Mutuality of Risk Sharing

The principle of fairness is also reflected in the risk and profit-sharing characteristics of Islamic financial transactions. This requirement must be clearly defined at the onset, and serves as an additional in-built mechanism that promotes the adoption of sound risk management practices by Islamic financial institutions. In particular, these features demand the exercise of appropriate due diligence and higher standards of disclosure and transparency to be observed by the Islamic financial institution, which in turn enforces market discipline and minimize informational asymmetries. Terms and conditions need to be honestly and clearly laid out; ambiguity based on future events cannot be part of Islamic transactions to avoid conflicts in future.

In Islamic finance, all form of contracts and transactions must be free from excessive gharar (uncertainty). Ambiguity and uncertainty in contracts will lead to an lead to an unfair advantage to one party over another. This implies that contracting under conditions of excessive uncertainty is not permissible.