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Islamic Finance v. Islamic Bankruptcy

posted by Jason Kilborn

As Bob mentioned in his introduction, I have spent many hours over the past year-and-a-half studying Arabic as a prelude to exploring the Islamic and Modern Middle Eastern law of financial distress--by far the most intense intellectual challenge of my life.  I've only begun to scratch the surface (the language alone is fiendishly difficult), but this promises to be a very interesting and productive project.

While most Credit Slips readers have heard of or, indeed, know some of the detail of the modern movement known as Islamic finance, I suspect virtually none of us knows anything about the way in which Islamic law deals with financial distress and bankruptcy.  The only non-Arabic source on this subject I have found is an early 1900s doctoral disssertation from the University of Paris, and it is largely a French summary of the bankruptcy law of Morocco at the time (heavily influence by Hanafi Islamic doctrine).  We've probably also all read the stories of ex-pats leaving their cars at the Dubai airport, fleeing to avoid imprisonment for debt, but even in places like Saudi Arabia, where shari'a is supposed to be the law of the land (and where a kind of nascent debt settlement system is developing, albeit slowly), I haven't see any evidence of serious engagement with the notion of bankruptcy as it appears in the primary Islamic law sources.

And appear it does!  One rather famous verse of the Qur'an, 2:280, directs (liberally translated) "If [he, the debtor] is in a difficult situation, let there be a postponement until easier times [and he is able to repay,] and if you were to remit [forgive] the debt [as charity,] it would be better for you, if you only knew."  And in the other major source of Islamic law, the sunna (tradition) of the Prophet (pbuh), one finds at least one story where a creditor is ordered to forgive half of his claim against a distressed debtor.  There are other similar stories in the sunna, and I very much look forward to sifting through the scholarly commentary on this issue, a process that I've begun with halting success.  If any Credit Slips readers are familiar with what Hanifa or Shafi'i or Hanbal or Malik or Ja'far or any other authoritative commentator has to say about this specific issue, any input would be welcome.  My greatest point of curiosity is why we don't see any serious treatment of bankruptcy in modern Middle Eastern law, despite its treatment in Islamic doctrine.  This is one of many interesting facets of my longer-term project.  As I've said before, we in "the West" have so much to learn, both about and from, "the Rest" of the world.


thanks for the post and I do enjoy creditslips often. Please do have a look at our blog (and drop me an email) since we have posted some relevant info but have other as yet unposted resources on similar topics. One area ihave looked at is insolvency (muflis) where the profligate is dealt with quite differently in shariah than western laws. As you mentioned perhaps imprisoned to compel but for the most part there are no forced sales ever.

I think part of it is because most of the Shariah literature (or almost, all of it, if we are talking about classic literature) is in Arabic. There are even recent writings on this subject but in Arabic. So unless you have the resource to read the Arabic literature you will be missing a large chunk. This (like many other practical topics) is very important subject and AAOIFI just issued this month a new standard that deals with bankruptcy. Hope this will help towards more standardization.

In Islam, interest is not allowed on purchases such as when buying a home and paying mortgage. I believe Islamic financing is more as a rent to own scenario where a higher than market price is charged due to interest and potential loss aka bankruptcy in which the lender isn't getting interest.

If an muslim has money in an interest bearing account he or she must give it to charity, if a muslim has a lot of debit he or she may not be obligated to give annual charity which is one of the five pillars. In many islamic countries this a debate or rather a problem in which many secular businessfolk along with governments want traditional banking, but the religious muslims know its haram (forbidden), sometimes governments separate the two branches and divisions although that doesn't make it legal but to somewhat appease the muslims.

If you file bankruptcy, you will have to go to court. This is not a typical court case where you stand before a judge to receive a sentence. Rather, this hearing gives your creditors a chance to try to get some of the money that you owe. You will be asked questions under oath by your trustee. These questions are about your assets, and the goal is to determine if you have been truthful when listing your assets, while showing that you do not have enough money to repay your debts. You will probably find that your creditors do not come to the meeting, but they can, and they can ask you questions.

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