The objective of this post is not to discuss the rationale behind the prohibition of gambling. Instead, the objective is to clarify which activities are considered gambling in Islamic Finance. Every transaction in which gain and loss are obscure is known as Al-Qimar (gambling) and Al-Maysir (unearned income) under Sharia. The prohibition of such is derived from the Quranic verse,
O ye who believe! Strong drink and games of chance and idols and divining arrows are only an infamy of Satan’s handiwork. Leave it aside in order that ye may succeed. Quran (5:90)
Games of chance that are mentioned in this verse include all types of gambling. The Arabic word “Maysir” is derived from the root word “Yusur” which means ease. Since a gambler does not perform laborious work and winnings are considered easy money as opposed to earning through labor, gambling is called Al-Maysir. The divining arrows in the verse refer to Azlam, a game of chance played with special wooden dice in the shape of arrows. Therefore, any kind of wager and all forms of gambling are considered Haram or prohibited. Just as Riba is considered Haram, gambling is also considered Haram. The scholarly consensus on gambling is unequivocal and understood by all sects of Muslims as irrefutable.
Before elaborating on activities considered as gambling, let’s briefly discuss games under game theory; these can be zero-sum, positive-sum or negative-sum games. Any game where a party wins at the expense of another is called a zero sum game. In other words, this is a situation where a person’s gain is equivalent to another person’s loss, where the net change in wealth or benefit is zero. Such a game may have as few as two players or hundreds of participants. Common examples of a zero-sum game with only two players are tennis and chess where there can be only one winner. A game of poker may have more than two participants but the net effect is zero as the combined wins equal combined losses across the table. In the financial markets, options and futures are examples of zero-sum games where for every party that makes a gain on a contract, there is a counter-party that loses (transaction costs being excluded).
Casino games are generally negative sum games. In gambling, funds are allocated with a negative expected return, but there is also some possibility of substantial gain. Gambling involves the intentional assumption of risk i.e. risk-taking behavior is assumed where excessive risk is sought rather than avoided. This is the exact definition of Gharar as explained in our previous post, where activities which involve uncertainty or excessive risk are prohibited. According to scholars, gambling displays Gharar in its extreme form. Interestingly, in games involving skill like poker, professional gamblers make money at the expense of weaker players by capitalizing on their weaknesses. However, there are no professional gamblers in negative sum games that do not involve skill like roulette or craps. Another example of a zero sum game (sometimes negative sum game) is speculation. In speculation, funds are allocated with an even (or slightly negative) expected return, but there is also some possibility of a potential gain vis-à-vis other players.
A negative sum game can be defined as a lose-lose situation as opposed a positive sum game which can defined as a win-win situation. Examples of these in classical economics would be a war between two countries (negative sum game) as opposed to a trade agreement (positive sum game). Allocating funds with a positive expected return is called investing. Investing is defined as allocating funds for generating a reasonable rate of return plus the return of original investment, commensurate with the risk. Investment is usually backed by a rationale and may also be backed by historical data supporting the rationale. Just as participating in a zero sum game is speculation and/or gambling, participating in a positive sum game is investing.
Another difference between gamblers, speculators and investors is their intention. Gamblers intentionally assume the risk for thrill or excitement. Speculators only assume risk when they have identified an advantage or weakness in their opponents that compensate for the risk and their costs. Investors, on the other hand, avoid undue risk and do not allocate any thrill-seeking value to the process.
In light of the above, we will discuss the difference between Gharar & Business Risk and talk about Risk vs Return in our next post.