Understanding Islamic Finance - Doha Academy of Tertiary Studies

Loan and Debt in Islamic Commercial Law 167original commitment is a loan meaning Qardal Hasan, as imposing a penalty provision in aloan contract is usury in the strict sense. 69The OIC Fiqh Council also resolved that penalty provision should become null and voidwhen a client proves that his failure to meet an obligation was due to a reason beyondhis control, or when he proves that the bank, as a result of his breach of the contract, hasincurred no loss. 707.13.1 Insolvency of the DebtorIf a debtor does not have enough money to pay his debt(s), he is termed insolvent/bankrupt(Muflis) in Islamic commercial law. 71 In such cases it must be ensured that the debtor is notresorting to fraudulent bankruptcy, in which case he can be pressed and even imprisonedfor payment of debt. However, if a person is really in trouble and there is little chance ofhis ability to pay in the foreseeable future, he can be declared insolvent; all his assets willbe sold and the proceeds distributed among the creditors on a pro rata basis. If some of thedebts remain unpaid, he must be given time for easement. The State or the regulators of thefinancial system can play an important role in resolving such issues, as the holy Prophet didin the case of Ibn Abi Hadrad and Jabir bin Abdullah. 72 Jurists differ regarding arrestingsuch an insolvent debtor. According to Imam Malik and Imam Shafi‘e, he can be arrestedonly if there is the possibility that he has some hidden wealth.If a commodity sold on credit is still with the insolvent buyer in the same condition,the seller has the first right according to a saying of the holy Prophet and according to themajority of the jurists. (Narrated Abu Huraira: “Allah’s Apostle said, ‘If a man finds hissame things with a bankrupt, he has more right to take them back than anyone else’.”) ImamAbu Hanifa is in favour of the distribution of its proceeds among all other creditors. 737.14 HAWALAH (ASSIGNMENT OF DEBT)Hawalah literally implies the transfer of something from one person to another or from onesituation to another. Legally, Hawalah is an agreement by which a debtor is freed froma debt by another becoming responsible for it, or by shifting the responsibility from oneperson to another with the effect that a debtor is replaced by another debtor.Hawalah may be restricted or unrestricted. In restricted Hawalah, the assignee has topay from the asset or property of the assignor that is in the possession of the assignee.Unrestricted Hawalah is not restricted to payment being made from the assets/property ofthe assignor/transferor in the hands of the transferee–the assignor (debtor) does not act ascreditor to the payer who undertakes to pay from his own funds and has recourse from theassignor provided that the payment was made by the order of the transferor. 74Hawalah, or the transfer of debt, is different from the transfer of right in which a creditoris replaced by another creditor. As such, it refers to the endorsement or assignment of debt.69 Al Baraka, Resolutions (1981–2001), No. 6/11, p. 103, also p. 137.70 OIC, Islamic Fiqh Academy, Resolution No. 109 (3/12), p. 252.71 Ibn Hajar, 1981, 5, pp. 62, 63.72 Ibn Hajar, 1981, 5, pp. 310, 311.73 Nisai, n.d., 7, pp. 311–314; Waliullah, 1353 H, pp. 56–58.74 Al-Atasi, 1403 AH, Majallah, Articles 673–679.