Information asymmetry in financial exchanges or transactions occurs when one party has more or better information than the other. This asymmetry can create an imbalance of power in transactions, potentially leading to an unfair exchange.

A prime example in Western markets is insider dealing (or insider trading), where individuals with access to material non-public information (information that could affect the price of a company’s stock) exploit their knowledge advantage for personal gain. This practice is illegal because it violates securities laws. This illegality is rooted in the unethical nature of such actions, as it breaches fiduciary duty and creates an unfair advantage. Insider trading also contributes to market inefficiency by eroding trust in the market.

Islamic financial principles emphasise the importance of full disclosure and mutual understanding between contracting parties. Islamic finance specifically prohibits excessive uncertainty (gharar), which can arise from information asymmetry when one party has significantly more information than the other, as well as exploitation (zulm), which refers to unjust or unfair treatment that can occur when this information imbalance is used to take advantage of another party.

  • Gharar
  • Zulm
  • Islamic finance
  • Insider dealing