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Based mostly on http://en.wikipedia.org/wiki/Islamic_banking . Islamic banking tries to avoid:
. In these arrangements debt is either replaced by equity with a repurchase agreement, and/or is collateralized. Copying/summarizing some innovations from Wikipedia:
This seems to disallow conventional insurance (including call and put options, which are insurance on investments), because one party is taking on a Gharar form of uncertainty.
http://www.alfalahconsulting.com/2011/05/prohibition-of-maysir-and-gharar.html says "Gharar in Islam refers to any transaction of probable objects whose existence or description are not certain, due to lack of information and knowledge of the ultimate outcome of the contract or the nature and quality of the subject matter of it. For example, the Prophet (pbuh) has forbidden the purchase of the unborn animal in the mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.
Islam has clearly forbidden all business transactions, which leads to exploitation and injustice in any form to any of the parties of a contract. It seeks protecting the different parties from deceit and ignorance by forbidding Gharar in any commercial exchange contracts that are not free from hazard, risk or speculation about the essential elements in the transaction to either party, or uncertainty of the ability of one party to honour its rights and obligations. It requires that all Islamic financial and business transactions must be based on transparency, accuracy, and disclosure of all necessary information so that no one party has advantages over the other party.
The rationale behind the prohibition of Gharar is to ensure full consent and satisfaction of the parties in a contract. Full consent can only be achieved in full disclosure and transparency and through perfect knowledge from contracting parties of the counter values intended to be exchanged. The prohibition of Gharar protects against unexpected losses and the possible disagreements regarding qualities or incompleteness of information.
Instead, the Shari’ah promotes the principle of profit-loss sharing between banks and entrepreneurs as an approach to encourage the spirit of brotherhood and cooperation in business relationships. Mutual risk-sharing could help absorbing the weight of loss by sharing it equitably between all parties. However, risk and uncertainty are conditioned by enough adequacy and accuracy of information to make reasonable estimates of the outcomes. Tolerable risk and uncertainties cannot exist in contractual obligations.
Islam has also categorically and firmly prohibited all forms of gambling. Maysir and Qimar are forms of gambling transactions that are considered as totally inequitable in Islam. Maysir refers to the easy acquisition of wealth by chance, whether or not it deprives the other’s right. Qimar means the game of chance in which one gains at the cost of others.
Even though, gambling consists in a form of speculation and that There should not be any place for commercial operations in Islam as it is purely speculative. The prohibited speculation under the Shari’ah is not that, which relies on the analysis of a lot of economic and financial data and which involves the investment of assets, skills and labour. Rather, it is one involving an effortless gain similar to a gambling scheme or activity. This is because the buyer is engaged in a transaction aimed at making profit through trading and not through dishonest appropriation of the property of others. "
Conventional insurance is replaced in Islamic finance by Takaful, which is a pure pooling of risk, rather than a risk transfer (http://www.qfinance.com/insurance-markets-checklists/takaful-insurance ; http://www.islamic-banking.com/takaful_insurance.aspx ).
I think these are very innovative ideas and some of them might have broader application. While thinking about debt (see [self:ideas-econ-debt], I independently came up with a concept similar to Musharaka, which i call 'temporary equity'. I also think that Takaful is interesting; imagine if instead of buying and selling put options on stocks, one had the ability to enter into a risk-taking pool in which the risk you are taking in one stock is offset by the risks others are taking in other uncorrelated stocks. Not sure exactly how that would work, but it's worth looking into (and I expect that somewhere in the world, there is an Islamic scholar who has done so).
It would be interesting to interpolate; just as fractional reserve banking is an interpolation between no-required-reserve and full-reserve banking, one could imagine saying that risk transfer is allowed but only up to some set fraction of the risk. An interesting fraction to start with might be (1 - 1/e) (about 60%). This would mean that e.g. car insurance could only pay 60% of the loss, which perhaps does not interoperate well with a legal system that will charge you hundreds of thousands of dollars if you kill someone accidentally. Perhaps legal losses could be exempted (or more generally, losses which are not bounded by one's net equity/net worth).
One might consider an insurance company not to be engaged in gambling, because although each individual policy, in isolation, is a gamble, when combined they form merely a statistical aggregate. It is true that there is some remaining risk that the properties of the aggregate are not understood (e.g. black swans), but any business venture faces the same problem, and Islam does not outlaw all business ventures. Also, as the webpage cited above notes, one might consider that financial analysis is a form of work, therefore investing based on analysis is acquisition of wealth by work, not by chance. This seems to me to be crucial because i think that financial markets perform an important service to society, namely, a collaborative prediction engine.
However, there is a conceptual difficulty in the application of Maysir. Whether or not the properties of the statistical aggregate have been adequately explored is a subjective question, and so is the amount of work involved in analysis. For example, a person might go to the horse races and put all their money on Smokey, because Smokey has a mole on his left leg and the person considers this a lucky sign, because yesterday the horse that won also had a mole on their left leg, and the person has some superstition that explains why a mole on the left leg leads to speed. Perhaps one might consider this observation to be too careless to transform the activity of betting on Smokey from gambling into actuarial science, and too easy to constitute analytical work. However, where does one draw the line between this and a quantitative analyst who observes the cointegration between stock X and stock Y? In both cases, there was the construction of an theory and the gathering of evidence. In both cases, the theory does not have so much evidence as for, say quantum physics. The difference is merely that in the case of Smokey, a reasonable observer would disagree with the theory.
One of the virtues of markets in their role of prediction aggregators is that they do not restrict participants to only make purchases on the basis of theories that are generally considered correct; this allows the market to incorporate information from theories which are strongly believed by some participants but which are not yet accepted by the consensus. By the time a financial theory is accepted by the consensus, the market may have been long been incorporating its results; this allows market predictions to be better than the consensus. This only works because the market has both a strong disincentive for participants to base purchases on incorrect theories, and because it takes away the money of persistently incorrect participants, attentuating their future ability to influence prices.
In other words, if Bob thinks that the sunspot cycle predicts stock market performance, who are we to tell him that he is wrong? Maybe they do. But in that case, how could the prohibition on Maysir be enforced, when anyone may at anytime legitimately claim that what we see as a gamble is really a careful analysis?
There is also a problem with 'easy'. There may be information that is easy for some market participants to acquire and difficult for others. The market provides an incentive for those with the information to disseminate it to the market so that it may be incorporated in prediction. If this is prohibited, now participants with easy access to information are disallowed from providing it, and this reduces the accuracy of the prediction (this reminds me of another concern i have with markets quite apart from Islam's concerns; namely, although the market incentivizes the sharing of specific predictions, it DISincentivizes the sharing of a method of making many predictions -- i consider this a huge problem).
My conclusion is that even if Maysir is considered a sin, it is one of those sins that cannot be externally observed and therefore not enforced (at least not in financial markets; a high-stakes poker game is not providing a service to society (except perhaps by training the participants) and therefore might be considered Maysir). So one might say to people that a certain mindset when making financial decisions might be sinful, but one cannot tell for sure when any person is doing it, and therefore cannot prohibit any specific transaction or class of transaction based on this.
Of course I have not studied this much and i could be misunderstanding what is meant by Maysir.
