Islamic Verdict on Bankruptcy

What is the Islamic verdict about bankruptcy?

Definition of the "Muflis" (bankrupt)

The Muflis, in the Arabic language, refers to the person who has no money at all, except the fulus, the fulus being a small coin - and who cannot afford to cover his own maintenance; this applies to everything from goods, gold, silver, liquid assets and so on.

The muflis in Shari‘ah terminology refers to a person whose debts are greater than his assets and his expenses are greater than his income. The Muflis is an Arabic word derived from "fulus" which is the plural of fels, a copper coin, known to be the lowest unit of currency and the lowest in value, used only for trivial matters. The fels is light in weight and very low in value. The Islamic Shari‘ah has determined accurately and meticulously all types of weights and measurements. Abu Dawud reported on the authority of Ibn ‘Umar that the Messenger of Allah (saw) said, "The standard measurement should be that of the people of Madinah, and the standard weight should be that of the people of Makkah." The classical scholars have studied the Shari‘ah texts, and found that the lawful Dinar weighed 4.25 grams of gold, and that the lawful Dirham weighed 2.975 grams of silver. The weight of the fels coin is actually 1/72nd of a grain of barley (0.62 grams), therefore the weight of the fels would be 0.0086 grams. Due to its light weight and its very low value, a person who does not have any money but fulus becomes known as a muflis.

Islam forbids the imprisonment of the muflis who is facing hardship, or the indebted person, and this is the widely spread opinion adopted by most of the scholars of the various Islamic Schools of Thought, referring in their evidence to Allah’s (swt) saying,

"If, however (the debtor) is in straightened circumstances, (grant him) a delay until a time of ease; and it would be for your own good - if you but knew it - to remit (the debt entirely) by way of charity." [TMQ 2:280]

It has been reported that the Messenger of Allah (saw) divided the assets of the muflis among the creditors, but he (saw) never imprisoned a muflis.

Islam has strongly stressed the obligation the indebted has towards his debtors, ordering him to settle his debts. Muslim reported on the authority of ‘Abdullah ibn ‘Amr ibn al-‘As that the Messenger of Allah (saw) said, "The martyr would have all his sins washed away (forgiven) except the debt."

Freezing the Assets of the Muflis

If the debts owed by the muflis were confirmed by a just person’s testimony, or if he himself admitted that he owed people money, and if his debtors asked the ruler to freeze his assets, then the Khaleefah must take action to do so. It would also be a duty for the Khaleefah to declare the freezing of his assets, and therefore to warn people against dealing with him lest they lose their money. This actually comes under one of the Khaleefah’s duties, which is to look after people’s affairs. The Messenger of Allah (saw) said, "Each one of you is a guardian and each one is responsible over his guardianship, and the Imam is a guardian and he is responsible over his subjects."

If the Khaleefah freezes the assets of the muflis, in order to sell them off and reimburse or return them to the debtors, he should however, under his duty of guardianship and fairness, leave the muflis enough funds in order to support himself and his dependants. Therefore, his house would not be sold, for he cannot live without it. But if he has two houses, one of them would be sold. If the muflis was working and earning, then in this case all his assets (except for his house which he needs to live in) would be sold and the debtors would be reimbursed. If the muflis could not work or could not find work, then enough money would be left for him to support himself, and he would be supported together with his dependants (by the State) until he was in a position to repay his debtors. Evidence about the freezing of the assets of the muflis by the Khaleefah comes from the narration of al-Darqutni on the authority of ‘Abd al-Rahman ibn Ka‘b ibn Malik that he said, "Mu‘adh ibn Jabal was a young generous man, he used to spend all his money, he kept borrowing money until all his assets were overtaken by his debts, so his debtors spoke to the Messenger of Allah (saw) about it, and the Messenger of Allah (saw) sold all of Mu‘adh’s assets, until Mu‘adh had no assets left."

Returning the Goods to the Debtors

If the Khaleefah chooses to freeze the assets of the muflis, and some of his debtors identify the goods that they have sold him, the goods should be returned to them and will not be included in those assets which are to be divided. Al-Bukhari, Muslim, al-Tirmidhi, Abu Dawud, Ibn Majah and al-Nisa’i reported on the authority of Abu Hurayrah that the Messenger of Allah (saw) said, "Whoever finds his goods with a man who has become muflis, he would be more entitled to them."

Dividing the assets of the muflis would be in parts and not equally. The Shari‘ah rule concerning the dividing of the assets, be it goods or other, is that the Khaleefah should sell the assets, then divide them amongst the debtors in parts, but not necessarily in equal parts, for he could not do them justice otherwise. ‘Abd al-Rahman ibn Dallaf reported that ‘Umar ibn al-Khattab announced regarding a man from Juhayna, that whoever was owed by him anything should turn up the next day for he was dividing his assets into parts. The Khaleefah, or his delegated assistant would then divide the parts among the debtors.

Who can be present and who can file a claim against the muflis? The following are not eligible for a share of the division of assets of the muflis:

1. Those that did not place a claim against the muflis;

2. Those that are not present at the time of the dividing of the assets, or did not send a delegate;

3. Those for whom the debt is not yet due, whether they have claimed it or not.

Giving sadaqah to the Muflis

Islam has made it obligatory upon every Muslim to pay zakat if the money reached the nisab (the minimum amount of money eligible for zakat) and completed a whole year. The payment of zakat must be only made to the Khaleefah or an authorised deputy (representative), and it is he who undertakes to spend it on those made eligible by Shari‘ah. It is forbidden to pay the zakat to anyone other than the Khaleefah or his a’amil (collector). In the absence of the Khaleefah, as is our situation today, the Muslim is commanded to pay it himself directly to the categories mentioned in the verse where Allah (swt) says,

"The offerings given for the sake of Allah are (meant) only for the poor and the needy, and those who are in charge thereof, and those whose hearts are to be won over, and for the freeing of human beings from bondage, and (for) those who are over-burdened with debts, and (for every struggle) in Allah’s cause, and (for) the wayfarer: (this is) an ordinance from Allah - and Allah is all-knowing, wise." [TMQ 9:60]

We note in the ayah that Allah (swt) referred to the gahrimeen, they are those in debt, and those who assume the burdens of debt to eliminate enmity, or to pay the diyyah (blood money), or those who assume the burdens of debt for personal needs, or the mufliseen (bankrupts). Anas reported that the Messenger of Allah (saw) said, "Begging is not permissible but for three types of persons: One with wretched poverty, or one with a horrid debt, or one with a painful blood money." Qabisa ibn al-Mukhariq al-Hilali reported that the Messenger of Allah (saw) said to him, "Qabisa! Begging is not permissible but for one of the three types of persons: One who has incurred debt, for him begging is permissible till he pays that off, after which he must stop it; a man whose property has been destroyed by a calamity which has smitten him, for him begging is permissible till he gets what will support life, or will provide him reasonable subsistence; and a person who has been smitten by poverty, the genuineness of which is confirmed by three intelligent members of his people, for him begging is permissible until he gets that which will support him. Qasiba! besides these three, (begging) for any other reason is forbidden, and anyone who engages in such, consumes that which is forbidden."

Therefore, it is forbidden to confiscate property of the muflis, to imprison him, or to charge him interest or penalties. However, the Khaleefah or his deputy have the sole power to freeze his assets and goods, which are in excess of his basic needs, to sell them and reimburse his debtors, giving him back any money left over after settlement. The indebted person must endeavour to do all he can to settle his debts, for he will be held accountable on the Day of Judgement, as is mentioned in the hadith above. In the case of the absence of the Khaleefah, such as our situation today, some people will deny their own debts, and since there is no-one to ensure collection of these debts, it will lead to the law of Allah (swt) not being implemented. Therefore the whole of the Muslim Ummah will be sinful except those that commit themselves in action, to re-establishing the Islamic State and appointing a Khaleefah to carry out his duties and implement the Islamic laws, giving everyone his rights, ensuring the laws are implemented, and that those abusing the law are punished.

Summary

1. Borrowing which is free from riba is mubah, subject to certain conditions.

2. The lending which is free from riba is mandub , subject to conditions.

3. To settle the debt (repay the loan) without riba is fard, subject to conditions.

4. In Islam, to imprison the indebted is forbidden.

5. To freeze the assets of the bankrupt, which are in excess of his own maintenance and that of his family, is permissible for the Imam (ruler) or his deputy alone.

6. Usurious loans, whether lending, borrowing, witnessing or writing are all forbidden.