How Is Bankruptcy Determined In The Islamic Community?

Bankruptcy is determined differently around the world — and sometimes not recognized at all. This is especially true in predominantly Muslim communities where shari’a law is still used to determine the difference between right and wrong. Here’s the good news for Muslims: financial obligations are crystal clear, although banking is also determined by shari’a law. That means the rules that govern the aforementioned obligations can be strict. It also means that circumventing the obligations might invite serious consequences.

Muslims are supposed to pray, first and foremost, that their financial obligations remain reasonable. This is because Allah is there to help members of the Muslim community pay back any outstanding debts. This also means that requesting a bank loan is perfectly reasonable under shari’a law. Even the Prophet Muhammad was known to have borrowed money on occasion. 

Requesting a loan isn’t as easy as it sounds, though, because Muslims are also asked to avoid interest whenever possible — which, in most cases, means not following through with a loan agreement. Followers should also keep in mind that borrowing must be based on a direct need. That means that Muslims are not permitted by Islam to request a loan for an unnecessary extravagance like a car or home.

Many Muslims have access to a charitable fund — known as “Zakat” — in order to more easily avoid bankruptcy. This fund works through what most of us would define as tithing, although the money donated to the pool is less than the customary ten percent. 

According to Islamic texts, “Whoever takes the money of the people intending to destroy it, God will destroy him.” That means that a person might be judged based on his or her use of money during life on Earth.

When repaying a loan, it’s important to put the family’s well being above all else. This leads to a situation during which bankruptcy is most common for Muslim followers, because sometimes bankruptcy has fewer life-changing consequences for a single family than poverty and debt. There is a single important caveat: even when declaring bankruptcy, a Muslim follower is still expected to repay the debt that got him or her there in the first place. Agreements are an important part of Muslim faith, and they must be upheld no matter what.

When filing for bankruptcy, Muslim followers are also expected to try very hard to arrange for financial assistance or an installment plan as long as a mutually amenable agreement can be made with the original lender. In some rare instances, a debt might be waived under local laws. Ultimately, it comes down to the abilities of the person who must pay off a debt and why the debt was taken on in the first place.