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.