Bankruptcy and Islam: An explicit tradition of compassion and forgiveness

Though bankruptcy laws in the region
today are largely dysfunctional, the Middle East has a uniquely solid and
venerable foundation on which more effective insolvency laws might be built. Islam
devotes particular attention to notions of peace and forgiveness – including a
surprisingly specific rule of bankruptcy relief.

The very notion might come as a surprise
for many in the West whose sole exposure to the Middle East is through
sensational and unflattering media portrayals of the region and its primary
faith. Some believers have indeed emphasised the bellicose aspects of the
Islamic tradition, but the actions of this highly visible minority are
ironically inconsistent with the core tenets of a faith whose very name is
directly linked with peace.

The linguistic root of the word “Islam”
(literally, “to surrender to God’s will”) is the very same root of the word
“salam” (peace). This is not a mere coincidence, it is obvious to any speaker
of Arabic (unlike, say, the obscure roots of most English words), and the
implications of this etymological relationship carry through to the substance
of what Islam advocates and prizes. The most often uttered phrase in the
Islamic world invokes a God who is, perhaps above all else, compassionate
(rahmaan) and merciful (rahiim). 

While the Qur’an does contain fiery
language and dire warnings for unbelievers (as does the Bible, of course), it
is also replete with constant admonitions to peace and forgiveness. In one
particularly notable example, verse 5:45 recalls the Torah and its famous lex
talionis, a life for a life, an eye for an eye, a tooth for a tooth, but it
immediately adds a distinct preference for forgiveness: “But whoever charitably
gives up [this lex talionis right], then it is an expiation for him.”
Similarly, verses 42:37 and :40 continue on this theme, promising the reward of
heaven to those who, among other favoured behaviours, “if they are angry,
forgive”, and though “the recompense for an evil is an evil like it, but
whoever pardons and seeks reconciliation, then his reward is with God”. The
option of pursuing one’s rights is preserved, but the repeated exhortation to
forgiveness and reconciliation is unmistakable, even if too often ignored.

The specific verse on insolvency
expresses a similar strong preference for forgiveness, but in any event calls
for compassion and peace. To be sure, Islam is quite clear on the importance of
fulfilling one’s promises. Verse 5:1 is an almost perfect reflection of the
Latin maxim pacta sunt servanda: “Oh, ye who believe, fulfil contracts.”
Nonetheless, Islam deals sensitively with the inevitable challenge of this
axiom when bad things happen to good people. Nestled within a discussion of the
evil of lending with interest, a single verse (2:280) prescribes the proper
treatment of a financially distressed debtor: “And if he is in difficulty [a
predicament, financial straits], then let there be a delay [respite] until [he
returns to a situation of] ease.” As with the lex talionis verses, this one
also concludes with a strong suggestion that offering not just a temporary
respite, but a permanent discharge would be preferable: “and if you charitably
give it up [remit the debt], it is better for you, if you only knew.” This
verse is not referring to debt and financial forgiveness in a metaphorical
sense; it is the manifest blueprint for a law of financial distress and
bankruptcy.

Alongside the Qur’an, the other primary
source of Islamic law is the example or tradition (sunna) of the Prophet
Muhammad, which also contains several striking bankruptcy-related “precedents”.
For example, in one narrative, the Prophet is said to have told the story of a
man who had died and was asked about his behaviour during his life. The man
explained that he had offered extensions of time to rich debtors to repay their
debts, and he had remitted (forgiven) part of the debts of poor debtors. For
this, his sins were forgiven1. In an even more explicit narrative, a man named
Ka‘b had accosted his debtor, a man named Ibn Abi Hadrad, in the mosque to
demand repayment of his debt. Their increasingly loud argument eventually
caught the attention of the Prophet, who quickly resolved the dispute by
directing Ka‘b to remit (forgive) half of the debt, and as Ka‘b indicated his
compliance, the Prophet directed Ibn Abi Hadrad to stand and pay the
remainder.

On the basis of these and other fleeting
but explicit references to financial distress in the primary sources, medieval
Islamic legal scholars elaborated a relatively sophisticated body of insolvency
law. Many details of the operation of such a system remained to be established,
and much was left to the judicious discretion of the judge (qadi or hakim), but
early system builders heroically constructed an edifice of rules and practices
based on these sources. This system was all but abandoned, however, as several
centuries of external influence descended on the Middle Eastern region,
especially in matters of finance and financial distress.

As indigenous governance movements
increasingly reassert themselves, however, and as the need grows for a
functional insolvency pressure valve to preserve human dignity and enterprise
value, the core of the Islamic tradition offers reformers a solid foundation on
which to build a modern insolvency relief structure. This region holds
tremendous promise for reconciliation between local values and ancient legal
norms on the one hand, and on the other, time-tested ideas borrowed from abroad
for implementing effective modern techniques for addressing financial distress.
In few other areas of governance do modern Western and Islamic norms seem to
dovetail so smoothly. The essential elements and policies of modern bankruptcy
law resonate quite harmoniously with the long Islamic tradition of peace,
compassion, reconciliation, and forgiveness. 

Endnotes: 

  1. Sahih Bukhari, vol. 3, book 41, no. 576.
     
  2. Sahih Muslim, book 010, no. 3780.
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Jason Kilborn

Professor Jason Kilborn teaches business and commercial law at John Marshall Law School in Chicago.  His primary focus is on the comparative analysis of insolvency systems for individuals, though his interest extends to international bankruptcy as well. He recently co-authored a book on international co-operation in cross-border insolvency cases, published by Oxford University Press.

Jason Kilborn
Professor of Law
John Marshall Law School, Chicago
315 S. Plymouth Court
Chicago, IL 60604
USA

T: +1 (312) 386 2860+1 (312) 386 2860
E: jkilborn@jmls.edu
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