The World Bank Legal Review Volume 5 Fostering Development through Opportunity , Inclusion , and Equity

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HDEEL ABDELHADY
The failures of large fi nancial institutions in 2007 and 2008 revealed the inadequacy of existing insolvency regimes to resolve failed fi rms while limiting the impact to the fi nancial system, public funds, and market confi dence. 1 In response, governments have studied and adopted measures to be er manage the insolvency of fi nancial institutions, with a focus on systemically important fi nancial institutions (SIFIs) and a ention to smaller fi rms. In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act created a special framework for the resolution of systemically important fi nancial companies. 2 In the United Kingdom, the Banking Act 2009 established a Special Resolution Regime to facilitate the swift and orderly resolution of failed fi rms. 3 Multilaterally, the G20 Financial Stability Board has moved to strengthen and standardize resolution frameworks. 4 These measures share common policy objectives; namely, the timely detection of risk, early regulatory intervention, the avoidance of government bailouts and related moral hazard, and enhanced market discipline. 1 In this chapter, Arabic terms such as mudaraba, mudarib, and Shari'ah appear with alternative phonetic spellings, due to diff erences in spelling between the author and some quoted sources. Because the diff erences are minor and the meanings remain clear, source spellings are intact. The terms Shari'ah and Islamic law are used interchangeably. In this chapter, OLA, a substantively harmonized and administratively managed resolution regime, is discussed as a framework of reference for the design of insolvency regimes for Islamic banks, which, like some fi nancial companies subject to OLA, straddle banking and capital markets and are well-suited for insolvency frameworks that combine banking and capital market rules and administratively managed insolvency processes Notably, Islamic banks and other Islamic fi nancial institutions have been absent from recent discussions on the resolution of failed banks. 5 This is not unexpected. Islamic fi nancial institutions are not-individually or collectively-suffi ciently large or interconnected to qualify for SIFI status. 6 But there is no reason to wait for Islamic banks to become systemically important to adopt regimes for their resolution. Islamic banks are not yet "too big to fail," but they are too young to risk failure. 7 Many governments, in Muslim-majority and other jurisdictions, have embraced Islamic banks, but only half-heartedly: they have taken steps to a ract funds through Islamic fi nance, but have yet to construct the legal and regulatory infrastructure needed to support its sustainable growth within their borders. This approach has proved passable, but it is neither legally sustainable nor economically optimal. Particularly in Muslimmajority jurisdictions, Islamic banking has the potential to boost economic and fi nance sector development and fi nancial inclusion. To realize this potential, enabling legal and regulatory environments are required to facilitate the sustainable growth of Islamic banking. Such environments must include insolvency regimes for Islamic banks that, like other well-crafted regimes promote market confi dence, allow for early detection of risk and regulatory intervention, and impose market discipline on Islamic banks and their counterparties, including by necessitating, if not mandating, improved disclosure and contracting practices. 5 Although the World Bank and the Islamic Financial Services Board (IFSB), an Islamic fi nancial services standard-se ing body, have explored "[e]ff ective insolvency regimes for Islamic fi nancial institutions," with a focus on framing some of the issues. Uncertainty as to the nature of Islamic fi nancial instruments and investor rights at default has had a chilling eff ect. For example, the sukuk market was adversely aff ected by a leading Shari'ah scholar's 2007 opinion raising doubts about the legality of some sukuk (commonly described as "Islamic bonds") then on the market. This chapter advocates the adoption of specialized, administratively managed (nonjudicial) resolution regimes for Islamic banks, for the following reasons: 8 • Insolvency regimes must mirror the unique features of Islamic banking; profi t-sharing investment accounts are discussed as an example of those unique features.
• Early intervention and expeditious resolution at failure are necessary to protect consumers, maintain confi dence in banks, and preserve the assets of failing or failed banks. These objectives would be best met through nimble, administratively managed processes rather than through the courts and subject to generic bankruptcy laws, particularly in jurisdictions in which the courts and/or insolvency laws are not suited for bank failures or where existing procedures might lead to ad hoc outcomes. 9 • Islamic banking is, where Shari'ah compliance is concerned, eff ectively self-regulating, at both the fi rm and industry levels. Self-enforced Shari'ah compliance is appropriate given the relative youth of Islamic banking and the potential innovation benefi ts of laissez-faire approaches. But because Shari'ah shapes all aspects of Islamic banking, self-regulation must be tempered by robust process-based and outcome-driven regimes that disallow the monopolization of information to an extent that regulators are limited in their ability to obtain, process, validate, and act on information pertinent to the health of Islamic banks.
Importantly, the positions advanced in this chapter are premised on the view that defi ning legal outcomes through specialized insolvency regimes for Islamic banks will propel-as a ma er of necessity-Islamic banks, standardse ing bodies, and regulators to improve existing Islamic banking regulation, with much needed policy direction and urgency.

Islamic Banking
Islamic banking has grown rapidly in the past 35 years, 10 reaching an estimated value of $ The growth of Islamic banks should be welcome. They have the potential to facilitate fi nancial inclusion, including by meeting the needs of fi nancially marginalized individuals and small and medium-size enterprises (SMEs) and capturing assets traditionally beyond the reach of formal economies. According to the World Bank, approximately "2.5 billion adults lack access to formal fi nancial services, limiting their ability to benefi t from economic opportunities, improve their health and education, and raise their income levels." 17 In the Middle East and North Africa, a natural market for Islamic banks, "only 18% of adults have a bank account." 18 In Egypt, the most populous Arab state, fewer than 10 percent of Egyptians have bank accounts, according to some estimates. 19 In Indonesia, the largest Muslim country by population, SMEs "are facing a credit crunch," notwithstanding the relative liquidity of Indonesia's commercial banks. 20 In other majority-Muslim jurisdictions, the market poten- With the growth of Islamic banking and its potential comes the need for substantively appropriate regulation and eff ective enforcement. An International Monetary Fund (IMF) study on Islamic banks and fi nancial stability found that "Islamic banks pose risks to the fi nancial system that . . . diff er from those posed by conventional banks . . . [due to] the specifi c features of Islamic contracts, and the overall legal, governance, and liquidity infrastructure of Islamic fi nance." 23 The same study concluded that large Islamic banks, compared to small Islamic and small and large conventional banks, were the least stable of the group. 24 "[L]arge Islamic banks . . . [had] signifi cantly lower z-scores [a stability measure] than small Islamic banks," while large conventional banks were found to have "signifi cantly higher z-scores than small commercial banks." 25 The growth of Islamic banks in number and size necessitates and underscores the importance of tailored regulation and insolvency frameworks.   25 Id., at 14 & note 12, noting that these fi ndings were at 1 percent. The authors indicate a positive correlation between "greater income diversity" (i.e., nonlending-based income) and increases in z-scores in large Islamic banks, "suggesting that a move from lending-based operation to other sources of income might improve stability in those banks." (Id., at 17.)

Islamic Banks in Practice
Four of the bedrock principles of Shari'ah that shape Islamic banking are • The prohibition of riba, a term commonly described as interest but that more broadly connotes the predetermination of fi xed and guaranteed returns with elements of excessive risk asymmetry 26 • Profi t and loss sharing (PLS) • The avoidance of gharar; that is, uncertainty to a degree that would obfuscate or frustrate economic or contractual purpose 27 • The avoidance of speculation As to the prohibition of interest , the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has a standard on the conversion of banks from conventional to Islamic that is emphatic. That standard requires as a prerequisite of conversion that "[a]ll traces of conventional transactions whereby the bank originated monetary assets and is liable to pay interest for them must be liquidated." 28 The prohibition of interest-the primary measure of profi t and marker for managing assets and liabilities in conventional banking-in principle distinguishes Islamic banks in all aspects of their operations.

Islamic Banking: Commercial Landscape
To compete with conventional counterparts, Islamic banks often benchmark profi t margins to prevailing interest rates (e.g., Libor), both in extending credit and in sourcing funding through deposits. For example, ijarah (lease fi nance) and murabaha (cost-plus-profi t sale-based fi nancing) transactions (on the asset side of the banks' balance sheets) are typically benchmarked to interest rates. On the liability side of the balance sheet, Islamic banks raise funds through 26 The concept of riba is well elucidated, as follows: [R]iba-a term literally meaning "an excess" and interpreted as "any justifi able increase of capital whether in loans or sales"-is the central tenet of the [Islamic] system . . . riba covers not only usury but also the charging of "interest" as widely practiced. This prohibition is based on arguments of social justice, equality, and property rights. Islamic law encourages the earning of profi ts but forbids the charging of interest because profi ts, determined ex post, symbolize successful entrepreneurship and creation of additional wealth, whereas interest, determined ex ante, is a cost that is accrued irrespective of the outcome of business operations. . . . Social justice demands that borrowers and lenders share rewards as well as losses . . . and that the process of accumulating and distributing wealth in the economy be fair and representative of true productivity. PLS-based investment accounts (discussed below), which often are managed to achieve competitiveness with conventional interest-bearing deposit accounts. 29 Such practices have not gone without criticism. Both from within and outside the Islamic fi nance industry, Islamic banks have been accused of mimicking conventional products, rather than providing truly Shari'ah -compliant off erings. Critics often cite the practice of benchmarking profi ts to interest rates as proof. Some Muslim consumers are skeptical as to the authenticity of Islamic banking products and refrain from Islamic banking for that reason.

Legal Landscape: Gaps and Gray Zones
Most of the jurisdictions in which Islamic banks operate, including those in which Shari'ah is a source of law, have yet to adopt comprehensive legal frameworks tailored to Islamic banking. Where Islamic banking contracts have been litigated under civil law, results have been confusing and unhelpful to the extent that litigation has not yielded Shari'ah precedent. 30 Although standardse ing bodies such as AAOIFI and the Islamic Financial Services Board produce helpful frameworks, these frameworks are generally nonbinding and are not always timely. 31 As noted above, Islamic banks are largely self-regulating where Shari'ah compliance is concerned: substantive decisions as to the Shari'ah soundness of products and governance are made by Shari'ah supervisory boards that comprise Shari'ah scholars who are recruited and remunerated by the banks they supervise and whose decisions are often proprietary. Such defi cient and sometimes incongruous legal environments breed ambiguity as to the rights and obligations of Islamic banks and their counterparties, generally and at insolvency. The profi t-sharing investment account (PSIA), a deposit product that yields no interest but is often managed to compete with interest-based deposits, is discussed here as an example of the issues that exist and can arise in jurisdictions lacking clear Islamic banking regulation and insolvency regimes.

PSIAs: A Unique "Liability" of Islamic Banks
Like their conventional counterparts, Islamic banks rely on customer deposits as a source of core funding. However, Islamic banks do not off er interest or other fi xed, guaranteed returns on deposits (demand deposits 32 and others), but rather provide nonfi nancial incentives to current account holders, such as bill payment, checkbooks, and debit cards. 33 Of interest here are PSIAs, which, from the consumer perspective, are functionally similar to, for example, conventional savings or certifi cate of deposit accounts. 34 Based on mudaraba, 35 PSIAs are of two kinds: "restricted" and "unrestricted." 36 They constitute a 32 Current (or checking) accounts are known as amanah accounts. Amanah, an Arabic term, means, inter alia, "trust," and its defi nition includes "deposited in trust" and "a deposit. PSIAs are generally available to all classes of customers, regardless of sophistication, and often with relatively small opening or minimum balance requirements. 38 Funds deposited are pooled with bank funds and invested by the bank at its discretion. Profi ts, if any, are distributed between the bank and PSIA depositors, according to pre-agreed-on percentages. Risk between the bank and PSIA depositors must be shared coextensively. According to AAO-IFI: It is not permissible for the capital provider to give the mudarib two amounts of capital on condition that the profi t earned on one of the two amounts would be taken by the mudarib while the capital provider would take the profi t earned on the other amount. It is not also permissible for the capital provider to state that the profi t of one fi nancial period would be taken by the mudarib and the capital provider would take the profi t of the following fi nancial period. 39 Similarly, it is not permissible to assign the profi t from a particular transaction to the mudarib and the profi t from another transaction to the capital provider. 39 Interestingly, however, AAOIFI provides that "when loss is incurred in one mudarabah operation, it can be covered from the profi ts of other operations, and if it exceeds the profi ts it should be covered from capital. What should really ma er is the fi nal result of the liquidation at the end of the fi nancial period specifi ed by the institution." AAOIFI 40, supra note 31, at para. 3/2/1. Shari'ah merits aside, this allowance should come with explicit requirements for disclosures to PSIA depositors and regulators and policies for management and accounting.
40 AAOIFI 13, supra note 35, at para. 8/6. The Shari'ah requirement of coextensive risk is elemental. For example, in agricultural investment and sharecropping, the "Prophet [Muhammad (PBUH)] . . . prohibited speculative sharecropping arrangements, such as agreements giving parties rights to yields from specifi c tracts of agricultural land or specifi c produce from sharecropped land . . . [and] required that parties agree to apportion the total agricultural produce, whether in percentages or by other measures." Hdeel Abdelhady, Islamic Owing to their nature and objectives, PSIAs have been likened to openended mutual funds and other collective investment schemes. But because they are off ered by deposit-taking banks, regulatory classifi cation of PSIAs varies. In the Dubai International Financial Centre, PSIAs are classifi ed specially for regulatory purposes. In the United Kingdom, bank-off ered PSIAs are treated as "deposits," a classifi cation necessitated by the deposit-taking function of the off ering bank but incompatible with the nature of the product. 41 AAOIFI describes PSIAs as "demand deposits" in one standard, 42 and likens the role of mudarib to an asset or fund manager in another standard. 43 In theory, PSIA depositors bear the risk of loss of principal, except in cases of bank negligence, misconduct, or breach of contract. Therefore, no reserve requirement a aches to PSIAs. 44 In reality, however, Islamic banks engage in "return smoothing" to avoid depositor withdrawals in response to losses and to achieve parity with returns off ered by conventional banks. They do this by various means, including • Maintaining profi t equalization reserve (PER) accounts and investment risk return (IRR) accounts, essentially rainy-day funds in which excess periodic profi ts are held to cover periodic profi t shortfalls and capital losses 45 • Deducting from profi ts owed to shareholders to bolster returns to PSIA depositors 46 The transfer of profi ts from shareholders to PSIA depositors is known as displaced commercial risk, because the risk of loss is "displaced" to shareholders to maintain a competitive position. 47 PSIAs raise a number of issues for Islamic bank insolvency and supervision, not only because of the risk of loss borne by depositors, but also because of the way these accounts are managed. The Dubai Financial Services Authority (DFSA) highlighted some of these issues in its comments to the G20 Financial Stability Board on eff ective insolvency regimes for SIFIs: The structures used in Islamic fi nance raise substantial questions [in insolvency] about depositor preference and deposit insurance. A common structure in Islamic banking is the . . . (PSIA), which in market terms plays a similar role to a conventional deposit account. It is in principle an investment product, in which both return and principal are at risk, but in practice, banks use various smoothing mechanisms to provide a return very similar to a conventional deposit and often mirroring conventional interest rates in the same market. Some regulators therefore follow the underlying principle, and treat PSIAs as investments; others treat them as deposits. Views in this area tend to be strongly held, and the situation is further complicated by the fact that there has been no legal test of this position in an insolvency. 48 In addition to the classifi cation of PSIA accounts, determinations of depositor preference, and rights to deposit insurance (where available), important questions about PSIA depositor treatment vis-à-vis Islamic banks, nondepositor creditors, and other PSIA depositors must be addressed. 49 For example, should less sophisticated PSIA depositors be treated more favorably than their more sophisticated counterparts? Retail consumer protection would require this result. 50  50 Consumer protection and the maintenance of market confi dence would justify strict disclosure requirements and depositor priority preferences tied to the relative sophistication of PSIA holders, using, for example, proxy measures of "sophistication," such as the net worth or annual income criteria, applied to determine accredited investor status in the because they assumed risk of loss? If so, are prevailing standards of disclosure suffi cient to justify this outcome? 51 If yes, would the policy objectives of consumer protection and market confi dence outweigh a contract-based assignment of responsibility at insolvency? 51 Typically, parties that contract for the least risk (e.g., secured creditors) are accorded higher priority in bankruptcy. Shareholders, commensurate with their risk and presumed exertion of control, have low priority. In such creditor hierarchies, PSIA depositors occupy a legal no-man's-land because they share risk like shareholders but have no control and are treated as depositors but have no capital certainty.
52 Related to these questions are AAOIFI standards on the realization of distributable profits, including that "realization of profi t in investment accounts does not take place before protecting the capital" (AAOIFI 40, supra note 31, at para. 3/1/1); "[r]ealization of profi t in investment accounts does not take place before . . . [inter alia] [l]iquidation of mudarabah assets, which can be either actual liquidation . . . or legal liquidation" (id., at para. 3/1/2/1); "[i]t is permissible to pay advance amounts to the holders of accounts before actual or legal liquidations so that fi nal se lement can be made later on [and] [a]fter actual or legal liquidation the institution is commi ed to make necessary additions to, or deductions from, the advanced amounts so that each holder of an investment account receives his exact share of the profi t" (id., at para. 5/3). As these and other mudaraba standards make clear, a ribution of entitlement to profi t requires meticulous and transparent accounting and reporting that is very specifi c as to, inter alia, time and fi nality.

Specialized Insolvency Regimes for Islamic Banks
Insolvency regimes for Islamic banks should refl ect the nature of Islamic banking, 54 comport with Shari'ah insolvency rules, and further Shari'ah-based objectives for market regulation. In dual jurisdictions in which Islamic and conventional banks operate side by side, considerations of judicial economy are particularly relevant. 55 The design of resolution regimes should compensate for any general weaknesses of legal and regulatory infrastructure, such as the inexperience or inadequacy of courts or regulators to expeditiously manage bank insolvencies in the absence of specialized frameworks.
In designing insolvency regimes for Islamic banks, it is not suffi cient to focus only on achieving convergence of Shari'ah and conventional insolvency rules. Shari'ah insolvency rules developed and applied in the context of single debtors, bilateral relationships, or relatively small groups are not, by themselves, suffi cient to inform resolution regimes for Islamic banks. Rather, Shari'ah insolvency rules must be interpreted in accordance with, and further the objectives of, Islamic legal and historical views of market regulation, which require that regulators be empowered to ensure lawful market conduct, impose market discipline, promote transparency, and protect consumers. Similarly, it is insuffi cient to examine conventional insolvency regimes applicable only to banks, because Islamic banking encompasses banking and capital market activities. The remainder of this chapter focuses on some fundamental Shari'ah insolvency rules, the nature and objectives of Shari'ah market regulation, and an example from the United States of a substantively harmonized, administratively managed insolvency regime. reserved in PER and IRR accounts could play in such an atypical performance, particularly at times in which PSIA depositor expectations for returns might be low (such as during a fi nancial crisis). Although it is accepted that Islamic banks were not directly exposed to losses incurred by conventional banks in the 2007-2008 period (an obvious explanation for the atypically be er return to shareholders), it is also accepted that Islamic banks typically yield lower returns to shareholders. Such issues underscore the need for robust, uniform accounting rules and practices, meaningful reporting requirements, and eff ective disclosure. Without verifi able information, the conclusiveness of some empirical analyses of Islamic banks' performance (however measured) is open to doubt.
54 Regulators need to decide whether to tailor insolvency frameworks to Islamic banking as understood in theory or as practiced, where there is divergence. As indicated above, Islamic banking theory and practice are not always or reliably the same. Presumably, regulators prefer that Islamic banking be truly Islamic, to justify and promote competition with and to secure the benefi ts of Islamic banking. But regulations must be practical. This is yet another policy question that is crystallized by insolvency considerations.
55 The author is aware of only two wholly Islamic banking systems, one in Sudan and one in Iran.

Shari'ah View: Insolvency (Tafl īs) and Regulatory Prerogative (Hisba)
Insolvency regimes for Islamic banks must conform to, or be compatible with, Shari'ah rules on bankruptcy (tafl īs) 56 and Shari'ah generally. But the extraction of rules from one area of Shari'ah (bankruptcy) without consideration of other relevant areas (market conduct and regulation) is an approach that lacks policy direction. This section discusses some of the basic elements of Shari'ah insolvency and market regulation, which together should inform policy choices on ma ers such as depositor and other creditor priority in bankruptcy.

Shari'ah Foundational Principles on Insolvency
Shari'ah bankruptcy rules share common principles with what are regarded as modern insolvency rules. The rules of tafl īs and varying opinions of classical Shari'ah scholars were articulated not long after the advent of Islam. 57 Islamic law recognizes insolvency as a legal status that triggers both creditor standing to bring claims and judicial authority to intervene in the fi nancial affairs of debtors. 58 Classical Shari'ah jurists recognized both balance sheet and cash fl ow insolvency, and courts (judges) were authorized to "interdict" debtors (declaring the debtor insolvent as a ma er of law) and prohibit the sale or other disposition of assets during the pendency of insolvency proceedings. 59 Shari'ah deals also with creditors' rights and respective priorities, but there are questions as to how those priorities would play out in contemporary practice. The DFSA has highlighted some of the issues: [W]e note that thinking about insolvency in the context of Shari'a law is at a relatively rudimentary level. . . . To give just one example, traditionally creditors are only those with matured debt, which clearly limits the ability of many who would normally be deemed creditors to take part in insolvency proceedings. One important feature of traditional Shari'a thinking is that all unsecured creditors rank pari passu, which clearly limits the ability to establish a hierarchy of claims. More work will therefore need to be done to consider 56 The Arabic tafl īs means bankruptcy or insolvency, or the "declaration of bankruptcy." Wehr Dictionary, supra note 32, at 850. how eff ective resolution regimes can be implemented in countries where Shari'a law is a signifi cant element of the legal system. There may also be instances in Islamic fi nance where Shari'a may be held to apply to particular transactions even within a common or civil law system. 60 The DFSA is correct, except that more work is needed to do more than just "consider how eff ective resolution regimes can be implemented in countries where Shari'a law is a signifi cant element of the legal system." More fundamentally, work is needed to fashion Shari'ah-compliant insolvency rules that refl ect the reality that Islamic banks deal with the public and intermediate on a large scale. Shari'ah-based market regulation is instructive in this respect.

Shari'ah-Based Market Regulation: Hisba 61
Islamic law and historical practice favor a strong role for regulators in se ing binding standards of market conduct and carrying out market supervision. The Islamic framework of government includes the offi ce of the market supervisor (al Muhtasib), the mandate of which is, broadly, "to promote good . . . and prohibit evil." 62 Bound by law and possessing delegated authority, the Muhtasib's function, like that of the modern regulator, is decidedly executive in nature. 63 The Muhtasib's powers are greatest in the areas of commerce and trade. 64 In the markets, the Muhtasib is duty-bound to promote transparency and market discipline, ensure lawful market conduct, maintain market confidence, and protect consumers 65 against unlawful and deceptive practices. 66 To achieve these ends, the Muhtasib is required to formulate rules based on practical knowledge of the marketplace. 67  At the same time, the Muhtasib, consistent with the principle of freedom of contract in Islamic law, respected market participants' contracts, so long as their transactions were understood by them and not harmful to others (in contemporary practice, this position would support, for example, strict disclosure and the restriction of some products to sophisticated consumers).
This brief description of the Muhtasib indicates that the role of the regulator, from the Shari'ah perspective, is clear, requiring practical regulation, consumer protection, responsiveness to market realities, and respect for the rights of qualifi ed parties to contract as they see fi t. The approaches and objectives of Shari'ah market regulation should be refl ected in insolvency regimes for Islamic banks.

Specialized Insolvency Regimes for Islamic Banks: Administrative Management and Substantive Hybridization
Because Islamic bank operations are complex in the sense that they encompass traditional banking and capital market activities, and because they off er sophisticated products to both sophisticated and unsophisticated customers, specialized regimes for their resolution should be multifaceted, with banking and capital market components and strong consumer protection objectives. 69 65 "Consumer protection was a core part of the muhtasib's job." Stilt, supra note 63, at 127, explaining that in Mamluk Egypt, "the [muhtasib's] appointment decree from the sultan focuses almost exclusively on market-related behavior, indicating a strong interest in commercial transactions. From the sultan's perspective, ensuring that the markets were running smoothly was more than a concern for the average person's welfare." An instructive example of such a specialized, substantively harmonized, and administratively managed framewor k is the Orderly Liquidation Authority (OLA) regime under Dodd-Frank. 70 The multiparty and multidisciplinary process by which OLA was formulated is also instructive because the process of designing Islamic bank insolvency regimes should include Shari'ah experts, regulators, standard se ers, and Islamic banks. 71 The remainder of this chapter discusses aspects of the OLA framework, with a focus on some of the powers of the FDIC as receiver (separately of deposit-taking banks and OLA-eligible fi nancial companies) and the treatment of insolvent broker-dealers (also a part of the OLA framework). 70 This chapter does not suggest that Islamic banks and OLA-eligible entities have the same operations or are exposed to or pose the same risks. It is important to note that orderly liquidation is a last resort option available only when it is determined that, inter alia, orderly liquidation is necessary to avoid damage to the fi nancial system and protect public funds from bailout scenarios. Furthermore, OLA-eligible fi nancial entities, particularly bank holding companies, conduct diff erent business lines through subsidiaries. Islamic banks conduct traditional banking and capital market operations via a single entity, and such organizational diff erences have implications at resolution. Finally, it is worth noting that the OLA framework has not been unanimously embraced; for example, doubts have been raised about the FDIC's ability to orderly liquidate fi nancial behemoths subject to OLA and the constitutionality of OLA itself.

FDIC Resolution of Deposit-Taking Banks
The FDIC-administered resolution regime 72 provides for a number of mechanisms that aid in furthering three primary policy objectives: • To maintain public confi dence in banks and the fi nancial system • To preserve and, where practicable, maximize failed bank assets and liabilities by, for example, the transfer of liabilities and assets to a healthy institution (purchase and assumption) or by establishing a bridge bank • To minimize the cost of resolution to deposit insurance funds 73 In addition, in FDIC resolution, the FDIC has the power to repudiate contracts, disallow claims, and recover assets fraudulently transferred up to fi ve years before or after its appointment as receiver. 74 Importantly, some of the FDIC's resolution powers (applicable in bank resolutions) are available, in modifi ed form, in orderly liquidation. 75 These and other aspects of the FDIC resolution process are a ractive for the relative fl exibility they provide. 76 In the case of Islamic banks, receivership powers similar to those of the FDIC, particularly the ability to repudiate contracts, transfer assets to healthy institutions, and establish bridge banks (or bridge frameworks), are important, particularly in cases in which Shari'ah bankruptcy rules might limit a failed or failing bank's ability to accelerate and recover against counterparties that are in default at or around the time of the bank's distress or insolvency. 77 The ability to transfer assets and liabilities to a healthy Islamic bank or to create a bridge bank is also important given the absence of (demand) deposit insur-72 The FDIC's role as receiver, and not as deposit insurer, is discussed in this chapter. In addition to the affi rmative powers of the FDIC in resolving deposittaking institutions (and its similar powers in the OLA context), the FDIC, as a ma er of case law and statute, has the authority to deem "improperly documented agreements" nonbinding on failed banks, an important tool for preserving assets and imposing market discipline. 79 In the Islamic banking context, imposition of market discipline through such authority would be particularly helpful in light of some of the suboptimal contracting practices that have become known. 80

OLA and SIPA Broker-Dealer Insolvency
The orderly liquidation framework encompasses insolvency rules and procedures for failed broker-dealers, a relevant element because Islamic banks engage in intermediation functions similar to those of broker-dealers that provide full (trade and advisory) and limited (trade and incidental services only) brokerage services. Some Islamic banks provide investment advisory, placement, and incidental services in various jurisdictions, including in the capacity of a mudarib and wakeel (agent under a wakala [agency] agreement). To the extent that Islamic banks place client funds and provide advisory services, the treatment and disposition of some customer accounts (particularly unrestricted mudaraba and wakala) will be an issue in insolvency. In connection with this, the United States Securities Investor Protection Act (SIPA) is relevant to the extent that it provides for an insurance program that protects the customers of certain insolvent broker-dealers and a specialized bankruptcy procedure for broker-dealers. 81 In bankruptcy (only Chapter 7 liquidation is available to broker-dealers), the Securities Investor Protection Corporation (SIPC) is 78 The insurability of PSIA deposits is questionable (risk is borne in principle by PSIA depositors), but some observers have advocated for insuring PSIA depositors in some fashion. As noted below, the SIPC's (privately funded) insurance fund for broker-dealers is an interesting model that might have relevance for Islamic banking where nondemand liabilities (i.e., PSIAs) are concerned. As to the ability of regulators to transfer liabilities and/or assets to healthy fi rms, regulators must have access to verifi able information about other fi rms in the market-this is yet another instance in which insolvency considerations highlight preinsolvency regulatory ma ers that need a ention.
79 This is a special defense of the FDIC to claims on a failed bank's assets. As the FDIC explains: "Like a bank regulator, the receiver must be able to rely upon the books and records of the failed fi nancial institution to evaluate its assets and liabilities accurately . . . unless an agreement is properly documented in the institution's records, it cannot be enforced either in making a claim or defending against a claim by the receiver. authorized to intervene and initiate (with court approval) a SIPA liquidation. 82 In a SIPA liquidation, the trustee (SIPC or a court-appointed trustee) is required to deliver securities (name securities) to customers of the failed brokerdealer, to the extent practicable. 83 This feature of SIPA-based insolvency refl ects two relevant objectives of the SIPA process: to promote continuity in market activity and to protect consumers. Both the SIPA and the SIPA-specifi c insolvency procedures for broker-dealers are worthy of consideration in the development of insolvency regimes for Islamic banks as a component of a harmonized resolution regime relevant to their capital market functions.

Conclusion
The story of the growth of Islamic fi nance and banking has been recounted many times, with good reason. In a relatively short period, Islamic banking has become an international industry, estimated to control more than $1 trillion in assets and with stellar growth projections. The potential of Islamic banks to contribute to economic and fi nancial sector development and fi nancial inclusion is well understood. But the full potential of Islamic banking will not be realized without adequate legal and regulatory support.
As Islamic banks continue to expand across borders and in size, the risks associated with Islamic banking will increase as a practicality of doing business. Islamic banking is too young to absorb the shocks of poorly managed bank failures. But it is suffi ciently mature to be understood and eff ectively regulated, including in insolvency. Owing to the nature of Islamic banking and the need for streamlined, expeditious resolution of failed banks, an administratively managed insolvency regime that combines laws appropriate to Islamic banks' various lines of business is desirable. One model for such a substantively harmonized, administratively managed regime is the orderly liquidation framework in the United States. Regulators, Islamic banks, standardse ing bodies, and other interested parties are well advised to undertake a collaborative process to develop and implement an insolvency regime for Islamic banks now, rather than to bear the reputational and economic costs of poorly managed bank failures in the future.