simon, 1996, p. 42). However, such standardized “rules of thumb” can themselves become
constraints on our decision-making: if they acquire the status of norms, they can reduce us
to mere engines of procedural rationality. In international banking and credit operations,
a codified assessment of credit risk in purely quantitative statistical terms (i.e. the
quantification of credit risk upon the statistical expected default frequency or EDF
provided by rating agencies) is now a widespread practice. The codified “rule of thumb”
encourages lenders to measure expected credit losses mathematically and to maintain a
capital buffer against unexpected credit losses. An important example of this paradoxical
response to uncertainty is the gradual adoption of the Basel guidelines in international
credit markets. Ironically, the convergence to standardized credit risk modelling creates a
misleading homogenization of information flows and can contribute to undermine
financial stability by amplifying herd behaviour in investment as was observed in the
process of leading to the 2007-2008 US subprime loan crisis.
Although Islamic banks and financial institutions were not always immune to the
subsequent 2008-2009 global crisis, they were to a considerable extent sheltered from the
crisis. “Islamic finance institutions were better placed to weather the storm, receiving
increasing interest from not only the Muslim community but also non-Muslim
population around the world” (SESRIC, 2009, p. 3). SESRIC (2009) concludes that due to
the prohibition of Gharar, financing extended through the Islamic mode can expand only
in line with the growth of the real economy and thereby help curb excessive credit
expansion. “In this respect, the prohibition on Gharar is often used to support the
criticism of conventional financial practices such as short-selling, speculative trading,
and derivatives” (SESRIC, 2009, pp. 5-6).
Keynes’ theory of expectations pointed out that while objective calculations of “risk”
were not possible for investments, he also rejected the idea that investments or stock
markets were entirely based on mass irrational psychology. The bridge between the
two was his concept of “animal spirits”. Apparently, Keynes distinguished enterprise
from speculation. “It is safe to say that enterprise which depends on hopes stretching
into the future benefits the community as whole” (Keynes, 1936, p. 162):
But individual initiative will only be adequate when reasonable calculation is supplemented
and supported by animal spirits, so that the thought of ultimate loss which often overtakes
pioneers, as experience undoubtedly tell us and them, is put aside as healthy man puts aside
the expectation of death (Keynes, 1936, p. 162).
Stock markets and investments more generally required “animal spirits” in individual Post-Keynesian
initiatives that supplemented and supported reasonable calculations of risk. perspective
If prevailing animal spirits were such that no investor could afford to absorb
“down-side risks” for a firm, it would not be able to raise capital. The existence of a
large and diversified base of investors with a broad range of animal spirits was
therefore essential for financing the entire range of economic activities in a growing
and changing economy. As long as the base as a whole keeps the strength and capacity 205
to absorb many different types of risks and uncertainty, the financial market backed
by such a base of investors can be dynamic and powerful. However, if the market
becomes exposed to risks and uncertainty beyond its capacity, the propensity to
periodic financial disaster would be rapidly increased:
If I may be allowed to appropriate the term speculation for the activity of forecasting the
psychology of the market, and the term enterprise for the activity of forecasting the prospective
yield of assets over their whole life, it is by no means always the case that speculation
predominates over enterprise. [. . .] Speculators may do no harm as bubbles on a steady stream
of enterprises. But the position is serious when enterprise becomes the bubble on a whirlpool of
speculation. When the capital development of a country becomes a by-product of the activities
of a casino, the job is likely to be ill-done (Keynes, 1936, pp. 158-159).
He treated the animal spirit in enterprise affirmatively, but that in speculation
cautiously. Table I compares how the Post-Keynesian and the Islamic mode of
investment look at animal spirits against minor/major uncertainties associated with
enterprise and speculation, respectively. It appears that the “animal spirit” against
major (excessive) uncertainty both in enterprise and speculation is prohibited in the
Islamic mode of investment and financial intermediation.
However, El-Gamal (2006) suggests that if the commutative contract containing
excessive Gharar meets a need that cannot be met otherwise, the contact would not be
deemed invalid based on that Gharar:
A canonical example is salam (prepaid forward sale), wherein the object of sale does not exist
at contract inception, giving rise to excessive Gharar. However, since that contract allows
financing of agricultural and industrial activities that cannot be financed otherwise, it is
allowed despite that Gharar (El-Gamal, 2006, p. 59).
Basically, Islamic principles of economics focus on clarity and lack of ambiguity, just
and fair treatment or all and care for the rights of others (Ayub, 2007, p. 12). So far as
these principles are necessarily ethical, incubating small- and middle-sized enterprises
in agricultural and industrial sectors would be acceptable to an extent in which the
associated major uncertainty can be shared and absorbed in the community through an
adequate profit-loss sharing agreement.

Animal spirits in enterprise Animal spirits in speculation Table I.

Minor Minor Comparison of the
uncertainty Major uncertainty uncertainty Major uncertainty Post-Keynesian view
and the Islamic mode of
Post-Keynesian view Positive Positive Acceptable Cautious investment of looking
(or negative) at animal spirits against
Islamic mode of Acceptable Cautious Acceptable Negative uncertainties in enterprise
investment (or acceptable) and speculation
IMEFM Ayub (n.d., p. 2) mentions:
6,3 For a more efficient economy, we must promote systems in which people work in productive
pursuits rather than unproductive ones. Change the system to relate it with real sector
activities and all those clever dealers who earn huge profits out of thin air could become
doctors, industrialists, business people and teachers instead!

206 Engagement in enterprise rather than speculation seems to be preferably considered in

the Islamic mode of investment.

4. Linkage between theory and practice

From the above observation, the Islamic financial institutions (IFI) are not necessarily
discouraged to share the associated risk and uncertainty with the small- and
middle-sized firms in the agricultural and industrial sector, so far as their enterprise is
based on the Islamic principles of economics. On the other hand, many scholars point out
the divergence between theory and practice, for instance, the excessive use of Murabaha
(Murabaha Syndrome), which gives a fixed rate of return to the banks (Ayub, 2007,
p. 446), and the financial disintermediation towards small-scale enterprises (Visser,
2009, p. 139). Unless the portfolio preference of a vast majority of depositors particularly
in developing countries is not so risk-averse, it makes sense that even Islamic banks that
specialize in small-scale credit tend to restrict themselves to Murabaha and Bai’salam
finance (Visser, 2009, p. 139).
Here, we look at the current practice of Islamic financial intermediation in Indonesia
which has the world’s largest population of Muslims. As of June 2009, there were five
state banks, 26 local government banks, 31 private banks-foreign exchange, 33 private
banks-non foreign exchange, 17 joint-venture banks, ten foreign banks in Indonesia.
Among these banks, we recognize two Islamic banks (Bank Muamalat, Bank Syariah
Mandiri) in the category of private banks-foreign exchange, and three Islamic banks
(Bank Syariah BRI, Bank Syariah Bukopin and Bank Syariah Mega Indonesia) in the
category of private banks-non foreign exchange.
Bank Indonesia (2009) shows the changes in the asset (credit) portfolio in the
Indonesian Islamic banks. We observe that the share of Murabaha operation, secured
trading or asset-backed financing with relatively low credit risk, has been dominant
(58.9 per cent in 2008, 56.3 per cent in 2009, respectively)[1]. Presumably, the
Indonesian IFI have been encouraged to select the low-risk projects in accordance with
the share of risk-averse funds in the IFI’s liability. The risk-averse fund should not be
invested in risky ventures. “However, in the case of single trade transactions or where
satisfactory documentation is available, Islamic banks should use Musharaka, as this
will give them higher returns” (Ayub, 2007, p. 446). Though it entails further
clarification on the trend, we observe that the share of Musharaka operation has been
increasing in the Indonesian IFI (19.4 per cent in 2008, 22.5 per cent in 2009,
respectively).
How do the IFI, successfully or reluctantly, screen and monitor the small-scale
Murabaha transaction and the Musharaka-based engagement while responding to the
intensified uncertainty? In other words, we should ask how the IFI evaluate the “margin
of safety” in the Hyman Minsky’s term[2], to prevent from undertaking the excess
credit risk. Lenders’ screening and monitoring is the basis of their assessment of
the extent to which expected cash inflows will cover cash payment commitments
(Minsky called the excess “margins of safety”). Minsky emphasized that the business Post-Keynesian
units that engage in speculative or Ponzi finance, even in hedge finance, are vulnerable perspective
to the events that reduce the cash flows from assets. Therefore, screening and
monitoring of borrowers’ cash flow projection is critical for credit appraisal. However,
monitoring is always intrinsically imperfect because monitoring agents are always
exposed to uncertainty.
The author had an opportunity to interview a director and bank managers of 207
Bank Syariah Mandiri that is the Indonesian Islamic bank having the largest
market share in lending as well as in deposit taking (the interview was held on
27 August 2012). According to the latest financial statement as of December 2011, the
total asset of the bank reached US$5.3 billion (increased by 49.8 per cent from the
previous year), including the credit (financing) outstanding balance of US$3.9 billion,
while the deposit taken amounted to US$4.7 million (increased by 47.0 per cent from
the previous year). The ROA ratio was 1.97 per cent (2.21 per cent as of December
2010), while the capital adequacy ratio was 14.75 per cent (10.60 per cent as of
December 2010). According to their explanation, the non-performing financing to asset
ratio (gross) stays at the range of 2-2.5 per cent. These financial data suggests that
the bank’s operation has been rapidly expanding while maintaining its soundness and
profitability.
Recently, the share of Murabaha in the bank’s financing portfolio has stayed at
around 50 per cent (49.3 per cent in 2009, 52.9 per cent in 2010, 53.8 per cent in 2011),
while that of Musharaka has slightly declined (21.0 per cent in 2009, 19.2 per cent in
2010, 14.8 per cent in 2011) though the extended amount for Musharaka has constantly
expanded (increased by 46.1 per cent from FY2009 to FY2010, by 18.3 per cent from
FY2010 to FY2011, respectively). Almost 75 per cent of the portfolio in 2011 is allocated
to the “non-corporate” clients in their term, which means the financing to individuals
and small and microenterprises. According to their explanation, this “non-corporate”
portion of financing includes the so-called “consumers financing” being composed of
those credits for individuals’ purchasing houses, automobiles and motorbikes through
the Murabaha scheme. The share of consumers financing has reached 58.5 per cent
of the non-corporate financing, occupying 43.7 per cent in the total portfolio.
Presumably, this financing is one of the major profit bases for the bank, earning
relatively higher returns from the individuals with relatively lower credit risk, because
the bank’s exposure is basically secured under the Murabaha contract by the
purchased asset to be pledged as collateral. Actually, the bank has increased the
consumers financing by 2.35 times from FY2010 to FY2011.
In my impression from the interview, it seems that the bank perceives the
prohibition of Gharar in the context of avoiding incompleteness of contract or
avoiding the transaction having gambling elements (Maisir), rather than in the context
of being cautious for the major risk and uncertainty associated with business and
enterprise. Under the economic situation where the demand for consumers financing is
still strong, the bank does not have to undertake the major uncertainty associated with
“animal spirits in enterprise” as mentioned in Table I. According to their explanation,
the bank is engaged in the Musharaka financing only in the case that it is hard to apply
the Murabaha scheme, such as the case of the bridge finance for the working capital
demand in the construction period of a construction project[3].
IMEFM In general, IFI are not allowed to impose on penalties from the debtors that have
6,3 fallen into arrears (Holy Qur’an 2:280) and are not allowed to use the credit derivatives
and hedging instruments to mitigate the credit risk. Under the prohibition of Gharar
in a sense of avoiding the major risk and uncertainty to share with, Islamic finance
struggles with the limited scope for penalty clauses under Shar’ia law (Visser, 2009,
p. 139). It makes sense that Islamic banks would rather not be involved in long-term
208 financing under the legal framework, except the secured financing like as housing loans.
Understandably, even Islamic banks that relatively specialize in small-scale credit tend
to restrict themselves to the secured Murabaha mainly for financing the purchase of
specific goods.

5. Concluding comments
This paper attempted to draw the wisdom of the prohibition of Gharar through the lens
of institutional and Post-Keynesian economics. We looked at one dimension of the
prohibition of Gharar which focuses on clarity and lack of ambiguity, just and fair
treatment or all and care for the rights of others. We also looked at the other dimension
which is related to the fundamental uncertainty associated with investment and
financial intermediation. The lens of institutional and Post-Keynesian economics is
useful to clarify two dimensions of Gharar, respectively.
The prohibition of Gharar in speculation is considered as the wisdom for
minimizing the potential periodic financial disaster. In parallel, under the prohibition of
Gharar (also the profit-loss sharing) framework, it may have created a dilemma of the
so-called “Murabaha syndrome” leading to the financial disintermediation
(particularly the dry-up of long-term funds) in the potentials in the agricultural and
industrial sector. Long-term growth may suffer as a result. In my view, based on the
best effort to avoid the incompleteness of contract, it might be acceptable, to an extent
in which the associated major uncertainty in enterprise can be shared and absorbed in
the community through an adequate profit-loss sharing agreement, to incubate small
and micro-enterprises in agricultural and industrial sectors. How IFI will tackle the
Murabaha syndrome while improving the financial intermediation to the agricultural
and industrial potentials should be watched.

Notes
1. The similar situation is observed in Malaysia. According to Annual Reports by Bank
Negara Malaysia, in the asset portfolio in the Malaysian Islamic banks, the share of
Murabaha and Murabaha-related operation (Bai Bithaman Ajil) was 48.2 per cent in
December 2008, 48.3 per cent in December 2010; the share of operating lease and
lease-to-purchase financing (Ijarah and Ijarah Thumma Al-Bai) was 33.1 per cent in
December 2008, 29.8 per cent in December 2010, respectively. In parallel, it is worth noting
that the share of Musharaka in the Malaysian IFI was only 1.1 per cent in December 2008,
2.5 per cent in December 2010.
2. Hyman Minsky, a Post-Keynesian economist with a reputation among monetary theorists for
being particularly pessimistic (Kindleberger, 2000, p. 13), contributed in great deal to
modelling the fragility of the monetary system and its propensity to periodic disaster.
According to Minsky, if a business unit’s cash flow commitments on debts are such that over
some period the cash receipts are expected to exceed the cash payments by a significant
margin, the unit is said to be engaged in “hedge” financing. Then, a “speculative” financing
unit has cash flow payments that exceed the cash inflows expected during some of the periods.
 However, the present value of the cash flow expected to accrue to the firm from owned Post-Keynesian
assets exceeds the present value of contractual cash payments. Since a speculative financing
unit has a positive net worth, the borrower may be able to refinance its position. Finally, perspective
a Ponzi financing unit is a speculative financing unit for which the interest portion of its cash
payment commitments exceeds its net income cash receipts, that is, business units engaged
in Ponzi finance have a negative net worth in computation of present values (Minsky, 1977,
p. 143).
3. In the construction period, the cost for construction including the labour cost for construction
209
is not yet fixed and it is intrinsically difficult to pledge the object building under the
construction. Of course, the object building can be pledged as collateral after the
construction.

References
Al-Saati, A.R. (2003), “The permissible Gharar (risk) in classical Islamic jurisprudence”,
Journal of King Abdulaziz University: Islamic Economics, Vol. 16 No. 2, pp. 3-19.
Arrow, K. (1974), The Limits of Organization, W.W. Norton, New York, NY.
Ayub, M. (n.d.), “Derivatives and Islamic finance”, working paper, State Bank of Pakistan
Karachi, available at: www.sbp.org.pk/departments/ibd/derivatives_islamic.pdf
(accessed 30 August 2012).
Ayub, M. (2007), Understanding Islamic Finance, Wiley, Chichester.
Bank Indonesia (2009), Indonesian Islamic Banking Outlook 2010, Bank Indonesia, Jakarta.
Cohen, D. and Knetsch, J.L. (1992), “Judicial choice and disparities between measures of economic
values”, in Kahneman, D. and Tversky, A. (Eds), Choices, Values, and Frames,
Cambridge University Press, Cambridge, pp. 424-450.
Davis, E.P. (1995), Debt Financial Fragility and Systemic Risk, Clarendon Press, Oxford.
Dore, R. (2011), Kinyu ga nottoru sekai keizai, Chuko-Shinsho, Tokyo.
Dymski, G. (1993), “Keynesian uncertainty and asymmetric information: complementary or
contradictory”, Journal of Post Keynesian Economics, Vol. 16 No. 1, pp. 49-54.
El-Gamal, A.M. (2006), Islamic Finance: Law, Economics, and Practice, Cambridge University
Press, Cambridge.
Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, Vol. VII,
Macmillan, London.
Keynes, J.M. (1937), “The general theory of employment”, Quarterly Journal of Economics, Vol. 51,
pp. 209-223.
Kindleberger, C. (2000), Manias, Panics and Crashes, 4th ed., Macmillan, London.
Knight, F. (1921), “From risk, uncertainty and profit”, in Putterman, L. (ed.), (1996),
The Economic Nature of the Firm: A Reader, 2nd ed., Cambridge University Press,
Cambridge, pp. 60-65.
Minsky, H. (1977), “A theory of systemic fragility”, in Altman, E.I. and Sametz, A.W. (Eds),
Financial Crises; Institutions and Markets in a Fragile Environment, Wiley, New York, NY,
pp. 138-152.
North, D. (1981), Structure and Change of Economic History, W.W. Norton, New York, NY.
North, D. (1990), Institutions, Institutional Change and Economic Performance,
Cambridge University Press, Cambridge.
North, D. (2005), Understanding the Process of Economic Change, Princeton University Press,
New York, NY.
IMEFM SESRIC (2009), “Islamic finance & banking system: a potential alternative in the aftermath of the
current global financial crisis (part II)”, SESRIC Monthly Report, Statistical, Economic and
6,3 Social Research and Training Centre for Islamic Countries, Oran, pp. 1-11,
October-November.
Simon, H. (1996), The Sciences of the Artificial, 3rd ed., The MIT Press, New York, NY.
Visser, H. (2009), Islamic Finance: Principles and Practice, Edward Elgar, London.
210 Williamson, O. (1985), The Economic Institutions of Capitalism, The Free Press, New York, NY.

About the author

Yasushi Suzuki is a Professor of Finance at Graduate School of Management,
Ritsumeikan Asia Pacific University, Japan. He has obtained PhD (Economics) and LLM
(International Economic Law) from the University of London, respectively. His main work is on
the institutional political economy of financial development. Yasushi Suzuki can be contacted at:
szkya@apu.ac.jp

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints