Small Business Bankruptcy Reform in the Arab World: Two Steps Forward, One Step Back

A remarkable wave of bankruptcy reforms has washed over the MENA region, from Morocco to Saudi Arabia.  News headlines have heralded these reforms as a great boon in particular to the thousands of SMEs that make up the bulk of these countries’ developing economies.  Upon closer inspection of the content of these reforms, however, when compared against global benchmarks recently developed by the World Bank, UNCITRAL, and other multi-national organizations, these reforms come up disappointingly short.  While they represent significant achievements and notable steps forward for business law in the region, all but one of these laws lack the most fundamental characteristic of an effective SME insolvency regime:  a non-negotiated discharge of residual, unserviceable debt. 

In my most recent paper, I explore the details of recent bankruptcy reforms in Saudi Arabia, the United Arab Emirates, Egypt, Morocco, Tunisia, Oman, and Bahrain (with a glance at pre-reform laws in Qatar and Kuwait).  I then chart the long historical arc of global bankruptcy law evolution, and I situate these MENA reforms only slightly to the right of center on that arc.  These new laws address the challenges facing large businesses in the late 1800s, coordinating negotiations among creditors and allowing a majority of amenable claimants to strike a deal to be imposed by law on holdouts.  In the latest MENA iterations, the super-majorities required to support such plans have been reduced in many cases to what seem to be manageable levels, and needless formalism has been swept aside to give way to swift, economical, and effective resolution of liquidation cases, in particular, which most proceedings to date have been (or quickly become).  

These are considerable advances for bankruptcy law in the MENA region, but it is not the boon for SMEs that recent headlines have suggested.  Small and especially micro businesses lack the value and its related negotiating leverage to attract the attention of their creditors, let alone to entice them into offering concessions to save a financially challenged entrepreneur.  Huge, country-sized conglomerates like AHAB and Sa’ad group can retain expensive advisers and credibly threaten to pull down billions of monetary units of investments with them if creditors allow them to fail.  In stark contrast to this, without the threat of a law-imposed discharge of at least part of their debts, SMEs have little to offer in exchange for relief, and creditors have little to lose in refusing to extend relief.

This is not news for those behind the recent reforms.  My paper reveals that modern benchmark recommendations for effective SME insolvency law have echoed the comments of analysts and reformers for years directed at Middle Eastern countries:  small entrepreneurs simply must have a path to a non-negotiated discharge of debt to learn from their mistakes and move forward with a clean slate and fresh start.  Not only do most of the recent MENA region reforms not offer a discharge of debt, they continue the long-criticized approach of imposing criminal liability on entrepreneurs for the all-but-universal practice of writing a check as a stand-in for a loan, and when that loan goes unpaid, not only collections court, but jail awaits the hapless drawer of that dishonored check.  This is not simply a bond that has not been honored; it is an abusive commercial practice that has run and will continue to run rampant over the region’s entrepreneurs.  Even this roundly denounced response to commercial distress was not entirely abolished in the latest reform efforts; instead, entrepreneurs were relegated to negotiating with their creditors for a potential softening of these hard laws, and relief is often conditioned on successful completion of a repayment plan.  This is no boon for SMEs and can hardly be expected to enhance the risk-tolerance and embrace of entrepreneurialism in the region.

Why is this, and is there a way to reconcile these traditionalist views on personal responsibility?  One of the most interesting revelations of my paper is that, while Islamic Law might explain the persistent absence of a mandatory discharge in MENA region bankruptcy laws, this is not an inevitable and invariable perspective on the straight path.  A prominent Shari’ah standard-setting organization has proposed an elusive balance between the sacred and the secular, announcing a legal technique that reconciles the imperatives of Islamic Law and the needs of modern business recovery legislation.  One country, Bahrain, has adopted this approach, demonstrating that a nation can be both pious and pragmatic in extending a discharge to financially overwhelmed entrepreneurs and SMEs.  

As it is, SMEs in the Arab world will likely be left to languish under the weight of debt burdens that economic volatility (and world pandemic) have made unserviceable, through no fault of the individuals affected.  The latest round of reforms, as impressive and notable as they are, fail to take the final, crucial, indispensable step toward effective bankruptcy relief for smaller entrepreneurs.  Islamic law experts and state authorities in Bahrain have shown that there is a respectable way, consistent with religious conviction, to confer a fresh start and rejuvenate these debtors for the benefit of all of society.  Perhaps the next round of reforms will see more of the bold, previously unthinkable steps that the Middle East has witnessed in recent weeks, as former foes come together to compromise for a common good.

Jason J Kilborn is Professor of Law at UIC John Marshall Law School, University of Illinois at Chicago.