Enhancing debt recovery process of Islamic banks using a Ju’alah -based decentralized model

Purpose This study aims to derive a compatible debt recovery approach for Islamic banks based on Ju’alah contract after identifying the key limitations of currently used approaches, such as inhouse debt recovery, outsourcing debt collection and debt factoring. Design/methodology/approach This paper uses qualitative research approach where data is collected from Shariah standards issued by the standard-setting bodies and regulatory authorities, product disclosure sheets, news, articles, books and annual reports. The data collected is analysed and reviewed to derive the proposed Ju’alah debt recovery model and other findings for this paper. To verify the Shariah validity and practical suitability of the model proposed in this paper, semistructured questionnaires have been distributed to collect opinions from the relevant stakeholders. Findings The study proposes a decentralised Ju’alah debt recovery approach where the bank offers a debt recovery task to an Amil (third party) based on unilateral acceptance through an announcement made in a dedicated loan recovery platform. Based on the responses from Shariah scholars and banking practitioners through semi-structured questionnaires, the study concludes that Ju’alah can be a Shariah compliant approach adopted by Islamic banks to facilitate the debt recovery by not burdening the debtor and fulfilling the Maqasid al-Shariah, will be more cost effective than the existing recovery methods. Originality/value It is anticipated that the findings of the paper would assist Islamic banks in exploring the possibility of using a decentralised Ju’alah debt recovery approach. Theoretically, as well as to the general society, this study provides an idea of a potential approach to a debt recovery mechanism in accordance with Shariah.