Bankruptcy

Islamic Finance v. Islamic Bankruptcy

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.

Full post as published by Credit Slips on June 22, 2010 (boomark / email).