Shariah legal framework for debt recovery practice in Islamic banking for financially constrained debtor

Abstract

This research discusses bank’s debt recovery practice focusing on Islamic banking and financially constrained debtors incapable of repaying debt due to having genuine difficulties. Since the law applicable to Islamic banking is derived from Shariah, it is important to ensure the debt recovery practice aligns with Shariah. In Shariah, incapable debtors are divided into darurah (necessity) and hajah (need), what differentiates these two is the level of hardship. In this research, both debtors are in difficulty but hajah still has income, not yet reaching darurah who do not have income, thus darurah must be prioritised. However, the researcher has found no specific parameter outlined by banks to categorise these types of debtors. In practice, banks and agency (AKPK) allow restructuring and rescheduling of payments for defaulters but requiring them to have income. This does not solve the problem of defaulters who lost their income. This research aims to investigate the practice of debt recovery in Islamic banking and other related agencies by observing approaches taken in cases involving incapable debtors from the aspect of implementation and legal framework. To achieve this objective, the researcher employed socio-legal research methodology by analysing documents from primary and secondary sources and interviews with executive officers of a bank and related agencies. The research findings found that incapable debtors with an income have provisions in the current debt recovery framework but not those who are not having income. Furthermore, Zakat allocations emphasise asnaf fakir and poor compared to asnaf debtors. Among the suggestions is establishing a cooperative fund with contributions from the government and central bank using donation proceeds from Islamic banks and public to solve the issue based on requirements adhering to the concept of VBI and maqasid Shariah. This could solve the problem of Muslim and non-Muslim debtors since Zakat is for Muslims.