Islamic Finance and Insolvency: An Overview of Related Literature

Abstract

Islamic finance has made great progress during the past two decades. Its growth
has been recognized and witnessed in both Muslim and non-Muslim majority
countries. Its performance and relative resilience during the global financial
crisis particularly attracted the attention of regulators, financial institutions, and
general masses towards this emerging segment of the conventional financial
system. However, since Islamic finance is still at its nascent stage of development
with compared to its conventional peer, there are many unsettled issues which are
not resolved yet. One such issue is the question of insolvency and bankruptcy.
While conventional financial system has witnessed many episodes of insolvency
and default throughout its history, there is a proper mechanism in place to
address this issue. But this is not the case with Islamic finance as we have yet to
witness a system wide wave of distress where one can observe the response of the
industry to such shock as well as the effectiveness of the measures taken to face
such a challenge. Due to this situation, there are a number of issues which need to
be addressed and questions that need to be answered when it comes to the matter
of default, insolvency and bankruptcy in Islamic finance. In this article, we aim to
present a review of the related literature which has discussed the question of
insolvency and default in the context of Islamic finance. We find that most of the
studies have confirmed that literature in the area is very scarce and further
exploration of this area is very much needed. In addition, it is also recognized in
the relevant literature that the classical Islamic law has rich sources that can be
looked at and utilized for effectively addressing many of these challenges and
issues of contemporary Islamic finance.