Bankruptcy

Islamic Bankruptcy?

By Jason Kilborn

Thanks so much, Bob, for the extremely gracious introduction.  I wish my knowledge of bankruptcy law were as capacious as Bob suggests. I'm working hard to live up to Bob's description in the narrower realm of consumer debt relief, but for comparative business bankruptcy (in the broad sense, including reorganization), I turn to Philip Wood, whose work I recommend heartily to CreditSlips readers.

One area where even Wood finds his knowledge limited is in the treatment of financial distress in the Islamic world. That gap and the important task of filling it has really peaked my interest in recent months. As I mentioned at my primary blog home, I have spent some time recently with some great work on Islamic law, business, and finance. At the same time, I have begun slowly to make headway in the specific (and underexplored) area of debt relief. Where better to begin to look, I thought, than the font and principal steward of Islam today, Saudi Arabia. Much to my surprise, I found that even in light of the strict Islamic finance law prohibitions on interest (riba), even The Kingdom has acknolwedged a need for debt relief for small business people as an alterative to liquidation bankruptcy. Already in 1996, Royal Decree No. M/16 of 4/9/1416H introduced a system to encourage debtors to seek collective settlements with creditors through the intermediation of a special organ in the Jeddah Chamber of Commerce, the Bankruptcy-Avoidance Ombudsman (diwaan al-maDHalim). On paper (or so my Google translation of the Decree suggests), the process resembles a European-style "accord" process, where the debtor remains in possession, and dissenting creditors can have a majority-approved plan (even one including a discharge of debt) crammed down on them! My sense is that this radical innovation has not met with a warm reception, as creditors continue to rely on the powerful lever of imprisonment for debt, and even the adminstrative authorities have moved slowly to implement the new process. The Ministry of Trade and Industry put in place the regulatory framework only in 2004, with decree no. 12 of 14/7/1425H, and the first conciliation commission was nominated only in May 2007. The Jeddah Chamber of Commerce chariman explained that the new procedure represented official acknowledgement of the fact that financial distress in the modern world emanates not from laziness or stupidity by debtors, but from inevitable external risks associated with more intense global economic competition. This from one of the most tradition bound nations in the world!

The world of bankruptcy/insolvency is changing, and an eye for comparative developments makes that eminently clear. As the U.S. whittles away at the protections and effectiveness of bankruptcy/reorganization, much of the rest of the world embraces the advantages of such protections. I, for one, hope that a new U.S. administration and legislature will move U.S. law back to its rightful leadership position in this area.

Full post as published by Credit Slips on February 16, 2009 (boomark / email).