Risk Management in
Islamic Financial Instruments
180
tools of his trade, and the capital of his business; he may sell everything apart from that
(Al-Munajjid, 2013).
It may not be necessary at this point to go into the details of Sharī‘ah rules on insolvency.
These have been comprehensively examined recently by Manṣūr (2012), with particular
reference to insolvency of corporate bodies. Kilborn (2011b) gives a comprehensive
foundation on Islamic bankruptcy law. Hamoudi (2011) berates the attitude of Muslim
countries in neglecting the fine principles of Islamic bankruptcy law, and Awad & Michael
(2010) examine the Islamic law of bankruptcy as understood in the Sunni jurisprudence.
A.6 DEBT RESTRUCTURING, DISPUTE MANAGEMENT AND DEFAULTS IN
ISLAMIC FINANCIAL TRANSACTIONS
While issues relating to insolvency are recognized in Islamic law, emphasis is placed on debt
restructuring and amicable dispute management that serves the purpose of all stakeholders.
The desirability of conciliation and forbearance is emphasized in Qur’an 2: 280 (Warde, 2011).
This basis of debt restructuring established in the Qur’an is further explained in a number of
prophetic precedents. ‘Abdullah b. Ka’b b. Malik once narrated that Ka'b demanded his debt
back from Ibn Abi Hadrad in the Mosque and their voices grew louder till Allah's Apostle heard
them while he was in his house. He came out to them raising the curtain of his room and
addressed Ka'b, "O Ka'b!" Ka'b replied, "Labaik, O Allah's Apostle." (He said to him), "Reduce
your debt to one half," gesturing with his hand. Kab said, "I have done so, O Allah's Apostle!" On
that, the Prophet said to Ibn Abi Hadrad, "Get up and repay the debt, to him."37 The Prophet
served as the judge during the early period of Islam and had cause to settle a number of
disputes in a manner acceptable to all the parties. He encouraged the creditor to reduce the
amount of debt and the debtor to pay off the debt as soon as possible, thereby avoiding a
situation where the latter will be declared bankrupt. As Warde (2011) rightly posited, “[t]he
judge (qadi) was the central figure in finding an appropriate resolution to the cases brought
before him. What resulted was an ad hoc attempt at compromise as opposed to systematic
receivership. Assuming good faith, both sides were expected to make concessions. Typically
there would be a reduction of debt and a change in terms based on the debtor’s ability to pay”.
It therefore follows from the above discussion that there cannot be debt restructuring without
appropriate steps toward dispute management among the stakeholders involved in a
particular transaction.
For disputes involving insolvency, it thus appears a number of amicable dispute resolution
processes are applicable (Oseni, Ansari, & Kadouf, 2012). Notable among these processes are
compromise of action, conciliation, arbitration, and litigation. That is, any case involving
insolvency should begin with compromise, and, if not resolved amicably, it may proceed for
conciliation and arbitration, and ultimately end in litigation. Compromise of action is meant to
create an avenue for the parties to discuss debt restructuring and make such compromise, or
any other arrangement they deem expedient, with the creditors. While the compromise of
action procedure does not involve a third party neutral who is empowered to make a binding
37 Vol. 3, Book 41, Hadith No. 600.