Shariah Financial Planning – Evening Crest Sdn Bhd

The concept of Islamic or Shariah financial planning is based on the incorporation of Shariah (Islamic law) rules and elements into the process of financial planning. Shariah rules and principles are positioned as the core of the application of financial planning, with Shariah rules and principles being observed and enforced throughout the process. Shariah financial planning may be defined as “a process of assisting clients in determining their financial goals and priorities and the resources to meet them optimally within the parameters of the Shariah.” Another definition is “the process of meeting life goals through the management of finances in accordance with the Shariah.”

Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.

Financial planning is undeniably important from an Islamic perspective; Muslims must be rich not only spiritually but also materially. Islamic financial planning is financial planning that in conformity to Shariah-compliant. The concept of Islamic or Shariah financial planning is based on the incorporation of Shariah (Islamic law) rules and elements into the process of financial planning. Shariah rules and principles are positioned as the core of the application of financial planning, with Shariah rules and principles being observed and enforced throughout the process. Shariah financial planning may be defined as “a process of assisting clients in determining their financial goals and priorities and the resources to meet them optimally within the parameters of the Shariah.” Another definition is “the process of meeting life goals through the management of finances in accordance with the Shariah.”
According to Shariah investment experts, Dr Ahcene Lahsasna, Shariah Financial Planning is an important topic in the Islamic finance industry. It covers a very practical area in the daily activities of the society who are involved in financial activities such as investment. Shariah financial planning can be understood from the position of Shariah on wealth and it is related to the management of wealth in various stages. A financial planner who engaged in advising a person carries on a business of analysing the financial circumstances of the person and provides a plan to meet that other person’s financial needs and objectives. This includes any investment plan in securities, whether or not a fee is charged in relation thereto. The advice should also be in Shariah compliance manner to address the concerns of the customers/clients.
Highlights of Shariah Financial Planning:
(a) Understand Shariah financial planning frameworks and how it is different from conventional along with pertinent issues and trends in the industry.
(b) Understand the systematic process of developing a Shariah financial plan.
(c) Comprehend how to construct and strategize a holistic Islamic financial plan.
(d) Appreciate the key aspect of shariah in financial planning.
(e) Understand the professional responsibilities and ethical conducts of an Islamic financial planner.
Definition of Financial Planning
Financial Planning is the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
Objectives of Financial Planning
Financial Planning has got many objectives to look forward to:
(a) Determining capital requirements- This will depend upon factors like cost of current and fixed assets, promotional expenses and long- range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
(b) Determining capital structure- The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt- equity ratio- both short-term and long-term.
(c) Framing financial policies with regards to cash control, lending, borrowings, etc.
(d) A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.
Importance of Financial Planning
Financial Planning is process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance can be outlined as:
(1) Adequate funds have to be ensured.
(2) Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
(3) Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
(4) Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.
(5) Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds.
(6) Financial Planning helps in reducing the uncertainties which can be a hindrance to growth of the company. This helps in ensuring stability and profitability in concern.

Actually, Financial planning is essentially a process, i.e. it is actually not a product. A It is popularly defined as the process of creating strategies to help clients manage their financial affairs to meet life goals and Shariah financial planning is a financial planning that is in conformity to Shariah laws (AL-Quran and As-Sunnah). According to Malaysia Financial Planning Council (MFPC) constitution defines it as a process or methodology of assisting clients in determining their financial goals, objectives and priorities and the resources to meet them in an optimal and practical manner. From the definition, we find the outcome of the process is to help the client achieve his financial goals and objectives. The product approach offers the financial products first and then trying to package them into a financial plan. The financial planning approach, in fact, does not assume a need as in the product approach. Goals and objectives are set based on current circumstances of the client. Since goals and objectives may vary over time, we can add that the financial planning process should be a never[1]ending process. The process described is comparable to identifying the characteristics of all the holes (problems) before selecting the plugs (solutions) to fit those holes which are more logical than the reverse way performed by financial solutions seller. Therefore, the financial planning is a process of meeting the goals of the client through a proper management of his finances and existing wealth. The advisor does not possess the finance or the wealth but only provide the advice base on his knowledge and skills, the determination of the financial goals and objectives are based on the available data gathered by the financial planner, in addition to that the financial planning is structured based on the current circumstances of the client whereby the financial planning is designed according to the existing wealth of the client. Itis very important to observe the proper matching between the condition and circumstances of the clients. The goals of the client may include buying or selling, saving or spending, education, starting a new business, restructuring an existing business, opening new windows for investment or planning for retirement, etc. From the above context we can identify the major parties involved in formulating the financial planning scope and framework which are:
(a) The personal financial planner – is an individual practitioner who provides financial planning services to clients and meets all competence, ethics and experience requirements of the profession.
(b) The client of the personal financial planner – is an individual who has accepted the terms of engagement by entering into a contract of services.
(c) The financial goals – is a quantifiable outcome aimed to be achieved at some future point in time or over a period of time.
(d) The existing wealth and resources of the client – is the existing wealth of the client is: “the existing resources of the client which include asset and liability.
(e) The financial plan provided by the personal financial planner – is the financial proposal provided by the personal financial in a comprehensive manner through an interactive process that has been designed in practical manner to meet the financial goal of the client within his existing resources.
Here, we shall be revisiting the most fundamental topics of financial planning process in conjunction with the practice standards in addition to some SHARIAH aspect of the financial planning and the mechanics of financial plan construction.
Topic of Discussions/Contents:
(1). Shariah Aspects and Framework on Financial Planning.
(2). Regulatory Framework and Shariah Guidelines for Financial Planners.
(3). Professional and Ethical Framework in Financial Planning.
(4). Personal Financial Statement and Cash Flow Management.
(5). Shariah Concepts in MUAMALAT.
(6). Risk Management and Wealth Protection.
(7). Investment and Entrepreneurship: Concepts and Planning.
(8). Zakat and Tax Planning
(9). Islamic Estate Planning
(10). Islamic Retirement Planning

(1). SHARIAH ASPECTS AND FRAMEWORK ON FINANCIAL PLANNING.

Prior to discussing the Shariah aspects of financial planning, it is necessary to understand the essential nature of financial planning itself. Financial planning, in the conventional sense, is a professional field concerned with assessing an individual’s or a firm’s current financial situation and his/her financial goals and planning the financial aspects of the strategy to achieve those goals taking into consideration all relevant factors. It involves the process of resolving the life goals of an individual or business, gathering relevant financial information, examining current financial status and thereafter, proposing a plan to realise the goals and implementing it in an objective manner. An individual’s financial goals can include buying a home, saving for children’s education or planning for retirement. Financial planning provides direction and meaning to a person’s financial decisions. It allows one to understand how each financial decision a person makes affects other areas of one’s finances. For example, buying a particular investment product might help one pay off mortgage faster or it might delay one’s retirement significantly. By viewing each financial decision as part of a whole, a person can consider its short and long-term effects on his life goals. Financial planning can also help one adapt more easily to life changes and feel more secure that one’s goals are on track. Necessary planning issues include gathering adequate and relevant data, assessing risk tolerance, complying with regulatory requirements and ethical and religious guidelines, and monitoring all circumstances affecting one’s personal financial plan. In this manner, financial planning involves insurance planning, investment planning, tax planning, estate planning, and retirement planning. Comprehensive financial planning involves an integrated approach to assessing the above planning areas and developing and then implementing a course of action for achieving individual, family or business financial objectives. It takes into consideration a person’s potential earnings, expected expenditure, accumulated assets, investment returns, and personal goals. Therefore, financial planning is a professional service provided to individuals and small firms, assisting in analysing and organising their financial affairs in realising their life goals. The core of financial planning practice is the planning itself, followed by implementation of the plan and then monitoring it. Usually, a person is not capable of accomplishing all the above himself, which involves making vital decisions about banking, insurance, investments, taxes, retirements and wills. Financial planners provide professional assistance to those who need guidance and counseling in handling the above.

The Shariah Dimension of Financial Planning

Financial planning is a field primarily concerned with decisions and activities related to finance. Because of this, the outlook of Shariah on wealth and finance is of importance in Shariah financial planning. At the outset, it should be understood that from the Shariah perspective, wealth, similar to other material resources given to man, is a trust, which should be used for his well-being and for the society at large. As dictated by the Shariah philosophy pertaining to wealth, it should only be used according to the guidelines provided by Allah, who is its real owner. Accumulation of wealth and spending it should be done in accordance with the Shariah criteria as the guiding principle at every level. Ways and means of earning wealth, depositing for protection, investing to seek its increase, as well as spending it on one’s food, clothing, housing, transportation, education, family and relatives, charitable and religious avenues, and finally, leaving one’s estate for distribution after death should all be conducted on the basis of the relevant Shariah guidelines. The purpose of human existence according to Shariah is to achieve sublimit of conduct thereby, attaining felicity in the hereafter. The world and what it contains are means accorded to man for preparation for this ultimate goal. Proper utilisation of assets should be done with the aim of achieving this end. All phases related to wealth including creation, accumulation, protection, purification and distribution of wealth should be undertaken with the aim of achieving success in this world and the hereafter. Financial planning for a Muslim should necessarily take this vital objective into consideration. Shariah financial planning therefore, is of a much wider scope and envisaged for a longer term in this sense, than conventional financial planning. It is the responsibility of a Shariah financial planner to help clients plan their finances in a way that ensures success in both worlds.

Shariah View on Spending

In modern economics, spending and expenditure is the natural path to equilibrium. Refusing to spend money constricts the circulation of money. In Shariah, spending does not mean lavish and extravagant living, but to put money and wealth in their proper places. The emphasis on spending rather than hoarding, in Shariah, should be understood in this context. Allah as the provider has entrusted wealth to man to use wisely, for his benefit and that of others. Wise spending requires making use of wealth responsibly and understanding it as the bounty of Allah. Financial planning is directly related to this aspect. One needs to know how to spread one’s expenditure over time. The time frame includes short term, medium term and long term. The Shariah perspective of spending requires Muslims to set their financial goals, and identify priorities, targets and costs.

Spending in this context does not imply undertaking current spending alone, but also meeting future spending to avoid situations where a person or his family may become constrained to demand others’ assistance. It is here that savings and investments become useful in financial planning. People set aside a surplus for future consumption by way of investing them wisely. However, this should be done in a way that does not result in the neglect of our duties towards other members of the society. Wealth given to us by Allah is not necessarily for our own use, but for the benefit of others as well. Thus, spending, which involves investment as well as charity in this sense, includes financial decisions for determining the best forms of investment for returns in this world and the next. Spending may not be performed in an excessive manner also. Allah, as stated in the Qur’ānic verses (al-Naḥl (17):27 and al-Aʿrāf (7):31), condemns isrāf or wasteful expenditure. Some Islamic economists too recognize the prohibition of isrāf or the sanction against wasteful expenditure and consumerism as an important principle of Islamic economics.

(2) THE DEVELOPMENT OF SHARIAH FINANCIAL PLANNING

Islam, as a divinely revealed religion encompassing a complete way of life that aims at man’s success in this life as well as the hereafter, has given a complete code for human conduct in all spheres. It consists of three major areas that deal with beliefs, ethics and Shariah. Shariah rules on conduct embody a comprehensive treatment of laws relating to family, financial dealings, judiciary, crimes, government, international law and economics. Financial dealings are governed by an elaborate set of rulings relating to contracts, in general, as well as particular types of contracts such as sale, partnership, lease, agency, guarantee, etc. In addition to rules and regulations, an array of ethical guidelines deals with ensuring the ideal and commended practices relating to all dealings and transactions. These rules are called the MU’AMALAT law.

Financial planning, as an individual field related to the broader context of finance and management, is of recent origin. Financial planning, being a discipline related to assisting and regulating the process of making financial decisions, comes under the broad purview of Shariah rules and ethics. In addition to Shariah laws related to transactions, those relevant to wealth and finance, as well as financial duties and obligations, are applicable in financial planning. The financial planning process should also conform to the objectives of Shariah pertaining to wealth, as well as human existence. Thus, the distinct worldview advocated by Shariah too becomes intrinsically related to financial planning.

In order to keep abreast the continually developing discipline of financial planning, the Shariah guidelines applicable to it have to be constantly verified and the body of relevant Shariah material updated. As the audience for this information in general do not possess a background in Shariah studies, presentation in a simplified and readily understood format is also vital. This challenge is currently being addressed by Shariah scholars, and new courses are in the pipeline. Courses of study that is entirely devoted to treating this subject or books written exclusively under this particular heading of Islamic financial planning are still scarce. Nevertheless, with growing market demand, more advancement is expected in this direction in the near future.

Financial Planning Services in Malaysia

Islamic financial planning is the product of Islamic finance and financial planning. The Shariah Financial Planning Certification is one of the first comprehensive training and certification programme in the world to produce Islamic financial planners. Having said that, Islamic financial planners are crucially needed to provide the service of advising clients on how to plan and acquire wealth including financial assets that are Shariah compliant. Financial Executives (FEs) in Islamic banks and in institutions providing UNIT TRUST and TAKAFUL, need to have this qualification in order to provide a better delivery service in comparison to the conventional financial institutions. Financial planning is a regulated activity, requiring a license from the Securities Commission Malaysia (SC) as per Schedule 2 of the Capital Markets and Services Act 2007 where the Act stated that: Financial planning means analyzing the financial circumstances of another person and providing a plan to meet that person’s financial needs and objectives, including any investment plan in securities, whether or not a fee is charged in relation thereto.

To be a representative of a financial planning company, the person must hold a Certified Financial Planner (CFP), Financial Planners and Advisers Association (FPA) or Registered Financial Planner (RFP) qualification. A qualified person for financial planning can apply to be a Capital Market Services License (CMSL) holder. He must have a minimum of 8 years relevant experience and a minimum net worth of RM50,000. An SC-licensed person is also required to fulfill the Continuing Professional Education (CPE) requirements. Twenty CPE points per year is required for license renewal.

The Continuing Professional Education (CPE) is required to maintain a professional competency and skills up to the expectation of the industry and regulators. The CPE is a form of training, workshop, talk series, provided to the participants in issues and matters related to the scope of the financial planning to ensure high quality and proper standards are met. The CPE are provided by license bodies, where they announce from time to time programme with relevant points. The participant will collect certificate that carry the said points after the programme as evidence.

With SC’s licensing requirement for financial planners, in future, it will be more rewarding for Islamic financial institutions to recruit FEs possessing certification as Islamic financial planners.

The development of Shariah financial planning in Malaysia is linked to the development of conventional financial planning. The financial planning concept in Malaysia was initially related to the insurance sector, before developing into individual field. With the advancement of the insurance industry, insurance organizations perceived the need for professional courses designed for training personnel in the field of financial planning. The National Association of Malaysian Life Insurance and Financial Advisors (NAMLIFA), then known as the National Association of Malaysian Life Insurance Agents (NAMLIA) introduced the first course in 1996 for its members through the Financial and Life Practitioners Council (FLPC), known then as the Life Practitioners Council (LPC). This professional level course, called the Fellow Chartered Financial Practitioner Program (FChFP), was fairly comprehensive, and addressed the needs locally. The second program was introduced by the Malaysian Insurance Institute (MII) in 1997 as Chartered Financial Consultant (ChFC). Both these programs were generally perceived as courses designed for insurance agents and were mainly led by the insurance sector.

Despite the availability of these programs, financial planning services in Malaysia were generally product-centred, where the emphasis was on marketing of specific products. A specialized approach to offering financial planning services that focused on the needs of clients was felt by professionals. In order to fill this gap, the Financial Planning Association of Malaysia (FPAM) was formed in 1999, comprising members from the fields of unit trusts, stock broking, law and accounting, in addition to insurance. It was awarded the licence to conduct CFP (Certified Financial Planner) examinations by the CFP International Council in September 1999. FPAM introduced its inaugural Islamic Financial Planning certification starting in 2008. In December 2008, its second batch of students took their IFP certification examination.

The Malaysian Financial Planning Council (MFPC) was formed in 2002, with a view to represent the financial planning profession in Malaysia and developing a professional level designation program. Promoted by LIAM, NAMLIFA and MII, the MFPC awards the Registered Financial Planner (RFP) designation. Holders of FChFP and ChFC may apply for conversion to RFP. MFPC aims at becoming the national body responsible for unifying financial planning services and strengthening the accountability, conforming to laws, regulations and ethics in the profession.

Table 1(a) below provides a synopsis of the development of financial planning services as a profession in the US and Malaysia.

Synopsis of the Development of Financial Planning Services in Malaysia

Year	Development
1969	International Association for Financial Planning (IAFP) is formed as a trade association involved in promoting financial planning.
1970 onwards	Colleges and Universities start undergraduate and master level courses in financial planning.
1972	College of Financial Planning is originally established to award the CFP designation.
1973	Institute of Certified Financial Planners (ICFP) formed by CFP designees.
1980	The American College (then the American College of Life Underwriters) offers Chartered Financial Consultant (ChFC).
1987	American Institute of CPAs (AICPA) develops the Personal Financial Planning Specialist program.
1996	National Association of Malaysian Life Insurance and Financial Advisors (NAMLIFA) introduce the Fellow Chartered Financial Practitioner Program (FChFP) designation program in Malaysia.
1988	Financial Planning Association of Singapore (FPAS) introduces CFP program in Singapore.
2001	Asia Pacific Financial Services Association (APFinSA – formerly Asia Pacific Life Insurance Council) adopts the FChFP as the joint professional financial practitioner designation for its members.
5 Nov, 2002	Governor of Bank Negara Malaysia launches the Registered Financial Planner (RFP) designation organized by the pro tem committee of the MFPC.
2003	APFinSA recognises FChFP designees from Malaysia and Singapore
10 Mar, 2004	MFPC registered as an association.

Licensing Criteria under Section 4: Fit and Proper

(1) Persons who apply to be licensed under the CMSA must be fit and proper, as set out in Section 64 and 65 of the CMSA. In assessing if you are fit and proper, we refer to the following criteria:

(a) Your organisational requirements;

(b) Your shareholding composition;

(d) Requirements relating to representatives’ competencies.

In assessing a licence application, the SC is also guided by relevant policies and guidelines, such as the policy on permitted activities for stockbroking companies and the Guidelines on Investment Banks.

(2) Every CMSL applicant will be required to submit its business model and scope of activities that it plans to carry on.

The Requirements for a CMSL Organisational Requirements Incorporation

(a) If you want to carry on any of the following regulated activities, you must be a company incorporated in Malaysia:

(i) Dealing in securities;

(ii) Dealing in derivatives;

(iii) Fund Management;

(iv) Dealing in private retirement schemes;

(v) Advising on corporate finance; and

(vi) Investment advice.

However, if you want to carry on the regulated activity of financial planning, you may do so either as a company, sole proprietorship or partnership. If you are a sole proprietor or in a partnership, you will be granted a CMSL but you will not be allowed to have any licensed representative acting on your behalf.

Member of an Alternative Dispute Resolution Body

CMSL holders who carry on one or more of the following regulated activities are required to be a member of an alternative dispute resolution body that is approved by the SC under the Capital Markets and Services (Dispute Resolution) Regulations 2010:

(a) Dealing in securities;

(b) Dealing in derivatives; and

Organisational competence

(3) As a CMSL applicant, you must ensure that your business is properly established, which includes the following:

(a) An organisational structure with clear lines of responsibility and authority;

(b) Necessary IT systems and infrastructure;

(d) Risk management policies and processes;

(e) Policies and processes on conflict management and the monitoring of unethical conduct and market abuse; and

(e) Policies and procedures to ensure compliance with applicable laws and regulations

(4) In situations where you want to carry on more than one regulated activity, you must demonstrate that you have:

(a) the requisite system and procedures to monitor all relevant activities within your organisation; and (b) control procedures in place to monitor any conflict of interest, unethical conduct and market abuse.

Shariah Financial Planning in Malaysia

Financial planning services provided to the public in Malaysia as well as educational programs offered on the subject are planned in general to suit clientele from all ethnic and religious backgrounds. They have usually not been customised to reflect the distinct aspirations or life objectives of any specific community. Consequently, the requirements of Muslims who are bound by the Shariah and wish to conduct their dealings and financial activities under Shariah guidelines are not satisfactorily addressed in the existing financial planning framework.

As a country with a predominant Muslim population, it was felt that a curriculum should be developed with the aim of fulfilling the demand of the Muslim populace of Malaysia, where their life-pattern and objectives are taken into consideration, and financial planning services that fit into the Shariah criteria are offered.

With this aim in mind, several attempts have been made so far by different organisations to provide a financial planning program that suits the Muslim clientele. To train financial planners who are sufficiently aware of the necessary Shariah background, some private entities related to wealth management and investment, such as Hijrah Wealth Management, has introduced courses that deal with Islamic aspects of financial planning. The Financial Planning Association of Malaysia recently began offering an Islamic financial planning programme.

With a view to offering a program that is more comprehensive and one that addresses the relevant Shariah issues while giving sufficient grounding on the conventional aspects, the Malaysian Financial Planning Council (MFPC) has initiated a full-fledged and independent Shariah financial planning program. This program is designed to award the Registered Financial Planner (RFP) Certificate and is expected to fulfil the demand in Malaysia and the region for professional Shariah financial planners. All aspects of financial planning related to regulatory controls, financial statements, ethics, risk management, investment, tax, estate, retirement, etc; are treated together with the relevant Shariah guidelines, providing the student with a broader perspective on offering financial planning services in Malaysia.

(4) DEFINING FINANCIAL PLANNING AND SHARIAH FINANCIAL PLANNER

Personal Financial Planning Defined

International Organization for Standardization defines personal financial planning as follows:

“Personal financial planning is an interactive process designed to enable a consumer/client to achieve his personal financial goals.”

Taking a goal-centred approach instead of the product-centred approach prevalent in the market, the MFPC constitution defines personal financial planning as “a process or methodology of assisting clients in determining their financial goals, objectives and priorities and the resources to meet them in an optimal and practical manner.”

A Personal Financial Planner is defined as “an individual practitioner who provides financial planning services to clients and meets all competence, ethics and experience requirements of the profession.” A client of a Personal Financial Planner is “an individual who has accepted the terms of engagement by entering into a contract of services.”

A financial goal is “a quantifiable outcome aimed to be achieved at some future point in time or over a period of time.”

4.2. Financial Planner as Defined by the Capital Markets Services Act (CMSA) Malaysia

The amendment to the CMSA 2007 describes a financial planner as “a person who carries on a business of analysing the financial circumstances of another person and provides a plan to meet that other person’s financial needs and objectives, including any investment plan in securities, whether or not a fee is charged in relation thereto.”

In the current practice, based on the range of services offered to clients by a practitioner, financial planners are sometimes classified into three categories:

(a) single-service financial planners

(b) multi-service financial planners

A single-service financial planner is a person who has only a single group of products to offer his clients, such as life or general insurance. He specializes in or represents one or two principals for products that belong to a single category. This may also be services such as stockbroking and real estate related services.

A multi-service financial planner commands a wider range of services, in that, he provides a broader combination of different classes of products and services to his clients. In Malaysia, the popular service combination of multi-service financial planners is mutual funds and, life and general insurance. Will-writing is sometimes provided as another service.

A comprehensive financial planner provides a full range of services to his clients. He considers all relevant aspects of the financial position of a client and uses his expertise in several professions and multiple sources of products to meet the client’s total financial needs.

However, this classification was based on the product-centred approach to financial planning that was prevalent in the early phases where the title of financial planner was used by persons involved in marketing various financial products. As such, in the correct context of professional financial planning, only the last mentioned, that is, the comprehensive service financial planner, would qualify for the title in the proper terms.
In terms of the scopes of financial planning, the main role of financial planners is to design financial plans that suit the needs of their clients. The advice can be in the form of comprehensive financial planning that deals with the whole range of issues in financial planning or ‘slice’ financial planning that focuses on certain segment of financial planning, for example, risk management and investment planning. Basically, services offered are in line with the content analysis of personal financial planning. There are 101 content areas suggested in the CFP Board’s current guide on CFP Certification The major headings are:

(a) General principles of financial planning

(b) Insurance planning and risk management

(d) Investment planning

(e) Income tax planning

(f) Retirement planning

(g) Estate planning

Corporate Financial Planning in Comparison to Personal Financial Planning

Corporate financial planning refers to the process of financial planning addressing firms and organisations that involves analyzing alternative investment, financing, and dividend strategies in the context of various potential economic environments. Planning involves forecasting both the outcomes of different strategies and their risks. In this manner, financial planning enables managers to improve their forecasts of important accounts of financial statements and better understand the interactions of investment, financing, and dividend decisions.

In developing a long-term financial plan for a firm, these three decisions (policies) can be described as follows:

(1). The firm’s investment decision. This refers to the amount of cash needed for the firm’s investment in a new asset (it is also called the capital budgeting decision). In addition, it also refers to the amount of working capital needed on an ongoing basis (also referred to as the working capital decision).

(2) The firm’s financing decision. This refers to new borrowing or new equity issued for financing the firm’s investment in new assets. This decision is influenced by the degree of financial leverage the firm chooses to employ and how it plans to raise the necessary new funds.

(3). The firm’s dividend decision. This refers to the amount of cash the firm thinks is necessary and appropriate to pay equity holders as cash dividends.

Defining Shariah Financial Planning

It was explained above that conventional financial planning is concerned with assisting clients to determine their current financial position and providing a practical strategy for achieving their financial objectives in life. Shariah financial planning, going a step further, aims at providing professional service to clients assisting them in designing a strategy for achieving their life goals within the framework of Shariah guidelines, thus ensuring their success in this world and the hereafter.

Instead of seeking financial gain in the short term, that is, in the life before death, it endeavours to bring the process of wealth creation, investment, preservation, and distribution under the overall values and principles of Shariah, for the betterment of the individual and the society. This involves bringing each stage of importance concerned with managing one’s finance within the boundaries of Shariah, in addition to complying with the additional duties imposed by Shariah on wealth. The latter includes modes of compulsory and optional charity such as ZAKAT, SADAQAH, and WAQF, planning for ḥajj pilgrimage, as well as, planning for division of estate according to the Shariah rules of inheritance.

Many definitions of conventional financial planning are formulated from the point of view of the professional. Adopting the same perspective, Shariah financial planning could be defined as “a process of assisting clients in determining their financial goals and priorities and the resources to meet them optimally within the parameters of the Shariah”.

From the perspective of the individual, Shariah financial planning can be defined as “the process of meeting life goals through the management of finances in accordance with the Shariah.” The reference to Shariah parameters excludes adopting ways and means that are repugnant to Shariah in any stage of planning and managing finances, while including the compulsory and recommended Shariah measures pertaining to finance such as zakāt, public good and fair dealing practices

Scope and Objectives of Shariah Financial Planning

The scope of the financial plan should extend over the client’s financial situation in a broad manner so that the plan may result in producing comprehensive financial planning recommendations. The recommendations could address all of the client’s needs (in budgeting and saving, tax matters, investment considerations, risk management, insurance planning, and estate planning) or if the nature of services required by the client is limited, be restricted to a single financial issue. However, this should be treated in the context of the client’s overall financial situation. Addressing a particular area without considering the client’s overall financial position could affect the client’s cash flow adversely, thus impeding the realisation of his financial objectives. In Shariah financial planning, the scope should be widened to cover the requirements and recommendations of the Shariah; thus, the plan would aim at the wellbeing of the client in the hereafter as well. The objectives of financial planning could be stated as follows:

(1). Providing direction and meaning to a person’s financial decisions;

(2). Allowing a person to understand how each financial decision affects other areas of his finances;

(3). Allowing an individual to adapt more easily to life changes and to feel more secure as a result;

In addition to the above, Shariah financial planning would incorporate an additional objective, which is, ensuring proper fulfilment of obligations and recommendations of a financial nature prescribed by the Shariah, and conducting the financial management process in a way compatible with Shariah precepts.

(5) THE FINANCIAL PLANNING PROCESS

During early Islamic period, the Islamic financial planning services has not been established as independent discipline as is prevalent today. The demand for financial planning requires the adoption of practices in the conventional setting to be adopted in line with the objectives of Shariah.

The personal financial planning process shall include, but is not limited to, six steps that can be repeated throughout the client and financial planner relationship. The client can decide to end the process before having passed all the steps. The process involves gathering relevant financial information, setting life goals, examining his current financial status and coming up with a strategy or plan for how he can meet his goals given his current situation and future plans.

The financial planning process consists of the following six (6) steps:

(1). Establishing and Defining the Client and Planner Relationship

The financial planner should clearly explain or document the services to be provided to the client and define both his and his client’s responsibilities. The planner should explain fully how he will be paid and by whom. The client and the planner should agree on how long the professional relationship should last and on how decisions will be made.

(2). Gathering Client Data and Determining Goals and Expectations

The financial planner should ask for information about the client’s financial situation. The client and the planner should mutually define the client’s personal and financial goals, understand the client’s time frame for results and discuss, if relevant, how the client feels about risks. The financial planner should gather all the necessary documents before giving advice the client needs.

(3). Analyzing and Evaluating the Client’s Financial Status

The financial planner should analyze the client’s information to assess the client’s current situation and determine what the client must do to meet his goals. Depending on what services the client has asked for, this could include analyzing the client’s assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.

(4). Developing and Presenting Financial Planning Recommendations and/or Alternatives

The financial planner should offer financial planning recommendations that address the client’s goals, based on the information the client provides. The planner should go over the recommendations with the client to help the client understand them so that the client can make informed decisions. The planner should also listen to the client’s concerns and revise the recommendations as appropriate.

(5). Implementing the Financial Planning Recommendations

The client and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as the client’s “coach”, coordinating the whole process with the client and other professionals such as attorneys or stockbrokers.

(6). Monitoring the Financial Planning Recommendations

The client and the planner should agree on who will monitor the client’s progress towards his goals. If the planner is in charge of the process, he should report to the client periodically to review his situation and adjust the recommendations, if needed, as the client’s life changes. 5.1 Essentials of a Comprehensive Financial Plan Every financial plan could take an individual form or order based on the unique financial situation, objectives and ambitions of a client. Nevertheless, the following elements should usually be included in a comprehensive financial plan, in addition to other factors deemed by the planner to be relevant to the particular client’s case:

(1). Personal data: Inclusive of family data, age, age of children, parents, etc.

(2). Client’s goals and objectives: A statement of the client’s established goals and objectives, in accordance with his priority, and the time frame for achieving each. These should be cast in as precise wording as possible.

(3). Identification of issues and problems: Should include personal and financial issues affecting the client, e.g. illness, cost of education etc, inclusive of hidden and future issues anticipated such as children’s marriages.

(4). Assumptions: Material assumptions made, inclusive of inflation, investment growth rate, income growth rate, etc.

(5). Balance sheet/net worth: Presentation and analysis should comprise a schedule listing assets and net worth.

(6). Cash flow management: Statement should include the client’s sources of funds and uses for the relevant years, as well as net cash flow, and an individual income statement.

(7). ZAKAT and Income tax: Statement and analysis should comprise, but not be limited to, income tax for all the relevant years. Forecasts should display the nature of the income and deductions in sufficient detail to allow estimation of tax liability.

(8). Risk management: The analysis should correspond to mortality, morbidity, liability and property.

(9). Investments: Should outline the current investment portfolio together with details of liquidity, diversification, and investment risk exposure. It should discuss the suitability of the investments in relation to the client’s needs and goals.

(10). Financial independence, retirement planning, education and other special needs: The analysis should include a projection of resources expected to be available for fulfilment of these needs in the future.

11. Estate planning: Identification of assets that could form the client’s estate and an analysis of the control, disposition and taxation of these assets.

(12). Recommendations: Clearly stated recommendations specifically addressing the goals and objectives of the client, and actions needed to cover any deficiency.

(13). Implementation: A list of steps needed to implement the recommendations, according to their priority, inclusive of the time to implement and the parties connected.

(6) ADDITIONAL ASPECTS RELEVANT TO THE SHARIAH FINANCIAL PLANNING PROCESS

In Shariah financial planning, the overall process would be substantially similar, with an important additional responsibility placed on the planner. It is that the relevant Shariah guidelines be kept in view by the planner constantly, and that the planner should ensure a contravention of Shariah guidelines does not occur at any stage of the development and implementation of the plan. Thus, the financial planner should avoid means of investment and deposit that are contrary to Shariah precepts. Involvement of interest and prohibited forms of insurance in the client’s finances should be checked. Proper discharge of financial obligations such as ZAKAT, expense of needy relatives, HAJJ, fulfilment of past debts, etc; should be duly planned for and diligently implemented.

In addition, he is required to educate the Muslim client on the Shariah procedures and requirements where relevant and ensure that these are duly fulfilled. The Muslim client’s awareness of these aspects should not be expected or taken for granted. It is the responsibility of the planner that the plan that is designed with his collaboration be free from any objection from a Shariah angle.

The Shariah financial planner should also reminded the Muslim client of the broader and longer term goals of Shariah that envisage success in the hereafter as well, and encourage him to enlarge his plan to include adoption of recommended charitable avenues, thus bringing good to the society at large. The tendency on the part of clients to be ultra-materialistic and restrict the financial plan to narrow personal gains should not be encouraged. The Shariah financial planner may attempt to recommend, where possible, spending on means of ṣadaqah and waqf endowments that result in creating an on-going chain of charities. The benefits and virtues of adopting such means can be emphasised, which according to the teachings of Shariah are not confined to the hereafter alone, but bring in worldly dividends as well.

The financial planning process comprising the six steps, together with additional aspects relevant to Shariah financial planning, can be summarised in the table 1(b) as follows:

Table 1(b): The Financial Planning Process

Proces	Description	Purposes	Additional Aspects
Step 1	Setting goals, objectives and priorities.	Establish where the client wants to go and arrange them in order of importance.	Why, when, where, and for whom assets are to be built; consider goals and objectives of a Muslim.
Step 2	Gathering relevant data and information.	Procure crucial information for determining the client’s situation.	Appropriate, accurate and complete information: not only quantitative, but also qualitative; information on Shariah obligations such as needy relatives.
Step 3	Analysing information and assessing financial status.	Identifying the client’s needs, resources, constraints and options.	Verify current net worth and current cash flow; determine current financial situation as indicated by financial ratios.
Step 4	Developing and presenting financial plan for implementation	Detailing the problems and solutions in a written format for the client’s consideration and actions.	The most important step for Muslims is to include zakat, hajj and other obligations, and include planning for risks, tax, investment, children’s education, avoid all prohibited means, retirement, estate, etc
Step 5	Executing the financial plan.	Getting permission and implementing the plan effectively and efficiently.	Selection of investment and other products; writing of wills; creating trusts; complying with Shariah criteria; recommending and engaging professionals in specific areas as required.
Step 6	Monitoring the execution and reviewing of the financial plan.	Checking and adjusting the execution to ensure goals and objectives listed are met.	Verifying plan is on track; evaluating plan, revising, and updating; reflecting on the current stage in life, and incorporating changes in life.

(7) SHARIAH POSITION ON THE PROFESSION OF FINANCIAL PLANNING

Financial planning can be examined from two perspectives, both of which are complementary. The first aspect deals with Shariah regulations governing human actions, such as spending, savings and investment. It sees that relations between economic agents, such as in contractual obligations are dutifully observed. It requires that economic choices be made on the basis of faith and knowledge so that the objectives of equity and efficiency are met. Thus, a Shariah financial planner should seek to ensure, as much as it falls on his shoulders, that choices pertaining to these activities are made, and operationally implemented, within Shariah parameters. Here, knowledge pertaining to Islamic regulations governing finance becomes vital. Financial planners should acquire such knowledge if they wish to advise clients on Shariah matters. This is also true of non-Muslim financial planners, whose contact with Muslim clients cannot be discounted.

The second pertains to financial planning as a profession. The Shariah position of engaging a financial planner from the perspective of the client, in the normal circumstances, would belong to the category of permissible actions. In the scale of importance, it would fall under taḥsīnī measures, which implies adopting what conforms to the best customs where efficiency is a virtue. Engaging a financial planner is a step taken in the direction of providing ease and comfort to the individual through assigning the task to a professional, rather than burdening oneself with it.

From the perspective of the financial planner, giving financial advice is permissible, as it helps protect the wealth and property of people. The contract of financial planning is based on leasing of service (ijārah al-ʿamal), where the client employs the planner to study his financial details and formulate a plan suitable for his needs in exchange for a fee (ujrah). If the aspect of implementation too is to be handled by the planner at any level, this could involve wakālah or agency, where the financial planner represents the client in transactions such as investment. The financial planner may charge a pre-agreed fee for his services.

Shariah Guidelines on Financial Planning as a Profession

It is common in the profession of financial planning that the financial planner earns introducer’s fees by making referrals. A financial planner earns commissions through recommending various investment products available in the market to the client. Where the financial planner earns an income through such means as a result of his providing financial planning services to his client, this should be done with the knowledge and approval of the client. As far as a Shariah financial planner is concerned, he should understand clearly that his status is primarily that of an employee and agent of the client. Therefore, his first priority should be to serve the best interests of the client, who has hired him to provide impartial advice on his financial matters. This may not be compromised under any situation. If the financial planner puts his earnings through referral fees and commissions as his first priority and jeopardises or compromises on the financial betterment of the client, he will be committing dishonesty in the eyes of Shariah.

The role of a Shariah financial planner should not be considered limited to merely distinguishing permissible financial activities from the impermissible. A Shariah financial planner should be conscious of his duty to contribute to the realisation of overall objectives of the Shariah, such as common welfare and reducing poverty. He should seek to make clients aware of their responsibilities towards relatives, outsiders, and the society in general.

(8) SHARIAH WORLDVIEW ON WEALTH MANAGEMENT PLANNING

Financial decisions made by individuals and societies and the goals they wish to achieve through wealth are necessarily based on the broader economic perspective adopted by them. It is known that various theories and approaches exist with regard to the economic background in issues relating to wealth and finance. In this sense, it is indispensable for a Shariah financial planner to have an understanding of the economic perspective of the Shariah and the position and function of wealth in it. As a preliminary step, it is necessary to understand some basic principles upheld by the Qur’ān and the Sunnah (prophetic guidance) that define the Shariah perspective of economics.

The Islamic Economic Objectives

The Shariah considers the economic activities of man lawful and meritorious, and approves of economic progress. It regards earning of livelihood in a righteous manner as an obligation of a secondary order. Despite this, however, economic activity is not the basic problem affecting humans according to the Shariah; and economic progress does not constitute the sole objective of human life. It is important to understand this fundamental difference between the theory of economics in Shariah and materialistic economics. According to the latter, livelihood is the fundamental problem of man and economic development is considered to be the ultimate goal of human life. In the economic theory advocated by Shariah, livelihood may be essential and indispensable, but it does not represent the true objective of human life.

It is due to this reason that while the Qur’ān criticizes monasticism and commands one to seek the bounty of Allah, it also warns against temptations and delusions of worldly life. This approach becomes clear when it is understood that in the perspective of Shariah, means of livelihood are merely different stages encountered in the human journey. The ultimate objective or destination is beyond them. The destination to be aspired is to attain sublimity in character and conduct, resulting in the felicity of the other world. Attaining this is the fundamental problem of man and the objective of his life. However, since achieving this end is possible only through traversing the path of this world, what is necessary for the life of this world also becomes essential. As long as the life path is traversed with the above objectives as the goal, means of livelihood remain as the bounty of Allah. However, if man loses sight of the objective, the very same means turn into delusions and trial. This is emphasised in the Qur’anic commandment: “Seek the other world by means of what Allah has bestowed upon you” (al-Qaṣaṣ (28): 77).

Reality of Wealth and Property

In the Shariah perspective, wealth is a creation of Allah in all its different forms and in principle, belongs to him. Thus, wealth, in reality is the property of Allah. The right to wealth enjoyed by man is only delegated to him by Allah. This is illustrated in the Qur’ān, where it is commanded: “Give to them of the property of Allah that he has given to you” (al-Nūr (24): 33).

This situation becomes clear when it is understood that human involvement in the attainment of wealth is limited to his exerting himself in the process of production and investment. The success of his effort is solely granted by Allah, for example, by making a seed grow into a tree and give fruit. This fact is further explained in the Qur’anic verse that refers to the creation of cattle that subsequently become the property of humans (Yā-Sīn (36): 71).

Thus, in Shariah, all forms of wealth are the property of Allah in principle, and the right to exploit this wealth has been bestowed by Him to humans. Thus, Allah is entitled to demand that man should exploit wealth subject to his commandments.

Thus, man has ‘right of property’ over the things he exploits, but this right is not absolute, arbitrary or boundless. It carries along with it certain limitations and restrictions which have been imposed by the real owner of the wealth. Wealth must be spent where He has commanded it to be spent and should not be in ways He has forbidden. The following verses of the Holy Qur’ān make this point clear:

“Seek the other world by means of what Allah has bestowed on you, and do not be negligent about your share in the world. And do good as Allah has done good to you, and do not seek to spread disorder on the earth” (al-Qaṣaṣ (28): 77).

This verse explains the Islamic point of view on the question of property. It places the following guidelines:

(1). Whatever wealth man possesses has been received from Allah;

(2). Man has to use it in such a way that his ultimate purpose should be the other world;

(3). Since wealth has been received from Allah, its exploitation by man must necessarily be subject to the commandments of Allah;

(4). A portion of wealth should be forwarded to others in obedience to the command of Allah to do good;

(5). Wealth should not be spent in forbidden ways that are likely to produce disorder on the earth.

This is what distinguishes the Islamic point of view on the question of wealth and property from the Capitalist and Socialist theories. Since the ideological background of Capitalism is materialistic, it gives man unconditional and absolute right of property over his wealth, and allows him to employ it as he likes. But the Holy Qur’ān has adopted an attitude of disapprobation towards this theory of property, in quoting the words of the nation of the Prophet Shuʿayb (peace be upon him). His people used to object:

“Does your way of prayer command you that we should forsake what our forefathers worshipped, or leave off doing what we like with our property?” (Hūd (11): 87).

These people used to consider property as really theirs and were hence convinced they should be able to do whatever they liked with it. The Qur’ān strikes at these very roots of Capitalism by referring to wealth as belonging to Allah, as in the verse quoted above, “Give to them of the property of Allah that he has given to you” (al-Nūr (24): 33).

The differences between the Islamic theory, and the theories of Capitalism and Socialism is that Capitalism affirms an absolute and unconditional right to private property whereas Socialism stand on the other end of the continuum by denying the right to private property. Islam, on the other hand promotes ʿadl or fairness. It accepts the right to private property but does not consider it to be absolute and unconditional.

Distribution of Wealth in the Islamic Economic System

It is necessary for a Shariah financial planner to understand how distribution of wealth in the Islamic economic theory differs from the Capitalist and Socialist theories. In the capitalist theory, wealth should be distributed over only those who have taken part in producing it, who are described in the terminology of economics as the factors of production. According to Capitalist economics, there are four factors – (a) Capital, (b) Labour, (c) Land (Resources), and (d) Enterpreneur:

Capital	Defined as ‘the produced means of production’, which means a commodity that has already undergone one process of human production and is again used as a means of another process of production
Labour	Any exertion on the part of man.
Land	Defined as ‘natural resources’ i.e. things which are used as means of production without having previously undergone any process of human production.
Enterpreneur	Alternatively, organization. This is the factor that brings together the other three factors, exploits them and bears the risks of profit and loss in production.

Under the Capitalist economy, the wealth produced by the cooperation of these four factors is distributed over these very four factors themselves in the following manner: one share is given to capital in the form of interest, the second share to labour in the form of wages, the third share to land in the form of rent or revenue, and the fourth share, or residue, is reserved for the entrepreneur in the form of profit.
In the Socialist theory, capital and land, instead of being private property, are considered to be national or collective property. Therefore, the question of interest or rent (revenue) does not arise in the philosophy of this system. Under the Socialist system, the entrepreneur too is not an individual but the state itself. Thus, profit, too, is not relevant, at least in theory. Now, there remains only one factor, which is labour. Therefore, labour alone is considered to have a right to wealth in the Socialist system. This wealth comes in the form of wages. As for wealth distribution in Islam, it divides wealth ownership into two categories:
(1). Those who have a primary right: This refers to those who have a right to wealth directly as a consequence of their participation in the process of production.
Example: Wages and salary from employment or profits from investment in production process.
(2). Those who have a secondary right: These are those who did not take part in the process of production directly, but who have been assigned a share in the wealth of the producers.
Example: Property acquired via HIBAH, WASIYYAH and FARA’ID.

As far as those who have a primary right to wealth (the factors of production) are concerned, their nature and classification is different in the Islamic system.

Capital	Refers to only those means that are spent, consumed or altered in the process of production, such as, money and foodstuff.
Land	Those means that remains unaltered in the process, such as, land, houses, machines etc that can be leased.
Labour	Human exertion in any form that includes organization and planning as well.

The return to each factor of production as defined in the Shariah-based economic system can take different forms, based on the nature of the factor. If capital is extended towards production in the form of a loan (QARD), it will be immune from sharing any loss, and will be recoverable in full. However, in this instance, it will not be entitled to any return over and above the original amount. Only the amount lent can be reclaimed by the lender irrespective of whether the final outcome of the production process is profit or loss. This is because the advancement, being in the form of a loan, did not bear any liability for loss.
Entitlement to profit is upheld in SHARIAH only when liability for loss too is borne.
On the other hand, if the capital was invested in the production process with undertaking of risk and liability, it will be rewarded with a share of profits, if profits are realised. In case of loss, the loss will be borne by the capital provider as in the case of MUDARABAH and according to the ratio of the capital invested as in the case of MUSHARAKAH.
Land, comprising of means such as fixed assets and equipment that remain unaltered in the production process, are rewarded with rental, when they were provided on the basis of lease. As these usually do not form capital, they do not undertake liability, and are not assigned a share of profit or loss.
Labour, if it is not extended on the basis of entrepreneurship but on a wage-based arrangement, is given the stipulated wages. Labour provided by the entrepreneur is rewarded with a share of profit, if profit is realised. In case of loss, the entrepreneur’s labour will go to waste, and he will not receive any return.
Thus, in the primary distribution of wealth among those who had taken part in the process of production, capital is given a share in the form of profit, instead of interest as in the capitalist system. This is because the risk of loss is borne by the capital, in the Islamic system. Thus, risk is not tied to entrepreneurship alone. Capital may not remain immune from the risk of loss. Entrepreneur, instead of being regarded as a separate entity bearing the risk himself, is merged with capital and labour. When labour is provided on an entrepreneurship basis, it too may deserve a share of profit instead of wages, and face the possibility of not receiving any return in case of loss.
The Shariah system for distribution of wealth has three objectives:

(1) The establishment of a practicable system of economy
Distribution of wealth aims at establishing a natural world system of economy that allows every individual to function normally based on his own abilities and choices voluntarily. In such an environment, the activities undertaken by an individual would be more useful and fruitful. This requires proper utilisation of the natural force of supply and demand in assets as well as utilities, due to which the Shariah upholds the related factors. The Qur’ān explains: “We have distributed their livelihood among them in worldly life, and have raised some of them above others in social degrees, so that some of them may utilise the services of others in their work” (al-Zukhruf (43): 32).
(2). Enabling everyone to get what is rightfully due to him
The second object of distribution of wealth is to allow every individual to receive what is rightfully his. However, based on the Shariah precept that wealth in principle is the property of Allah himself, who alone lays down the rules as to how it is to be used. Legitimate claim to wealth is not limited to those who had directly taken part in its production. On the contrary, those to whom Allah has made obligatory upon others to help are also counted as legitimate sharers of wealth. Hence, the poor, the needy, the helpless and the destitute too have a rightful due in wealth. The Qur’ān says, “In their wealth there is a known right for those who ask for it and those who have need for it” (al-Maʿārij (70): 24-25). Some other verses refer to this right as the right of Allah, for example, “And pay what is rightfully due to Him on the day of harvesting” (al-Anʿām (6): 141).
In this manner, distribution of wealth is to take place among those who have taken part directly in production as well as those to whom a right is assigned by Allah.
(3). Eradicating concentration of wealth
The third object considered by Shariah to be important is that wealth, instead of becoming concentrated in a few hands, should be allowed to circulate in the society freely. This is to narrow down the distinction between the rich and the poor as far as it is practicable. Therefore, the Shariah does not permit any individual or group to have a monopoly over primary sources of wealth but gives every member of the society a right to derive benefit from these. Mines, forests, un-owned barren land, wild game, fishes, rivers, seas, are all primary sources of wealth that every person could make use of to the extent of his ability. The Qur’ān explains, “So that it (wealth) does not become confined only to the rich among you” (al-Ḥashr (59):7.
Of these three objectives, the first distinguishes Islamic economy from Socialism, the third from Capitalism, and the second from both at the same time.
The above universal objectives of the Shariah pertaining to wealth based on the distinct economic outlook it advocates should reflect on a Muslim’s attitude towards wealth. Financial planning, which is primarily concerned with guiding the decision-making process related to wealth, should be governed by this overall philosophy.
Consequently, in the operational level, these concepts should be applied in one’s personal budget in every stage of creation, accumulation, protection and distribution of wealth.

Understanding The Differences Between Islamic Banking And Conventional Banking

Islamic Banking is based on the principles of Shariah Law. In Islamic banking interest is prohibited, it is asset-based financing where the trade of elements is not permissible by Islam. Conventional Banking is based on the Man-made laws and the banking system is profit-oriented.

The purpose of conventional banking is to make money through interest. It is not based on the Shariah laws but is governed by the banking regulations of their respective countries. The risk-sharing factor is different in Islamic banking and conventional banking. The factors of risk management and risks in financial markets are different in Islamic banking and conventional banking. In Islamic banking, there are two different forms of bank finance and Islamic securities which is also called SUKUK. Whereas in conventional banking these are called as bank loans and bond issues, these categories are not applicable to Islamic finance…Read more

In addition to this, conventional bank invests the deposits in non-shariah compliant avenues and subsequently earns non-shariah compliant returns. Let us first understand the major difference between Islamic banking and the conventional banking system. Islamic banking must comply with Shariah laws, but conventional banks do not have to comply with them. For example, conventional banks charge interest (Riba), and they may involve in the trading of Shariah prohibited elements such as Alcohol, Pork, etc., or elements like Gharar (Uncertainty) or Maysir (Gambling). The below video gives a detailed comparison of Islamic banking vs conventional banking.

Differences between Islamic Banking and Conventional
Standard Chartered – Saadiq
Differences Between Islamic And Conventional Banking
Islamic Banking Vs Conventional Banking

Islamic Finance And Conventional Finance?
How does Islamic finance differ from conventional finance?
The main difference between Islamic and conventional finance is the treatment of risk, and how risk is shared. In this issues, we examine what these differences can teach us about risk and risk management in conventional banking and financial markets…Read more

What types of Islamic finance are there?
The two main forms of Islamic finance are bank finance and issuing Islamic securities (called sukuk). In conventional terminology, you might think of these as debt – bank loans and bond issues respectively, but that is inaccurate. Those categories cannot be applied to pure Islamic finance.
In Islamic finance, interest is prohibited. If an enterprise is financed by debt with an obligation to pay interest, the risk of the business is not being shared fairly.

Profit and loss sharing
Instead, Islamic finance requires that finance be provided on the principle of profit and loss sharing. Under shariah law, finance can be provided through several types of contracts. Each type specifies how risk is shared between the enterprise and the supplier of finance.

Mudarabah
One such contract is a mudarabah. This specifies in advance how profits and losses are to be shared between the financier and the entrepreneur.

Profits are shared in a predetermined ratio, so the financier’s return fluctuates according to business profitability. Losses, except those caused by the entrepreneur’s fraud or negligence, are to be borne entirely by the financier.
Contrast that with a conventional loan where the financier has a contractual right to receive interest (and capital repayment) irrespective of the condition of the borrowers’ business.

Does Islamic finance operate with pure profit and loss sharing?
Islamic banks and sukuk are currently based on contracts
that formally match what is required by shariah law.
But many scholars argue that the way they operate is not based on Islamic profit and loss sharing. A buyer of a sukuk, for example, expects to receive an assured yield comparable to an interest-bearing bond.
Owners of bank deposits expect capital certainty comparable to deposits in a conventional bank. Islamic banks smooth fluctuations in profits to provide this capital certainty.
And they channel most of their lending through shariah-compliant methods that, unlike mudarabah, do not involve participating in enterprise risk.
Therefore, a number of scholars observe that most Islamic finance is not different in substance from conventional finance.

How do Islamic banks manage risk?
A pure Islamic bank would share risks – profits and losses – with its customers. The ethical code underlying shariah does not seek to abolish risk: it recognises that business enterprise is desirable but is inherently risky. Therefore banks need to manage risks to keep them below undesirable levels.
Islamic banks also need to ensure their risk management does not involve purely speculative risk-taking, which is prohibited under shariah. As you will see next week, conventional investment banks can appear to be betting on exchange rate changes or on the prices of financial assets.

What methods are available to manage risk?
Islamic banks can use some of the methods available to conventional banks. To minimize the risk of default they can investigate and monitor the businesses they finance. In fact, profit and loss sharing might create an additional reason for monitoring the enterprise.

Challenges in risk management
However, Islamic banks face particular challenges in risk management. Some instruments that conventional banks use are not available. This includes conventional financial derivatives.
A financial derivative is an instrument whose value is determined by another financial instrument. This directly contravenes the principle of materiality: materiality means finance must be tied to real economic activity. Shariah-compliant derivative markets have not developed.
As you can see, Islamic finance is based on ethical principles including sharing risk; profit and loss sharing; and real activity.

Useful links
Shariah Financial Planning Concept
Ethical Values in Islamic Financial Planning
Islamic Finance, Islamic Banking and Sukuk
Knowledge And Application Of Islamic Financial Planning for SME...
A review of Islamic financial planning process in Oman and Nigeria
Shariah-compliant Companies/Investments
Shariah-Compliant Funds: Definition and Examples
Shariah compliant company – definition
Newly classified Shariah-compliant securities
Shariah-compliant Stocks (i-Stocks)

MODULE 1 / CHAPTER 1
FUNDAMENTAL OF SHARIAH FINANCIAL PLANNING
Content/Topic Chapters
1. Shariah Framework on Financial Planning
2. Regulatory Framework and Shariah Guidelines for Financial Planners
2. Professional and Ethical Framework in Financial Planning
4. Personal Financial Statement and Cash Flow Management
5. Shariah Concepts in Muamalat
6. Risk Management and Wealth Protection
7. Investment and Entrepreneurship: Concepts and Planning
8. Zakat and Tax Planning
9. Islamic Estate Planning
10. Islamic Retirement Planning

Chapter 1
SSHARIAH ASPECTS AND FRAMEWORK ON FINANCIAL PLANNING
Chapter Outline:
1.0 Introduction
1.1 The Shariah Dimension of Financial Planning
1.2 The Development of Shariah Financial Planning
1.2.1 Financial Planning Services in Malaysia
1.2.2 Shariah Financial Planning in Malaysia
1.3 Defining Financial Planning and Shariah Financial Planner
1.3.1 Personal Financial Planning Defined
1.3.2 Financial Planner as Defined by the Capital Markets Services Act
(CMSA) Malaysia
1.3.3 Corporate financial planning in Comparison to Personal Financial Planning
1.3.4 Defining Shariah Financial Planning
1.3.5 Scope and Objectives of Shariah Financial Planning
1.4 The Financial Planning Process
1.4.1 Essentials of a Comprehensive Financial Plan
1.5 Additional Aspects Relevant to the Shariah Financial Planning Process
1.6 Shariah Position on the Profession of Financial Planning
1.6.1 Shariah Guidelines on Financial Planning as a Profession
1.7 Shariah Worldview on Wealth Management Planning
1.7.1 The Islamic Economic Objectives
1.7.2 Reality of Wealth and Property
1.7.3 Distribution of Wealth in the Islamic Economic System
1.8 Conclusion

Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) The Shariah Dimension of Financial Planning
(b) Development of Shariah Financial Planning in Malaysia
(c) Definition of Financial Planning and Shariah Financial Planning
(d) The Financial Planning Process and the Essentials of a Financial Plan
(e) Additional Aspects Relevant to Shariah Financial Planning
(f) Shariah Position on the Profession of Financial Planning
(g) Shariah Worldview on Wealth Management Planning

Definitions:
Asset-based investment – In Islam, money is viewed as a medium of exchange. It has no intrinsic value in or of itself. Its worth is only measured when it’s exchanged with goods and services that carry intrinsic value. The use of money for the purpose of making money is prohibited in Islam. Money should not be the subject of investment per se. Investments that are based on money exchange, are, therefore, not permissible. This is related to the prohibition of riba’.
Riba’ – meaning excess, increase, or addition implies any excess compensation without due consideration. It refers to interest-bearing loans or transactions. Islam has prohibited the excess resulting from interest as it transgresses the Islamic finance principles that promote justice and partnership. Riba’ al-qard, or loan riba’ for example, distorts the concept of socioeconomic justice as it enables those with capital to be wealthier just by lending money and making money out of it through the interest charged. This goes against the prohibition of the use of money for the purpose of making money as it is exploitative of the poor who will be saddled with the ever-increasing debt. It also contorts just distribution of wealth and circulation of money to the real economy where goods or services are supposed to be exchanged with money in order for it to be profitable. Islam also condones dealings that only benefit one party as risks should be shared between involved parties. By forbidding riba’, Islam upholds socioeconomic justice and promotes partnership.
Gharar or uncertainty is derived from the Arabic root word ‘gharra’ meaning ‘to deceive’. It refers to uncertainties in transactions regarding the terms and conditions, price, etc. Some examples of gharar include contracts that are not drawn out in clear terms, the sale of something that one does not own, such as short-selling, or has yet to be manufactured without an explicitly defined contract from the outset, complex derivatives transactions such as futures, and any forms of speculations (maysir) such as gambling. Gharar contradicts the Islamic finance principles that foster fairness, justice, and risk-sharing. The prohibition of gharar protects investors against investments that expose them to a high degree of uncertainties, excessive risks, and one-sided losses. It also prevents investors from future dispute and exploitation where one party gains at the expense of the loss of the other party, such as in gambling.
Investment in businesses that sell prohibited goods and/or engage in unlawful activities is strictly prohibited – There are certain matters that are outright unlawful in Islam as they are clearly stated in the Qur’an and Sunnah. Everything that is considered harmful either to the body, mind, soul, or society is prohibited, while whatever is beneficial is permissible. Among the prohibitions include killing, stealing, oppressing, sex outside of marriage, pork, alcohol, entertainment that contradicts Shariah, and other non-permissible activities. So naturally, any type of investment that involves these will fall under the unlawful category and must be avoided by Muslim investors.

1.0 INTRODUCTION
Prior to discussing the Shariah aspects of financial planning, it is necessary to understand the essential nature of financial planning itself. Financial planning, in the conventional sense, is a professional field concerned with assessing an individual’s or a firm’s current financial situation and his/her financial goals and planning the financial aspects of the strategy to achieve those goals taking into consideration all relevant factors. It involves the process of resolving the life goals of an individual or business, gathering relevant financial information, examining current financial status and thereafter, proposing a plan to realise the goals and implementing it in an objective manner. An individual’s financial goals can include buying a home, saving for children’s education or planning for retirement.
Financial planning provides direction and meaning to a person’s financial decisions. It allows one to understand how each financial decision a person makes affects other areas of one’s finances. For example, buying a particular investment product might help one pay off mortgage faster or it might delay one’s retirement significantly. By viewing each financial decision as part of a whole, a person can consider its short and long-term effects on his life goals. Financial planning can also help one adapt more easily to life changes and feel more secure that one’s goals are on track.
Necessary planning issues include gathering adequate and relevant data, assessing risk tolerance, complying with regulatory requirements and ethical and religious guidelines, and monitoring all circumstances affecting one’s personal financial plan. In this manner, financial planning involves insurance planning, investment planning, tax planning, estate planning, and retirement planning.
Comprehensive financial planning involves an integrated approach to assessing the above planning areas and developing and then implementing a course of action for achieving individual, family or business financial objectives. It takes into consideration a person’s potential earnings, expected expenditure, accumulated assets, investment returns, and personal goals.
Therefore, financial planning is a professional service provided to individuals and small firms, assisting in analysing and organising their financial affairs in realising their life goals.
The core of financial planning practice is the planning itself, followed by implementation of the plan and then monitoring it. Usually, a person is not capable of accomplishing all the above himself, which involves making vital decisions about banking, insurance, investments, taxes, retirements and wills. Financial planners provide professional assistance to those who need guidance and counseling in handling the above.
1.1 THE SHARIAH DIMENSION OF FINANCIAL PLANNING
Financial planning is a field primarily concerned with decisions and activities related to finance.
Because of this, the outlook of Shariah on wealth and finance is of importance in Shariah financial planning. At the outset, it should be understood that from the Shariah perspective, wealth, similar to other material resources given to man, is a trust, which should be used for his well-being and for the society at large. As dictated by the Shariah philosophy pertaining to wealth, it should only be used according to the guidelines provided by Allah, who is its real owner. Accumulation of wealth and spending it should be done in accordance with the Shariah criteria as the guiding principle at every level. Ways and means of earning wealth, depositing for protection, investing to seek its increase, as well as spending it on one’s food, clothing, housing, transportation, education, family and relatives, charitable and religious avenues, and finally, leaving one’s estate for distribution after death should all be conducted on the basis of the relevant Shariah guidelines.
The purpose of human existence according to Shariah is to achieve sublimit of conduct thereby, attaining felicity in the hereafter. The world and what it contains are means accorded to man for preparation for this ultimate goal. Proper utilisation of assets should be done with the aim of achieving this end. All phases related to wealth including creation, accumulation, protection, purification and distribution of wealth should be undertaken with the aim of achieving success in this world and the hereafter. Financial planning for a Muslim should necessarily take this vital objective into consideration.
Shariah financial planning therefore, is of a much wider scope and envisaged for a longer term in this sense, than conventional financial planning. It is the responsibility of a Shariah financial planner to help clients plan their finances in a way that ensures success in both worlds.
2.1 Shariah View on Spending In modern economics, spending and expenditure is the natural path to equilibrium. Refusing to spend money constricts the circulation of money. In Shariah, spending does not mean lavish and extravagant living, but to put money and wealth in their proper places. The emphasis on spending rather than hoarding, in Shariah, should be understood in this context. Allah as the provider has entrusted wealth to man to use wisely, for his benefit and that of others. Wise spending requires making use of wealth responsibly and understanding it as the bounty of Allah.
Financial planning is directly related to this aspect. One needs to know how to spread one’s expenditure over time. The time frame includes short term, medium term and long term. The Shariah perspective of spending requires Muslims to set their financial goals, and identify priorities, targets and costs.
Spending in this context does not imply undertaking current spending alone, but also meeting future spending to avoid situations where a person or his family may become constrained to demand others’ assistance. It is here that savings and investments become useful in financial planning. People set aside a surplus for future consumption by way of investing them wisely.
However, this should be done in a way that does not result in the neglect of our duties towards other members of the society. Wealth given to us by Allah is not necessarily for our own use, but for the benefit of others as well. Thus, spending, which involves investment as well as charity in this sense, includes financial decisions for determining the best forms of investment for returns in this world and the next. Spending may not be performed in an excessive manner also. Allah, as stated in the Qur’ānic verses (al-Naḥl (17):27 and al-Aʿrāf (7):31), condemns isrāf or wasteful
expenditure. Some Islamic economists too recognize the prohibition of isrāf or the sanction against wasteful expenditure and consumerism as an important principle of Islamic economics.
1.2 THE DEVELOPMENT OF SHARIAH FINANCIAL PLANNING
Islam, as a divinely revealed religion encompassing a complete way of life that aims at man’s success in this life as well as the hereafter, has given a complete code for human conduct in all spheres. It consists of three major areas that deal with beliefs, ethics and Shariah. Shariah rules on conduct embody a comprehensive treatment of laws relating to family, financial dealings, judiciary, crimes, government, international law and economics. Financial dealings are governed by an elaborate set of rulings relating to contracts, in general, as well as particular types of contracts such as sale, partnership, lease, agency, guarantee, etc. In addition to rules and regulations, an array of ethical guidelines deals with ensuring the ideal and commended practices relating to all dealings and transactions. These rules are called the muʿāmalāt law.
Financial planning, as an individual field related to the broader context of finance and management, is of recent origin. Financial planning, being a discipline related to assisting and regulating the process of making financial decisions, comes under the broad purview of Shariah rules and ethics. In addition to Shariah laws related to transactions, those relevant to wealth and finance, as well as financial duties and obligations, are applicable in financial planning. The financial planning process should also conform to the objectives of Shariah pertaining to wealth, as well as human existence. Thus, the distinct worldview advocated by Shariah too becomes intrinsically related to financial planning.
In order to keep abreast the continually developing discipline of financial planning, the Shariah guidelines applicable to it have to be constantly verified and the body of relevant Shariah material updated. As the audience for this information in general do not possess a background in Shariah studies, presentation in a simplified and readily understood format is also vital. This challenge is currently being addressed by Shariah scholars, and new courses are in the pipeline.
Courses of study that is entirely devoted to treating this subject or books written exclusively under this particular heading of Islamic financial planning are still scarce. Nevertheless, with growing market demand, more advancement is expected in this direction in the near future.
3.1 Financial Planning Services in Malaysia
Islamic financial planning is the product of Islamic finance and financial planning. The Shariah Financial Planning Certification is one of the first comprehensive training and certification programme in the world to produce Islamic financial planners. Having said that, Islamic financial planners are crucially needed to provide the service of advising clients on how to plan and acquire wealth including financial assets that are Shariah compliant. Financial Executives (FEs) in Islamic banks and in institutions providing unit trusts and takāful, need to have this qualification in order to provide a better delivery service in comparison to the conventional financial institutions.
Financial planning is a regulated activity, requiring a license from the Securities Commission Malaysia (SC) as per Schedule 2 of the Capital Markets and Services Act 2007 where the Act stated that: Financial planning means analyzing the financial circumstances of another person and providing a plan to meet that person’s financial needs and objectives, including any investment plan in securities, whether or not a fee is charged in relation thereto.
To be a representative of a financial planning company, the person must hold a Certified Financial Planner (CFP), Financial Planners and Advisers Association (FPA) or Registered Financial Planner (RFP) qualification. A qualified person for financial planning can apply to be a Capital Market Services License (CMSL) holder. He must have a minimum of 8 years relevant experience and a minimum net worth of RM50,000. An SC-licensed person is also required to fulfill the Continuing Professional Education (CPE) requirements. Twenty CPE points per year is required for license renewal.
The Continuing Professional Education (CPE) is required to maintain a professional competency and skills up to the expectation of the industry and regulators. The CPE is a form of training, workshop, talk series, provided to the participants in issues and matters related to the scope of the financial planning to ensure high quality and proper standards are met. The CPE are provided by license bodies, where they announce from time to time programme with relevant points. The participant will collect certificate that carry the said points after the programme as evidence.
With SC’s licensing requirement for financial planners, in future, it will be more rewarding for Islamic financial institutions to recruit FEs possessing certification as Islamic financial planners.
The development of Shariah financial planning in Malaysia is linked to the development of conventional financial planning. The financial planning concept in Malaysia was initially related to the insurance sector, before developing into individual field. With the advancement of the insurance industry, insurance organizations perceived the need for professional courses designed for training personnel in the field of financial planning. The National Association of Malaysian Life Insurance and Financial Advisors (NAMLIFA), then known as the National Association of Malaysian Life Insurance Agents (NAMLIA) introduced the first course in 1996 for its members through the Financial and Life Practitioners Council (FLPC), known then as the Life Practitioners Council (LPC). This professional level course, called the Fellow Chartered Financial Practitioner Program (FChFP), was fairly comprehensive, and addressed the needs locally. The second program was introduced by the Malaysian Insurance Institute (MII) in 1997 as Chartered Financial Consultant (ChFC). Both these programs were generally perceived as courses designed for insurance agents and were mainly led by the insurance sector.
Despite the availability of these programs, financial planning services in Malaysia were generally product-centred, where the emphasis was on marketing of specific products. A specialized approach to offering financial planning services that focused on the needs of clients was felt by professionals. In order to fill this gap, the Financial Planning Association of Malaysia (FPAM) was formed in 1999, comprising members from the fields of unit trusts, stock broking, law and accounting, in addition to insurance. It was awarded the licence to conduct CFP (Certified Financial Planner) examinations by the CFP International Council in September 1999. FPAM introduced its inaugural Islamic Financial Planning certification starting in 2008. In December 2008, its second batch of students took their IFP certification examination.
The Malaysian Financial Planning Council (MFPC) was formed in 2002, with a view to represent the financial planning profession in Malaysia and developing a professional level designation program. Promoted by LIAM, NAMLIFA and MII, the MFPC awards the Registered Financial Planner (RFP) designation. Holders of FChFP and ChFC may apply for conversion to RFP.
MFPC aims at becoming the national body responsible for unifying financial planning services and strengthening the accountability, conforming to laws, regulations and ethics in the profession.
Table 1.1 provides a synopsis of the development of financial planning services as a profession in the US and Malaysia.

Table 1.1: Synopsis of the Development of Financial Planning Services in Malaysia

Licensing Criteria under Section 4: Fit and Proper
(1) Persons who apply to be licensed under the CMSA must be fit and proper, as set out in Section 64 and 65 of the CMSA. In assessing if you are fit and proper, we refer to the following criteria:
(a) Your organisational requirements;
(b) Your shareholding composition;
(c) The adequacy of your financial resources; and
(d) Requirements relating to representatives’ competencies.
In assessing a licence application, the SC is also guided by relevant policies and guidelines, such as the policy on permitted activities for stockbroking companies and the Guidelines on Investment Banks.
(2) Every CMSL applicant will be required to submit its business model and scope of activities that it plans to carry on.
The Requirements for a CMSL

Organisational Requirements

Incorporation
(1) If you want to carry on any of the following regulated activities, you must be a company incorporated in Malaysia:
(a) Dealing in securities;
(b) Dealing in derivatives;
(c) Fund Management;
(d) Dealing in private retirement schemes;
(e) Advising on corporate finance; and
(f) Investment advice.
However, if you want to carry on the regulated activity of financial planning, you may do so either as a company, sole proprietorship or partnership. If you are a sole proprietor or in a partnership, you will be granted a CMSL but you will not be allowed to have any licensed
representative acting on your behalf.
Member of an Alternative Dispute Resolution Body CMSL holders who carry on one or more of the following regulated activities are required to be a member of an alternative dispute resolution body that is approved by the SC under the Capital Markets and Services (Dispute Resolution) Regulations 2010:
(a) Dealing in securities;
(b) Dealing in derivatives; and
(c)Fund management
Organisational competence
(3) As a CMSL applicant, you must ensure that your business is properly established, which includes the following:
(a) An organisational structure with clear lines of responsibility and authority;
(b) Necessary IT systems and infrastructure;
(c) Adequate internal control systems;
(d) Risk management policies and processes;
(e) Policies and processes on conflict management and the monitoring of unethical conduct and market abuse; and
(f) Policies and procedures to ensure compliance with applicable laws and regulations
(4) In situations where you want to carry on more than one regulated activity, you must demonstrate that you have:
(a) the requisite system and procedures to monitor all relevant activities within your organisation; and
(b) control procedures in place to monitor any conflict of interest, unethical conduct and market abuse.
3.2 Shariah Financial Planning in Malaysia
Financial planning services provided to the public in Malaysia as well as educational programs offered on the subject are planned in general to suit clientele from all ethnic and religious backgrounds. They have usually not been customised to reflect the distinct aspirations or life objectives of any specific community. Consequently, the requirements of Muslims who are bound by the Shariah and wish to conduct their dealings and financial activities under Shariah guidelines are not satisfactorily addressed in the existing financial planning framework.
As a country with a predominant Muslim population, it was felt that a curriculum should be developed with the aim of fulfilling the demand of the Muslim populace of Malaysia, where their life-pattern and objectives are taken into consideration, and financial planning services that fit into the Shariah criteria are offered.
With this aim in mind, several attempts have been made so far by different organisations to provide a financial planning program that suits the Muslim clientele. To train financial planners who are sufficiently aware of the necessary Shariah background, some private entities related to
wealth management and investment, such as Hijrah Wealth Management, has introduced courses that deal with Islamic aspects of financial planning. The Financial Planning Association of Malaysia recently began offering a Islamic financial planning programme.
With a view to offering a program that is more comprehensive and one that addresses the relevant Shariah issues while giving sufficient grounding on the conventional aspects, the Malaysian Financial Planning Council (MFPC) has initiated a full-fledged and independent Shariah financial planning program. This program is designed to award the Registered Financial
Planner (RFP) Certificate and is expected to fulfil the demand in Malaysia and the region for professional Shariah financial planners. All aspects of financial planning related to regulatory controls, financial statements, ethics, risk management, investment, tax, estate, retirement, etc;
are treated together with the relevant Shariah guidelines, providing the student with a broader perspective on offering financial planning services in Malaysia.
1.3 DEFINING FINANCIAL PLANNING AND SHARIAH FINANCIAL PLANNER
1.3.1 Personal Financial Planning Defined
International Organization for Standardization defines personal financial planning as follows:
“Personal financial planning is an interactive process designed to enable a consumer/client to achieve his personal financial goals.”
Taking a goal-centred approach instead of the product-centred approach prevalent in the market, the MFPC constitution defines personal financial planning as “a process or methodology of assisting clients in determining their financial goals, objectives and priorities and the resources
to meet them in an optimal and practical manner.”
A Personal Financial Planner is defined as “an individual practitioner who provides financial planning services to clients and meets all competence, ethics and experience requirements of the profession.”
A client of a Personal Financial Planner is “an individual who has accepted the terms of engagement by entering into a contract of services.”
A financial goal is “a quantifiable outcome aimed to be achieved at some future point in time or over a period of time.”
4.2. Financial Planner as Defined by the Capital Markets Services Act (CMSA) Malaysia
The amendment to the CMSA 2007 describes a financial planner as “a person who carries on a business of analysing the financial circumstances of another person and provides a plan to meet that other person’s financial needs and objectives, including any investment plan in securities, whether or not a fee is charged in relation thereto.”
In the current practice, based on the range of services offered to clients by a practitioner, financial planners are sometimes classified into three categories:
(a) single-service financial planners
(b) multi-service financial planners
(c) comprehensive service financial planners
A single-service financial planner is a person who has only a single group of products to offer his clients, such as life or general insurance. He specializes in or represents one or two principals for products that belong to a single category. This may also be services such as stockbroking and real estate related services.
A multi-service financial planner commands a wider range of services, in that, he provides a broader combination of different classes of products and services to his clients. In Malaysia, the popular service combination of multi-service financial planners is mutual funds and, life and general insurance. Will-writing is sometimes provided as another service.
A comprehensive financial planner provides a full range of services to his clients. He considers all relevant aspects of the financial position of a client and uses his expertise in several professions and multiple sources of products to meet the client’s total financial needs.
However, this classification was based on the product-centred approach to financial planning that was prevalent in the early phases where the title of financial planner was used by persons involved in marketing various financial products. As such, in the correct context of professional financial planning, only the last mentioned, that is, the comprehensive service financial planner, would qualify for the title in the proper terms.
In terms of the scopes of financial planning, the main role of financial planners is to design financial plans that suit the needs of their clients. The advice can be in the form of comprehensive financial planning that deals with the whole range of issues in financial planning or ‘slice’ financial planning that focuses on certain segment of financial planning, for example, risk management and investment planning. Basically, services offered are in line with the content analysis of personal financial planning. There are 101 content areas suggested in the CFP Board’s current guide on CFP Certification.2 The major headings are:
(a) General principles of financial planning
(b) Insurance planning and risk management
(c) Employee benefits planning
(d) Investment planning
(e) Income tax planning
(f) Retirement planning
(g) Estate planning
4.3 Corporate Financial Planning in Comparison to Personal Financial Planning Corporate financial planning refers to the process of financial planning addressing firms and organisations that involves analyzing alternative investment, financing, and dividend strategies in the context of various potential economic environments. Planning involves forecasting both the outcomes of different strategies and their risks. In this manner, financial planning enables managers to improve their forecasts of important accounts of financial statements and better understand the interactions of investment, financing, and dividend decisions.
In developing a long-term financial plan for a firm, these three decisions (policies) can be described as follows:

(a) The firm’s investment decision. This refers to the amount of cash needed for the firm’s investment in a new asset (it is also called the capital budgeting decision). In addition, it also refers to the amount of working capital needed on an ongoing basis (also referred to as the
working capital decision).

(b) The firm’s financing decision. This refers to new borrowing or new equity issued for financing the firm’s investment in new assets. This decision is influenced by the degree of financial
leverage the firm chooses to employ and how it plans to raise the necessary new funds.

(c) The firm’s dividend decision. This refers to the amount of cash the firm thinks is necessary and appropriate to pay equity holders as cash dividends.
4.4 Defining Shariah Financial Planning
It was explained above that conventional financial planning is concerned with assisting clients to determine their current financial position and providing a practical strategy for achieving their financial objectives in life. Shariah financial planning, going a step further, aims at providing
professional service to clients assisting them in designing a strategy for achieving their life goals within the framework of Shariah guidelines, thus ensuring their success in this world and the hereafter.
Instead of seeking financial gain in the short term, that is, in the life before death, it endeavours to bring the process of wealth creation, investment, preservation, and distribution under the overall values and principles of Shariah, for the betterment of the individual and the society. This involves bringing each stage of importance concerned with managing one’s finance within the boundaries of Shariah, in addition to complying with the additional duties imposed by Shariah on wealth. The latter includes modes of compulsory and optional charity such as zakāt, ṣadaqah and waqf, planning for ḥajj pilgrimage, as well as, planning for division of estate according to the Shariah rules of inheritance.
Many definitions of conventional financial planning are formulated from the point of view of the professional. Adopting the same perspective, Shariah financial planning could be defined as “a process of assisting clients in determining their financial goals and priorities and the resources to meet them optimally within the parameters of the Shariah”.
From the perspective of the individual, Shariah financial planning can be defined as “the process of meeting life goals through the management of finances in accordance with the Shariah.” The reference to Shariah parameters excludes adopting ways and means that are repugnant to
Shariah in any stage of planning and managing finances, while including the compulsory and recommended Shariah measures pertaining to finance such as zakāt, public good and fair dealing practices

4.5 Scope and Objectives of Shariah Financial Planning
The scope of the financial plan should extend over the client’s financial situation in a broad manner so that the plan may result in producing comprehensive financial planning recommendations. The recommendations could address all of the client’s needs (in budgeting and saving, tax matters, investment considerations, risk management, insurance planning, and estate planning) or if the nature of services required by the client is limited, be restricted to a single financial issue. However, this should be treated in the context of the client’s overall financial situation. Addressing a particular area without considering the client’s overall financial position could affect the client’s cash flow adversely, thus impeding the realisation of his financial objectives. In Shariah financial planning, the scope should be widened to cover the requirements and recommendations of the Shariah; thus, the plan would aim at the wellbeing of the client in the hereafter as well. The objectives of financial planning could be stated as follows:

1. Providing direction and meaning to a person’s financial decisions;

2. Allowing a person to understand how each financial decision affects other areas of his finances;

3. Allowing an individual to adapt more easily to life changes and to feel more secure as a result;
In addition to the above, Shariah financial planning would incorporate an additional objective, which is, ensuring proper fulfilment of obligations and recommendations of a financial nature prescribed by the Shariah, and conducting the financial management process in a way compatible with Shariah precepts.
5.0 THE FINANCIAL PLANNING PROCESS
During early Islamic period, the Islamic financial planning services has not been established as independent discipline as is prevalent today. The demand for financial planning requires the adoption of practices in the conventional setting to be adopted in line with the objectives of Shariah.
The personal financial planning process shall include, but is not limited to, six steps that can be repeated throughout the client and financial planner relationship. The client can decide to end the process before having passed all the steps. The process involves gathering relevant
financial information, setting life goals, examining his current financial status and coming up with a strategy or plan for how he can meet his goals given his current situation and future plans.
The financial planning process consists of the following six (6) steps:

STEP 1: Establishing and Defining the Client-Planner Relationship
The financial planner should clearly explain or document the services to be provided to the client and define both his and his client’s responsibilities. The planner should explain fully how he will be paid and by whom. The client and the planner should agree on how long the professional relationship should last and on how decisions will be made.
STEP 2: Gathering Client Data and Determining Goals and Expectations
The financial planner should ask for information about the client’s financial situation. The client and the planner should mutually define the client’s personal and financial goals, understand the client’s time frame for results and discuss, if relevant, how the client feels about risks. The financial planner should gather all the necessary documents before giving advice the client needs.
STEP 3: Analyzing and Evaluating the Client’s Financial Status
The financial planner should analyze the client’s information to assess the client’s current situation and determine what the client must do to meet his goals. Depending on what services the client has asked for, this could include analyzing the client’s assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.
STEP 4: Developing and Presenting Financial Planning Recommendations and/or Alternatives:
The financial planner should offer financial planning recommendations that address the client’s goals, based on the information the client provides. The planner should go over the recommendations with the client to help the client understand them so that the client can make informed decisions. The planner should also listen to the client’s concerns and revise the recommendations as appropriate.
STEP 5: Implementing the Financial Planning Recommendations
The client and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as the client’s “coach”, coordinating the whole process with the client and other professionals such as attorneys or stockbrokers.
STEP 6: Monitoring the Financial Planning Recommendations
The client and the planner should agree on who will monitor the client’s progress towards his goals. If the planner is in charge of the process, he should report to the client periodically to review his situation and adjust the recommendations, if needed, as the client’s life changes.
5.1 Essentials of a Comprehensive Financial Plan
Every financial plan could take an individual form or order based on the unique financial situation, objectives and ambitions of a client. Nevertheless, the following elements should usually be included in a comprehensive financial plan, in addition to other factors deemed by the
planner to be relevant to the particular client’s case:
Personal data: Inclusive of family data, age, age of children, parents, etc.
Client’s goals and objectives: A statement of the client’s established goals and objectives, in accordance with his priority, and the time frame for achieving each. These should be cast in as precise wording as possible.
Identification of issues and problems: Should include personal and financial issues affecting the client, e.g. illness, cost of education etc, inclusive of hidden and future issues anticipated such as children’s marriages.
Assumptions: Material assumptions made, inclusive of inflation, investment growth rate, income growth rate, etc.
Balance sheet/net worth: Presentation and analysis should comprise a schedule listing assets and net worth.
Cash flow management: Statement should include the client’s sources of funds and uses for the relevant years, as well as net cash flow, and an individual income statement.
Zakāt and Income tax: Statement and analysis should comprise, but not be limited to, income tax for all the relevant years. Forecasts should display the nature of the income and deductions in sufficient detail to allow estimation of tax liability.
Risk management: The analysis should correspond to mortality, morbidity, liability and property.
Investments: Should outline the current investment portfolio together with details of liquidity, diversification, and investment risk exposure. It should discuss the suitability of the investments in relation to the client’s needs and goals.
Financial independence, retirement planning, education and other special needs: The analysis should include a projection of resources expected to be available for fulfilment of these needs in the future.
Estate planning: Identification of assets that could form the client’s estate and an analysis of the control, disposition and taxation of these assets.
Recommendations: Clearly stated recommendations specifically addressing the goals and objectives of the client, and actions needed to cover any deficiency.
Implementation: A list of steps needed to implement the recommendations, according to their priority, inclusive of the time to implement and the parties connected.
1.6 ADDITIONAL ASPECTS RELEVANT TO THE SHARIAH FINANCIAL PLANNING
PROCESS
In Shariah financial planning, the overall process would be substantially similar, with an important additional responsibility placed on the planner. It is that the relevant Shariah guidelines be kept in view by the planner constantly, and that the planner should ensure a contravention of Shariah guidelines does not occur at any stage of the development and
implementation of the plan. Thus, the financial planner should avoid means of investment and deposit that are contrary to Shariah precepts. Involvement of interest and prohibited forms of insurance in the client’s finances should be checked. Proper discharge of financial obligations
such as zakāt, expense of needy relatives, ḥajj, fulfilment of past debts, etc; should be duly planned for and diligently implemented.
In addition, he is required to educate the Muslim client on the Shariah procedures and requirements where relevant and ensure that these are duly fulfilled. The Muslim client’s awareness of these aspects should not be expected or taken for granted. It is the responsibility of the planner that the plan that is designed with his collaboration be free from any objection from a Shariah angle.
The Shariah financial planner should also reminded the Muslim client of the broader and longer term goals of Shariah that envisage success in the hereafter as well, and encourage him to enlarge his plan to include adoption of recommended charitable avenues, thus bringing good to
the society at large. The tendency on the part of clients to be ultra-materialistic and restrict the financial plan to narrow personal gains should not be encouraged. The Shariah financial planner may attempt to recommend, where possible, spending on means of ṣadaqah and waqf
endowments that result in creating an on-going chain of charities. The benefits and virtues of adopting such means can be emphasised, which according to the teachings of Shariah are not confined to the hereafter alone, but bring in worldly dividends as well.
The financial planning process comprising the six steps, together with additional aspects relevant to Shariah financial planning, can be summarised as follows:
Table 1.2: The Financial Planning Process

1.7 SHARIAH POSITION ON THE PROFESSION OF FINANCIAL PLANNING
Financial planning can be examined from two perspectives, both of which are complementary.
The first aspect deals with Shariah regulations governing human actions, such as spending, savings and investment. It sees that relations between economic agents, such as in contractual obligations are dutifully observed. It requires that economic choices be made on the basis of
faith and knowledge so that the objectives of equity and efficiency are met. Thus, a Shariah financial planner should seek to ensure, as much as it falls on his shoulders, that choices pertaining to these activities are made, and operationally implemented, within Shariah parameters. Here, knowledge pertaining to Islamic regulations governing finance becomes vital.
Financial planners should acquire such knowledge if they wish to advise clients on Shariah matters. This is also true of non-Muslim financial planners, whose contact with Muslim clients cannot be discounted.
The second pertains to financial planning as a profession. The Shariah position of engaging a financial planner from the perspective of the client, in the normal circumstances, would belong to the category of permissible actions. In the scale of importance, it would fall under taḥsīnī measures, which implies adopting what conforms to the best customs where efficiency is a virtue. Engaging a financial planner is a step taken in the direction of providing ease and comfort to the individual through assigning the task to a professional, rather than burdening oneself with
it.
From the perspective of the financial planner, giving financial advice is permissible, as it helps protect the wealth and property of people. The contract of financial planning is based on leasing of service (ijārah al-ʿamal), where the client employs the planner to study his financial details and formulate a plan suitable for his needs in exchange for a fee (ujrah). If the aspect of implementation too is to be handled by the planner at any level, this could involve wakālah or agency, where the financial planner represents the client in transactions such as investment. The financial planner may charge a pre-agreed fee for his services.
7.1 Shariah Guidelines on Financial Planning as a Profession
It is common in the profession of financial planning that the financial planner earns introducer’s fees by making referrals. A financial planner earns commissions through recommending various investment products available in the market to the client. Where the financial planner earns an income through such means as a result of his providing financial planning services to his client, this should be done with the knowledge and approval of the client. As far as a Shariah financial planner is concerned, he should understand clearly that his status is primarily that of an employee and agent of the client. Therefore, his first priority should be to serve the best interests of the client, who has hired him to provide impartial advice on his financial matters.
This may not be compromised under any situation. If the financial planner puts his earnings through referral fees and commissions as his first priority and jeopardises or compromises on the financial betterment of the client, he will be committing dishonesty in the eyes of Shariah.
The role of a Shariah financial planner should not be considered limited to merely distinguishing permissible financial activities from the impermissible. A Shariah financial planner should be conscious of his duty to contribute to the realisation of overall objectives of the Shariah, such as common welfare and reducing poverty. He should seek to make clients aware of their responsibilities towards relatives, outsiders, and the society in general.
1.8 SHARIAH WORLDVIEW ON WEALTH MANAGEMENT PLANNING
Financial decisions made by individuals and societies and the goals they wish to achieve through wealth are necessarily based on the broader economic perspective adopted by them. It is known that various theories and approaches exist with regard to the economic background in issues relating to wealth and finance. In this sense, it is indispensable for a Shariah financial planner to have an understanding of the economic perspective of the Shariah and the position and function of wealth in it. As a preliminary step, it is necessary to understand some basic principles upheld by the Qur’ān and the Sunnah (prophetic guidance) that define the Shariah perspective of economics.
1.8.1 The Islamic Economic Objectives
The Shariah considers the economic activities of man lawful and meritorious, and approves of economic progress. It regards earning of livelihood in a righteous manner as an obligation of a secondary order. Despite this, however, economic activity is not the basic problem affecting humans according to the Shariah; and economic progress does not constitute the sole objective of human life. It is important to understand this fundamental difference between the theory of economics in Shariah and materialistic economics. According to the latter, livelihood is the
fundamental problem of man and economic development is considered to be the ultimate goal of human life. In the economic theory advocated by Shariah, livelihood may be essential and indispensable, but it does not represent the true objective of human life.
It is due to this reason that while the Qur’ān criticizes monasticism and commands one to seek the bounty of Allah, it also warns against temptations and delusions of worldly life. This approach becomes clear when it is understood that in the perspective of Shariah, means of livelihood are merely different stages encountered in the human journey. The ultimate objective or destination is beyond them. The destination to be aspired is to attain sublimity in character and conduct, resulting in the felicity of the other world. Attaining this is the fundamental problem of man and the objective of his life. However, since achieving this end is possible only through traversing the path of this world, what is necessary for the life of this world also becomes essential. As long as the life path is traversed with the above objectives as the goal, means of livelihood remain as the bounty of Allah. However, if man loses sight of the objective, the very same means turn into delusions and trial. This is emphasised in the Qur’anic commandment: “Seek the other world by means of what Allah has bestowed upon you” (al-Qaṣaṣ (28): 77).
1.8.2 Reality of Wealth and Property
In the Shariah perspective, wealth is a creation of Allah in all its different forms and in principle, belongs to him. Thus, wealth, in reality is the property of Allah. The right to wealth enjoyed by man is only delegated to him by Allah. This is illustrated in the Qur’ān, where it is commanded:
“Give to them of the property of Allah that he has given to you” (al-Nūr (24): 33).
This situation becomes clear when it is understood that human involvement in the attainment of wealth is limited to his exerting himself in the process of production and investment. The success of his effort is solely granted by Allah, for example, by making a seed grow into a tree and give fruit. This fact is further explained in the Qur’anic verse that refers to the creation of cattle that subsequently become the property of humans (Yā-Sīn (36): 71). Thus, in Shariah, all forms of wealth are the property of Allah in principle, and the right to exploit this wealth has been
bestowed by Him to humans. Thus, Allah is entitled to demand that man should exploit wealth subject to his commandments.
Thus, man has ‘right of property’ over the things he exploits, but this right is not absolute, arbitrary or boundless. It carries along with it certain limitations and restrictions which have been imposed by the real owner of the wealth. Wealth must be spent where He has commanded it to
be spent and should not be in ways He has forbidden. The following verses of the Holy Qur’ān make this point clear:
“Seek the other world by means of what Allah has bestowed on you, and do not be negligent about your share in the world. And do good as Allah has done good to you, and do not seek to spread disorder on the earth” (al-Qaṣaṣ (28): 77).
This verse explains the Islamic point of view on the question of property. It places the following guidelines:

Whatever wealth man possesses has been received from Allah;
Man has to use it in such a way that his ultimate purpose should be the other world;
Since wealth has been received from Allah, its exploitation by man must necessarily be subject to the commandments of Allah;

A portion of wealth should be forwarded to others in obedience to the command of Allah to do good;

Wealth should not be spent in forbidden ways that are likely to produce disorder on the earth.
This is what distinguishes the Islamic point of view on the question of wealth and property from the Capitalist and Socialist theories. Since the ideological background of Capitalism is materialistic, it gives man unconditional and absolute right of property over his wealth, and
allows him to employ it as he likes. But the Holy Qur’ān has adopted an attitude of disapprobation towards this theory of property, in quoting the words of the nation of the Prophet Shuʿayb (peace be upon him). His people used to object:
“Does your way of prayer command you that we should forsake what our forefathers worshipped, or leave off doing what we like with our property?” (Hūd (11): 87).
These people used to consider property as really theirs and were hence convinced they should be able to do whatever they liked with it. The Qur’ān strikes at these very roots of Capitalism by referring to wealth as belonging to Allah, as in the verse quoted above, “Give to them of the
property of Allah that he has given to you” (al-Nūr (24): 33).
The differences between the Islamic theory, and the theories of Capitalism and Socialism is that Capitalism affirms an absolute and unconditional right to private property whereas Socialism stand on the other end of the continuum by denying the right to private property. Islam, on the other hand promotes ʿadl or fairness. It accepts the right to private property but does not consider it to be absolute and unconditional.
1.8.3 Distribution of Wealth in the Islamic Economic System
It is necessary for a Shariah financial planner to understand how distribution of wealth in the Islamic economic theory differs from the Capitalist and Socialist theories.
In the capitalist theory, wealth should be distributed over only those who have taken part in producing it, who are described in the terminology of economics as the factors of production.
According to Capitalist economics, there are four factors:

Under the Capitalist economy, the wealth produced by the cooperation of these four factors is distributed over these very four factors themselves in the following manner: one share is given to capital in the form of interest, the second share to labour in the form of wages, the third share to land in the form of rent or revenue, and the fourth share, or residue, is reserved for the entrepreneur in the form of profit.
In the Socialist theory, capital and land, instead of being private property, are considered to be national or collective property. Therefore, the question of interest or rent (revenue) does not arise in the philosophy of this system. Under the Socialist system, the entrepreneur too is not an individual but the state itself. Thus, profit, too, is not relevant, at least in theory. Now, there remains only one factor, which is labour. Therefore, labour alone is considered to have a right to wealth in the Socialist system. This wealth comes in the form of wages.
As for wealth distribution in Islam, it divides wealth ownership into two categories:

Those who have a primary right: This refers to those who have a right to wealth directly as a consequence of their participation in the process of production.
Example: Wages and salary from employment or profits from investment in production process.
Those who have a secondary right: These are those who did not take part in the process of production directly, but who have been assigned a share in the wealth of the producers.
Example: Property acquired via hibah, waṣiyyah and farā’id.

As far as those who have a primary right to wealth (the factors of production) are concerned, their nature and classification is different in the Islamic system.

On the other hand, if the capital was invested in the production process with undertaking of risk and liability, it will be rewarded with a share of profits, if profits are realised. In case of loss, the loss will be borne by the capital provider as in the case of muḍārabah and according to the ratio of the capital invested as in the case of mushārakah.
Land, comprising of means such as fixed assets and equipment that remain unaltered in the production process, are rewarded with rental, when they were provided on the basis of lease. As these usually do not form capital, they do not undertake liability, and are not assigned a share of profit or loss.
Labour, if it is not extended on the basis of entrepreneurship but on a wage-based arrangement,is given the stipulated wages. Labour provided by the entrepreneur is rewarded with a share of profit, if profit is realised. In case of loss, the entrepreneur’s labour will go to waste, and he will not receive any return.
Thus, in the primary distribution of wealth among those who had taken part in the process of production, capital is given a share in the form of profit, instead of interest as in the capitalist system. This is because the risk of loss is borne by the capital, in the Islamic system. Thus, risk is not tied to entrepreneurship alone. Capital may not remain immune from the risk of loss.
Entrepreneur, instead of being regarded as a separate entity bearing the risk himself, is merged with capital and labour. When labour is provided on an entrepreneurship basis, it too may deserve a share of profit instead of wages, and face the possibility of not receiving any return in case of loss.
The Shariah system for distribution of wealth has three objectives:

The establishment of a practicable system of economy
Distribution of wealth aims at establishing a natural world system of economy that allows every individual to function normally based on his own abilities and choices voluntarily. In such an environment, the activities undertaken by an individual would be more useful and fruitful. This requires proper utilisation of the natural force of supply and demand in assets as well as utilities, due to which the Shariah upholds the related factors. The Qur’ān explains:
“We have distributed their livelihood among them in worldly life, and have raised some of them above others in social degrees, so that some of them may utilise the services of others in their work” (al-Zukhruf (43): 32).
Enabling everyone to get what is rightfully due to him
The second object of distribution of wealth is to allow every individual to receive what is rightfully his. However, based on the Shariah precept that wealth in principle is the property of Allah himself, who alone lays down the rules as to how it is to be used. Legitimate claim to wealth is not limited to those who had directly taken part in its production. On the contrary, those to whom Allah has made obligatory upon others to help are also counted as legitimate sharers of wealth.
Hence, the poor, the needy, the helpless and the destitute too have a rightful due in wealth. The Qur’ān says, “In their wealth there is a known right for those who ask for it and those who have need for it”
(al-Maʿārij (70): 24-25). Some other verses refer to this right as the right of Allah, for example, “And pay what is rightfully due to Him on the day of harvesting” (al-Anʿām (6): 141).
In this manner, distribution of wealth is to take place among those who have taken part directly in production as well as those to whom a right is assigned by Allah.
Eradicating concentration of wealth
The third object considered by Shariah to be important is that wealth, instead of becoming concentrated in a few hands, should be allowed to circulate in the society freely. This is to narrow down the distinction between the rich and the poor as far as it is practicable. Therefore, the Shariah does not permit any individual or group to have a monopoly over primary sources of wealth but gives every member of the society a right to derive benefit from these. Mines, forests, un-owned barren land, wild game, fishes, rivers, seas, are all primary sources of wealth that every person could make use of to the extent of his ability. The Qur’ān explains, “So that it
(wealth) does not become confined only to the rich among you” (al-Ḥashr (59): 7).
Of these three objectives, the first distinguishes Islamic economy from Socialism, the third from Capitalism, and the second from both at the same time.
The above universal objectives of the Shariah pertaining to wealth based on the distinct economic outlook it advocates should reflect on a Muslim’s attitude towards wealth. Financial planning, which is primarily concerned with guiding the decision-making process related to wealth, should be governed by this overall philosophy.
Consequently, in the operational level, these concepts should be applied in one’s personal budget in every stage of creation, accumulation, protection and distribution of wealth.

Self-Assessment Test
Circle the letter of the correct choice for each of the following.
1, The following statement is true about spending in Islam EXCEPT:
A. Spending should not be lavish and extravagant.
B. Wise spending requires making use of wealth responsibly and understanding it as the bounty of Allah.
C. The Shariah perspective of spending does not necessarily require Muslims to set their financial goals, and identify priorities, targets and costs.
D. Spending is meant for present and future benefits.
2. Which of the following organizations is NOT the promoter of MFPC?
A. LIAM
B. NAMLIFA
C. MII
D. FPAM
3. Which of the following statements is NOT TRUE about the concept of property in Islam?
A. Wealth exploitation by man must necessarily be subject to the
commandments of Allah.
B. Islam teaches its practitioners to concentrate on working to do good deeds for the hereafter than with less working for the worldly life.
C. A portion of wealth should be forwarded to others in obedience to the
command of Allah to do good.
D. Wealth should not be spent in forbidden ways that are likely to produce
disorder on the earth.
4. Which of the following activities does not fall under the step of gathering client data and determining goals and expectations?
A. Analysing a client’s assets, liabilities and cash flow.
B. Gathering necessary documents.
C. Defining a client’s personal and financial goals.
D. Understanding a client’s time frame for results.
5. Factors of production in Islamic economics include:
i. Labour
ii. Land
iii. Money capital
iv. Capital
A. i, ii, iii
B. i, ii, iv
C. i, iii, iv
D. All of the above.
6. In Shariah investment, which of the following is NOT TRUE about capital providers?
a) In a Murabahah contract, profit will be stated upfront on a sale.
b) In a Mudharabah contract, profit will be enjoyed based on fixed rate
determined upfront.
c) In a Mudharabah contract, loss will be borne solely by capital providers.
d) In a Musharakah contract, loss will be borne by the capital providers solely.
7. Which of the following is TRUE about the Mudharabah terms?
i. The seller needs to state the actual cost and capital to the buyer.
ii. The investment capital is contributed by the Capital Provider.
iii. The liability of the Capital Provider is normally limited to the Capital.
iv. Both parties agree on the profit as an addition to the actual cost.
A. i and ii
B. ii and iii
C. i and iv
D. All the above
8. The following is the main source of hukm in Islam EXCEPT__________.
a) Al-Quran
b) ‘Urf
c) Qiyas
d) Law & Legislation
9. Which contract, according to the Shariah, is relevant to the relationship between financial planners and their clients?
A. Mudharabah
B. Musharakah
C. Mutawalli
D. Wakalah
10. To be a financial planner, one should comply with the following requirements of the Securities Industries Act 2003:
i. Possess an Investment Adviser License issued by the Securities
Commission Malaysia
ii. Be a member of a financial planning association
iii. Having a net worth of RM100,000
iv. Not declared a bankrupt
A. i, ii, iii only
B. i, ii,iv only
C. i, ii only
D. All of the above.
Answer: 1-c, 2-d, 3-b, 4-a, 5-b, 6-d, 7-b, 8-b, 9-d,10-c

MODULE 1 / CHAPTER 2
REGULATORY FRAMEWORK AND SHARIAH
Guidelines for Financial Planners
Chapter/Topics Outline:
2.0 Introduction
2.1 Regulatory Bodies Governing Financial Planning Profession
2.1.1 Licensing Regulatory Body
2.1.2 Other regulatory bodies
2.1.3 Relevant Acts
2.2 Shariah Authorities relevant to Financial Planning
2.2.1 Shariah Advisory Council of Bank Negara Malaysia
2.2.2 Shariah Advisory Council of Securities Commission Malaysia
2.2.3 Other Related National Council for Fatwa
2.3 Sources of Shariah
2.3.1 Definite Sources of Islamic Law
2.3.2 Non-Definite Sources of Islamic Law
2.4. Conclusion
Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Regulatory Bodies Governing the Financial Planning Profession
(b) Shariah Authorities Relevant to Financial Planning
(c) Sources of Shariah

2.0 INTRODUCTION
There are various regulatory bodies that govern the practice of financial planning. The mainbodies namely Bank Negara Malaysia (BNM) and Securities Commission Malaysia are involved in licensing the practice itself. The others come into the picture due to the comprehensive component of the financial planning practice which includes investment, risk management and estate distribution that have its own regulatory bodies governing each practice. The role of a professional association is to look at the interest of profession. For example, Life Insurance Association of Malaysia (LIAM) is a self-regulating body that oversees the practice of the life insurance industry in Malaysia. Similar to Securities Commission Malaysia and the Federation of Investment Managers Malaysia (FIMM) to provide the guidelines to the unit trust industry in Malaysia. This chapter will review each of the regulating bodies relevant to the practice of financial planning. Shariah financial planning, in addition, has to observe an extra set of guidelines laid out by the religious authorities related to financial practices such as the National Council for Fatwā and the Shariah Advisory Council in the Securities Commission Malaysia.
2.1 REGULATORY BODIES GOVERNING FINANCIAL PLANNING PROFESSION
2.1 Licensing Regulatory Body
Shariah financial planning is the product of Islamic finance and financial planning. The essence of Shariah Financial Planning certification is to support the financial planner’s capability of meeting the financial needs of the client in conformity with the Shariah principle. Having said that, Shariah financial planners are crucially needed to provide the service of advising clients on how to plan and acquire wealth including financial assets that are Shariah compliant.
Financial planning is a regulated activity, requiring a license from the Securities Commission Malaysia (SC) as per Schedule 2 of the Capital Markets and Services Act 2007. A Financial Planner as defined by SC is a person who analyzes the financial circumstances of another person and provides a plan to meet that other person’s financial needs and objectives. To be a representative of a financial planning company, the person must hold either Registered Financial Planner (RFP), CFP, or ChFC qualification. A qualified person for financial planning can apply to be a Capital Market Services License holder. He must have a minimum of 8 years of relevant experience and have a minimum net worth of RM50,000. An SC-licensed person is also required to fulfill the Continuing Professional Education (CPE) requirements. Twenty CPE points per year is required for license renewal.
2.2 Other Regulatory Bodies
Other regulatory bodies in the industry of financial planning are selfregulating organizations (SROs) representing the professionals working in the industry. The Malaysian Takāful Association (MTA), for example, has its objectives as follows:
(a) To promote and represent the interests of the member companies and the takāful industry.
(b) To render, where possible, to member companies such advice and assistance as may be required.
(c) To circulate information likely to be of interest to member companies, and to collect, collate and publish statistics and other information relating to takāful.
The primary roles of the MTA in relation to consumer protection are as follows:
(d) MTA requires all takāful agents be registered on an annual renewal basis and conducts basic exams for the agents.
(e) MTA imposes a Continuous Professional Development requirement of a minimum of 30 hours per year for Family Takāful agents.
(f) Setting the agents’ competency level and ensuring their continuous development will translate into better services to the consumers so that they are able make informed decisions.
Other SROs working directly in providing part of the components of comprehensive financial planning are LIAM, PIAM, FIMM, FPAM and MFPC.
2.3 Relevant Acts
Relevant Acts that govern the financial planning industry are:
(a) Capital Markets and Services Act 2007:
This act governs the licensing of financial planners.
(b) FSA Act 2013:
It was introduced to replace Insurance Act 1963. The Act was introduced to promote better accountability on the part of the insurer, insurance brokers and adjusters to strengthen their financial standards, to ensure their operations are conducted in a sound manner and to provide greater protection to policy owners.
(c) IFSA Act 2013:
It replaced the Takāful Act 1984 which was amended in 2003 to strengthen the role of the Shariah Advisory Council. It provides the Council with
recognition as the authoritative body over Shariah matters that relate to Islamic finance and Takāful.
Other related Acts are the Companies Act 1965, and Central Bank of Malaysia Act.
2.2 SHARIAH AUTHORITIES RELEVANT TO FINANCIAL PLANNING
This sub-chapter contains a brief on the sources of Islamic law. In addition, some background on the two authorities that provide the guidelines for practitioners to run Shariah financial planning
affairs will also be touched on. They are the National Council for Fatwā and the Shariah Advisory Council providing the opinion on muʿāmalāt affairs to the Securities Commission Malaysia.
3.1 Shariah Advisory Council
The Shariah Advisory Council (SAC) was established in 1996 under the authority of the Securities Commission Malaysia. The duty of the council is to advise the Security Commission on Islamic capital market operations, standardize and harmonize the application of Shariah principles and concept and, review Shariah compatibility with other conventional instruments and new Islamic Instruments. However, it’s most important function is to endorse the permissible or permitted counters in its list of Shariah-compliant securities. The members of the council comprise Muslim scholars who are experts in Islamic Shariah principles who have been trained in uṣūl al-fiqh or fiqh al-muʿāmalāt and expert in finance and corporate matters who are conversant in Shariah.
The role of the council is to facilitate Muslim investors’ participation in acquiring Shariah compliant financial assets. The council revises and publishes the Shariah compliant securities list every six months. With the regularly updated information on Shariah compliant securities counters, Muslim investors can be confident that they are adhering to Shariah requirements while investing.
The objectives of SAC are to harmonize Shariah interpretations, strengthen the regulatory and supervisory oversight of the industry and foster a pool of competent Shariah advisors. SAC uses both the qualitative and quantitative approaches of analysis to decide whether the securities is
Shariah compliant or otherwise. The qualitative approach is used to scrutinize the business activities of companies. SAC of SC agrees that securities that fall into the categories listed below must be excluded:
 Operations based on ribā (interest) involving financial institutions such as commercial and merchant banks and finance companies;
(a) Operations involving gambling activities;
(b) Activities involving the manufacturing or sale of non-permissible (forbidden in Shariah’s point of view) products such as pork, liquor and non-slaughtered meat; and
(c) Operations in the presence of gharar (uncertainty) elements such as conventional insurance companies.
If companies are involved in both permitted and Shariah noncompliant securities, the following criteria should be used:
(d) The core activities must be those conforming to Shariah guidelines. Non-permissible elements must be very small compared to the non-permissible activities;
(e) The public perception of the company must be good or accepted as a company dealing in lawful Islamic activities; and
(f) The core activities must be important and beneficial from an Islamic point of view.
In addition to the general outline on core activities, the Shariah scholars of SAC of SC also agree on the benchmark of Shariah noncompliant securities that may be allowed for securities to be granted Shariah adherence status using the quantitative approach of analysis. A 5% benchmark of non-permitted activity can be tolerated when non-permissible elements (activities not allowed by Shariah) are inseparable from the operation of the business. This 5% benchmark applies to activities related to riba from conventional financial institutions such as banks and insurance operators to businesses involving gambling, alcohol and pork.
These activities considered as ‘umūm al-balwā or activities that involve the general public which are unavoidable in the context of modern business operations. The activities include income generated from fixed deposits received from conventional banking institutions and income received from the tobacco business.
A 20% benchmark is used to for the mixed contribution of rental received by the companies that are not Shariah compliant. Examples are premises used for gambling and sale of liquor.1 This benchmark is allowed for income generated from unlawful Shariah activities that are regarded as
highly important for the development of society. Such activities are called “maṣlaḥah”. Among activities that fall into this category are hotel operations and share brokerage because these activities are needed in order to mobilize resources in the economy. In the eyes of Shariah, it is
feared that hotels will be involved in selling alcohol and other unlawful activities. However, at the same time, the hotel trade is vital for the use of the general public. Thus, a high-percentage benchmark is allowed for income generated by this sector.
It is to be noted that SAC approval includes ordinary shares, call warrants and transferable subscription rights (TSRs). Loan stocks and bonds are not included unless they are issued in accordance with Islamic principles. Other Shariah issues dealt with by the SAC are on the
revision of the permissible status of securities from permissible to non-permissible and vice versa.
The bottom line is that the establishment of SAC has been able to guide Muslim investors in choosing permissible investments. Previously, Muslim investors were either reluctant to deal in stocks or had great difficulties in looking for permissible investment. SAC, however, was
particularly responsible for the increasing Muslim investor participation in the equity markets.
Muslim investors are, hence, urged to keep up-to-date with current changes in the list of Shariah compliant securities, as well as Islamic scholars’ opinions on certain investment modes.
It is only recently that Muslim investors have been able to draft their financial plans in accordance with Shariah principles. They had to wait until the Malaysian Islamic capital market had become broader and deeper. In the 1980s and early 1990s, although Muslims were already aware of the Shariah requirements of investing in permissible products, Islamic financial planning was not viable as only limited financial assets were available. In addition, Islamic financial institutions are now catering to vital areas of financial planning. With the establishment of the Shariah Advisory Council both in the Securities Commission Malaysia and Bank Negara, investors’ confidence is now captured. With the presence of Islamic scholars that are qualified in Islamic law, especially in fiqh muʿāmalāt, investors are confident that the financial institutions are
observing the muʿāmalāt principles accordingly. Islamic capital and financial market currently provide various products and services in areas such as risk management planning, investment planning, and estate management planning.
Shariah Advisory Council (SAC) of Bank Negara Malaysia
To administer the Shariah compliancy of Islamic financial institutions in Malaysia, namely banking and takāful institutions, the Shariah Advisory Council of Bank Negara Malaysia (SAC) was established in May 1997.
It serves as the highest Shariah authority in Islamic finance in Malaysia. The SAC has been given the authority for the ascertainment of Islamic law for the purposes of Islamic banking business, takāful business, Islamic financial business, Islamic development financial business or any other business, which is based on Shariah principles and is supervised and regulated by Bank Negara Malaysia.
As the reference body and advisor to Bank Negara Malaysia on Shariah matters, the SAC is also responsible for validating all Islamic banking and takāful products to ensure their compatibility with the Shariah principles. In addition, it advises Bank Negara Malaysia on any
Shariah issue relating to Islamic financial business or transactions of Bank Negara Malaysia as well as other related entities.
In the recent Central Bank of Malaysia Act 2009, the role and functions of the SAC was further reinforced whereby the SAC was accorded the status of the sole authoritative body on Shariah matters pertaining to Islamic banking, takāful and Islamic finance. While the rulings of the SAC shall prevail over any contradictory ruling given by a Shariah body or committee constituted in Malaysia, the court and arbitrator are also required to
refer to the rulings of the SAC for any proceedings relating to Islamic financial business and such rulings shall be binding.
Consisting of prominent Shariah scholars, jurists and market practitioners, members of the SAC are qualified individuals and have vast experience in banking, finance, economics, law and application of Shariah, particularly in the areas of Islamic economics and finance. SAC is chaired
by Dr. Mohd Daud Bakar for 2008/2010. Nine other scholars are on the SAC for the session. At the organizational level, every institution offering products and services are required to elect its own Shariah Committee to advise on the operations of business in accordance with Islamic principles. In order to facilitate the Shariah Committee in carrying out its duties, the responsibilities of the Islamic financial institutions are to:
(a) Refer to the Shariah Committee on all Shariah Issues.
(b) Adopt and take necessary measures for the implementation of the Shariah Committee’s advice.
(c) Obtain the Shariah Committee’s validation on all Shariah issues and documentation.
(d) Provide the Shariah Committee with access to relevant records, transactions, manual and other relevant information.
(e) Provide the Shariah Committee with sufficient resources, such as budget allocation, independent expert consultation, reference materials, and familiarise the Shariah Committee with the operations of the bank.
(f) Establish a secretariat as the bridge of communication between the Shariah Committee and the bank. Among the responsibilities of the secretariat are to:
a) Arrange and coordinate Shariah meetings on a quarterly basis or more frequently if required.
b) Arrange pre-Shariah meetings prior to quarterly meetings.
c) Circulate meeting notifications and agendas for meetings at least 3 working days in advance.
d) Take minutes of all consultations with Shariah Committee and SAC of Securities Commission Malaysia (all consultations must be endorsed by the Shariah Committee members).
e) Distribute the endorsed minutes to the respective recipients within 3 working days.
f) File the minutes for future references.
Shariah Committee members of an institution providing product and services that are Shariahcompliant have the duties and responsibilities to:
g) Advise the Islamic bank.
h) Endorse documentation such as:
o Proposal forms
o Product manuals
o Marketing advertisements
o Sales illustrations and brochures
o Contracts
o Agreements
o Legal documentation
(i) Assist the SAC of SC to distribute the agreed information.
(j) Ensure compliance.
o Ensure all written opinion given by the SAC is properly implemented.
o Ensure all Shariah advice is adopted.
o Ensure all products and services, policies, documentation, and communications are in line with the opinion given by the SAC and Shariah Committee.
3.2 National Council for Fatwā
At the federal level, the National Fatwā Committee was formed in 1970, under the National Council for Malaysian Islamic Affairs. Later, it was transferred to the Islamic Affairs Division at the Prime Minister’s Department in 1984 and eventually, the Jabatan Kemajuan Islam Malaysia
(JAKIM), the Prime Minister’s Department in 1997. The function of the National Fatwā Committee is to discuss and coordinate issues regarding fatwā at the national level.
The World Fatwā Management and Research Institute (INFAD) in Universiti Sains Islam Malaysia (USIM) and the Securities Commission Malaysia are collaborating to compile and publish the fatwā from various fatwā authorities in muʿāmalāt to be used for institutions in the Islamic finance industry. This initiative is vital for more uniformed practices relating to the muʿāmalāt issues.
Currently, there are a few institutions of Islamic Fiqh Academy (Majmaʿ al-Fiqh al-Islāmī) in several Islamic countries in the world. Majmaʿ al-Fiqh al-Islāmī in Jeddah, Sudan and India, Majmaʿ al-Fiqh al-Islāmī and Rābiṭah al-Ālam al-Islāmī are among the bodies in collaboration with INFAD. Among the functions of these institutions are to produce fatwā and answer
questions posed by Muslims or nonMuslims. There are also Islamic academic centers that carry out related studies like The Center of Islamic Studies in Egypt and The Center of Sunnah Studies in Qatar.
Besides those, there are other institutions that gather the viewpoints of ancient and modern ʿulamā’ in various fields produced through publications, video compact discs, the internet and web sites, for example Ibn Baz, Shanqiti, Fatwā Online, Islam Online and Darul Ifta’ in South
Africa. Individual viewpoints from ʿUlamā’ or institutions like Darul Ifta’ and Al-Azhar House of Fatwā can also be accessed directly through the Internet.
However, research centers and individual viewpoints obtained from the Internet regarding the fatwā researches are not comprehensive. Their focus is on public researches, providing answers according to certain sects and giving responses to certain fatwā questions. INFAD’s coverage on
various global factors or global fatwā information, on the other hand, will be far more comprehensive.
INFAD is also the first institution formed at a higher learning institution in Malaysia and in the world. It is not a body that produces fatwā and does not take over the functions of established fatwā bodies in Malaysia or abroad. INFAD is a research and consultation center to produce
input based on research, information and expertise that can help strengthen the fatwā institutions and to aid certain parties in making decisions and explaining certain policies, or to provide and be a source of authoritative information to other research institutions.
In Islamic countries, the issuance of fatwā is carried out by institutions or individual organizations. In Indonesia, it is done by the Pertubuhan Muhammadiah dan Nahdatul ʿUlamā’ and in the case of Malaysia, by a formal government institution. In this country, the function of issuing a fatwā is included in the jurisdiction of Islamic law. All the states in Malaysia, including the Federal Territories of Kuala Lumpur, Labuan and Putrajaya are vested with the power by the Federal Constitution. The responsibility to produce fatwā is given to the Mufti who is assisted by
the Fatwā Committee. Researches will be carried out before a certain fatwā is issued. INFAD has a more holistic, multidimensional and global scope that differs from other foreign fatwā organizations and state fatwā committees and centers in Malaysia.
4.0 SOURCES OF SHARIAH
4.1 Definite Sources of Islamic Law
The majority of Islamic scholars from the four Islamic schools of thought (Shāfiʿī, Ḥanafī, Mālikī and Ḥanbalī) have agreed that there are four sources of Islamic law. According to them, these sources of Islamic law are definite (qaṭʿī) or. They are:
(a) Al-Qur’ān (The Holy Book of Islam)
(b) Al-Sunnah (The actions and sayings of Prophet Muhammad (s.a.w.)
(c) Ijmāʿ ʿUlamā’ (The outcome of discussion of Islamic scholars)
(d) Qiyās (The analogical deduction of laws applied to current situations)
Other sources of the Islamic law consist of istiḥsān, maṣāliḥ mursalah, ʿurf and istiṣḥāb.
However, the majority of scholars (jumhūr ʿulamā’) are not in the consensus that these sources are binding as the source of Islamic law; that is, some ʿulamā’ agree that they are the source of Islamic law, and some do not. They are referred to as dalīl ẓannī (not definite).
4.2 Non-Definite Sources of Islamic Law
a) Istiḥsān
Istiḥsān literally means to deem something preferable. In its juristic sense, istiḥsān is a method of exercising personal opinion (ra’y) in order to avoid any rigidity and unfairness that might result from literal application of law. Istiḥsān as a concept is close to ‘equity’ in Western law. However, ‘equity’ in Western law is based on natural law, whereas istiḥsān is essentially based on divine law.
Istiḥsān is not independent of Shariah; it is an integral part of Shariah. Istiḥsān is an important branch of law to the changing needs of society. Istiḥsān has been validated by Ḥanafī, Mālikī and Ḥanbalī jurists. Imam Shāfiʿī and Ẓāhirī have rejected it as a method of deduction. However,
in effect, the majority of Islamic scholars have accepted istiḥsān. For example, it is allowed (mubāḥ) for the goods to be absent at the time of sale through the contract of salam. The original ruling was the goods must be present. Also, based on istiḥsān, ʿulamā’ are of the opinion that in
the transaction of istiṣnāʿ (sale by order/manufacturing), it is common for the goods not to be present during the transaction as long as the parties are willing to enter into the contract.
Istiḥsān is not independent of Shariah; it is an integral part of Shariah. Istiḥsān is an important branch of law to the changing needs of society. Istiḥsān has been validated by Ḥanafī, Mālikī and Ḥanbalī jurists. Imam Shāfiʿī and Ẓāhirī have rejected it as a method of deduction. However,
in effect, the majority of Islamic scholars have accepted Istiḥsān. For example, it is allowed (mubāḥ) for the goods to be absent at the time of sale through the contract of salam. The original ruling was the goods must be present. Also, based on istiḥsān, ʿUlamā’ are of the opinion that in
the transaction of istiṣnāʿ (sale by order/manufacturing), it is common for the goods not to be present during the transaction as long as the parties are willing to enter into the contract.
b) Maṣāliḥ Mursalah
It literally means benefit or interest. When qualified as maṣāliḥ mursalah, it refers to unrestricted public interest. Maṣāliḥ mursalah is synonymous with istiṣlāḥ which is also called maṣlaḥah muṭlaqah. Al-Ghazali thinks maṣlaḥah consists of considerations which secure a benefit or
prevent harm. Protection of life, religion, intellect, lineage and property is maṣlaḥah.
On the basis of Maṣlaḥah, the companions of the Prophet decided to issue currency to establish prisons and impose agricultural land tax (kharāj). The ʿUlamā’ of Uṣūl are in agreement that istiṣlāḥ is not proof with respect to devotional matters (ʿibādah) and specific Shariah injunctions,
for example, shares of inheritance. The majority of ʿulamā’ maintain that istiṣlāḥ is proper grounds for legislation. Al-Shāṭibī points out that this is the purpose of al-Anbiyā’ that, “We have not sent you but as a mercy for all creatures” (al-Isrã’ (17):107). There are supports for maṣlaḥah in the Qur’ān in Sūrah Yūnus (10): 7, al-Ḥajj (22): 78 and al-Mā’idah (5): 6.
c) ʿUrf (Custom)
ʿUrf (custom) is defined in uṣūl al-fiqh as “recurring practices which are acceptable to people of sound nature”. ʿUrf and its derivative maʿrūf both occur in the Qur’ān, mostly in the sense of ‘good’ (as opposed to ‘bad’ or ‘evil’) in adherence to Allah’s injunctions (Ãli‘Imrãn (3): 110; alAʿrāf (7): 199). However, ʿUrf has been used to mean ‘custom’ in other parts of the Qur’ān (see al-Baqarah (2): 233) with regard to the maintenance of children.
Therefore, the Shariah has in principle, approved custom in determining rules regarding permissible and non-permissible. Fuqahā’ also adopted ʿurf in the determination of the aḥkām of Shariah. The rules of fiqh which are based on juristic opinion (ra’y) or ijtihād have often been formulated in the light of prevailing custom. It is, therefore, permissible to depart from them if the custom on which they were founded changes in the course of time.
The following are the conditions of ʿurf:
(a) It must be common and recurrent.
(b) ʿUrf must be in practice at the time of transaction, i.e., ʿurf that are not in practice at the
time of decision-making by ʿulamā’ is not a basis for future ʿurf.
(c) Custom or ʿurf must not violate the naṣṣ or clear stipulation of the Qur’ān and the Sunnah.
(d) Custom must not contravene the terms of a valid agreement (valid according to Shariah).
d) Istiṣḥāb
Istiṣḥāb literally means ‘courtship’ or ‘companionship’. In Uṣūl alFiqh, istiṣḥāb means presumption of existence or non-existence of facts. It can be used in the absence of other proof (dalīl).
The term has been validated by a large member of scholars, though not all. In its positive sense, istiṣḥāb presumes continuation of a fact (marriage or a transfer of ownership) till the contrary is proven. For example, for a transfer of ownership to be valid, the actual transfer has to take place
according to Shāfiʿī school or continuation of fact of non-transfer will be applied. This concept is important to decide whether hibah during the life of the deceased is valid or otherwise. If hibah is to be considered valid, then the amount will be excluded from the estate. The remaining estate will be distributed to the heirs after deducting the amount that falls under bequest (waṣiyyah).
In summary, dalīl ẓannī can be used in addition to the main sources of law to restore the order of law, especially in the muʿāmalah law. This is to enable the law to be practiced in modern times where similar situations did not exist during the earlier days of Islam.
Self-Assessment
Circle the letter of the correct choice for each of the following.
1. The following is the main source of hukm in Islam EXCEPT__________.
A. Al-Quran
B. Law and Legislation
C. Qiyas
D. Itjmak Ulama’
2. A 20% benchmark of non-permissible portion that is allowed to be present in Shariahcompliant shares is under _________.
A. Tobacco related activities .
B. Share trading business institutions.
C. Activities that involve gambling.
D. Activities in conventional insurance.
3. The following are the conditions of Urf EXCEPT:
A. Past custom
B. The phenomenon is common and recurrent
C. The Urf must not violate clear stipulation of Al-Quran and Al-Sunnah
D. Custom must not contravene the terms of a valid agreement
4. The following are the responsibilities of the Shariah Secretariat of Islamic financial institutions EXCEPT:
A. Provide a Shariah resolution to the financial institution if required.
B. Take minutes on all consultations with SC and SAC of the Securities Commission Malaysia.
C. Provide consultation on Shariah issues that arise to the Board of Directors.
D. Distribute the endorsed minutes to the respective recipients within 3 working days.
5. Istihsan is one of the sources of Shariah law. Which of the following Ulama’ does NOT consider it as a method of deduction of hukm?
A. Hanbali
B. Syafie
C. Hanafi
D. Maliki
6. The Malaysian Takaful Agency (MTA) is a self-regulating organisation with the following roles EXCEPT:
A. To conduct examination before a person can be a takaful agent.
B. To impose Continuous Professional Development requirements of a minimum of 15 hours per year for Family Takaful agents.
C. To set the agents’ competency level and ensure their continuous development.
D. To register takaful agents on an annual basis.
7. The responsibilities of a financial institution towards its Shariah Committee (SC) include:
i. Obtaining SC’s validation on all Shariah issues and all documentation.
ii. Providing SC with sufficient resources, such as budget allocation, independent expert consultation, reference material.
iii. Familiarising SC with the operation of the bank.
iv. Adopting and taking the necessary measures for implementation of SC’s advice if it is agreed by the Board of Directors.
A. i, ii, iii
B. i, ii, iv
C. i, iii, iv
D. All of the above
8. Which is the highest advisory body in Islamic finance issues?
A. Shariah Secretariat
B. National Shariah Council
C. Shariah Committee
D. National Shariah Advisory Council

9. The responsibilities of Shariah Committee of an Islamic financial institutions include:

i Enduring documents limited to contract, agreements and products manuals.

ii. Ensuring all written opinion given by the SAC is properly implemented.

iii. Ensuring the SAC of Securities Commission Malaysia in distributing agreed information.

A. i, ii, iii

B. ii, iii, iv

C. i, iii, iv

D. All the above.

10. Which of the following statements is considered investment activities allowed under the maslahah concept?
i. TSRs
ii. Loan stocks and bonds
iii. Shares
iv. Investment-linked insurance
A. i only
B. i, ii, iii
C. ii, iii, iv
D. i, iii, iv
Answer: 1-b, 2-b, 3-a, 4-a, 5-b, 6-b, 7-a, 8-d, 9-b,10-a.

MODULE 1/ CHAPTER 3
PPROFESSIONAL AND ETHICAL FRAMEWORK IN FINANCIAL PLANNING
Chapter/Topics Outline:
3.0 Introduction
3.1 The Concept of Ethics in Islam
3.1.1 Ethics in financial planning
3.1.2 Ethics: Legal versus moral obligation
3.1.3 Ethics and the Economy
3.2 Professional Responsibilities in Financial Planning
3.3 Code of Ethics for Financial Planners
3.3.1 RFP Code of Ethics, Professional Obligations and Practice Standards
3.4 Dealing with Clients’ Complaints
3.4.1 Investigation Committee
3.4.2 Complaints
3.4.3 Investigation
3.4.4 Disciplinary Committee
3.4.5 Proceedings before the National Council
3.4.6 Appeal Committee
3.5 Conclusion
Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Shariah Concept of Ethics
(b) Professional Duties in Financial Planning
(c) Code of Ethics for Financial Planners
(d)) Dealing with Clients’ Complaints
3.0 INTRODUCTION
Wealth management in Islam is a form of ʿibādah to achieve al-Falāḥ or success in this worldly life and the hereafter. Unlike conventional financial planning where the planning horizon ceases at the time of death, the Islamic financial planning horizon is extended not only to this world but also to the hereafter. In Islam, accumulating wealth is not in itself sinful as long as it is done through ḥalāl means. Islam emphasizes that its followers should possess certain qualities by which they are able to administer their wealth efficiently.
The Shariah leaves no ambiguity on how wealth should be managed. These qualities should be maintained regardless of whether a person is managing his own wealth or when he is planning for others. Adhering to good ethics and moral behavior helps shape professionalism in financial planning. When one plans for oneself, one should observe ethical behaviour. It is even more so when one is planning for others. In other words, apart from knowing how to become a successful financial planner, keeping to ethics is the indispensable ingredient success in financial planning.
It has been proven that knowledge alone is insufficient if it is not put into practice. We may find, for instance, a financial planner being sued for breaching the trust given or indulging in other unethical practice.
It is equally important to stress that bad attitude may have a great impact on a financial planner’s performance as it may result in the client rejecting the planner’s service. A good planner should constantly strive to better himself and maintain his impeccability throughout his career. Since the incidence of breach of ethics in the financial services industry is widespread, a financial planner should be very sound in his knowledge of any conduct or practice that could be interpreted as unethical. In other words, he should be aware of what is ethically permissible. Otherwise, his actions may be considered unethical although they may be ‘lawful’ according to the law of the land and not be indictable in the absence of any admissible evidence.
This chapter will discuss the characteristics of a financial planner from the Shariah perspective so as to give a clearer picture to those involved in this industry. The discussion will centre on ethics and its relationship to legal obligation. It will also provide the reader with a series of professional code of ethics and the practice of the various professional bodies in Malaysia and their conformity with the Shariah standard of ethics.
3.1 THE CONCEPT OF ETHICS IN ISLAM
It is undeniable that the teaching of Islam is concerned with ethics. This is evident from the Prophet’s tradition as he was reported to have said, “I was sent to perfect good conduct”. In many Qur’ānic verses we can find a similar meaning encouraging us to be ethical and to follow good conduct. What is ‘ethics’? It refers to a set of moral principles that distinguishes what is right from wrong. Within the Shariah perspective, the term which is most closely related to ethics in the Qur’ān is khuluq. The concepts of goodness (khayr), righteousness (birr), justice (ʿadl) and piety (taqwā) mentioned in the Qur’ān have a close relationship with ethics.
2.1 Ethics in Financial Planning
Generally speaking, financial planners are supposed to observe good conduct in carrying out their duties. The following are some of the qualities or characteristics a planner should be equipped with in the course of becoming a good Shariah financial planner.
a) Trustworthiness (Amānah)

The very purpose of the creation of mankind is to fulfill amānah entrusted upon them by Allah.
There are many Qur’ānic verses that explained the importance of this concept;
“We offered the trust onto the heavens and the earth and the hill, but they shrank from bearing it and were afraid of it. And man assumed it. Lo! He hath proved a tyrant and a fool” (al-Aḥzāb (33): 72) Amānah means that a financial planner should ingrain in himself that what he is doing is considered as amānah and needs to be delivered in the best possible form. It does not mean, however, that no monetary element should be involved when carrying out his duties. Otherwise, no one will take on the responsibility of such a job on the pretext that it is not lawful to charge the clients. From the Shariah point of view, becoming a financial planner falls under the scope of “collective obligation” which means, “if no Muslim is involved in this work all communities are to blame”.
b) Righteousness and Making One’s Work Perfect
A financial planner should not only limit himself to performing his professional duties, rather he should also strive to achieve excellence in his work by carrying out duties assigned to him in the best manner. To achieve this, a planner should equip himself with the necessary knowledge and qualification. In this regard the Prophet (s.a.w.) said “Allah, the Exalted is Good and He accepts only what is good”, narrated by Abū Hurayrah.
c) Sincerity
This means a financial planner should seek to obey Allah in performing his work. Being sincere, he can avoid influences or pressures and apply himself to his work as a religious commitment as well as a professional duty. However, it does not mean that a planner is prohibited from taking monetary benefit in performing his work as long as it is lawful and according to Shariah principles. Hence, apart from getting worldly benefits and material gains, a planner becomes worthy of reward from Allah the Almighty.
d) Allah-Fearing Conduct in Everything This is the belief that Allah is observing the acts of his servants. Taking this into consideration in desisting from what Allah does not please. This implies that a planner should act in an Allah fearing manner irrespective of what is being practiced by the people around him. In other words, self-monitoring stemming from intrinsic motives may not be effective unless it is tied to both faith and feeling that one is being observed by Allah from whom nothing is concealed. As Allah says, “For verily He knows what is secret and what is yet more hidden” (Ṭā-Hā (20): 7).
e) Accountability before Allah
A planner should be aware that he will be accountable to Allah on the Day of Judgement. As such, he should take precaution not to get involved in activities that may incur punishment. Allah says in Sūrah al-Zalzalah (99): 6-8, “Then shall anyone who has done an atom’s weight of good, see it. And anyone who has done and atom’s weight of evil shall see it”. In another verse Allah says, “All sufficient is Allah in taking account”, (al-Nisā’ (4): 6). Therefore, a planner should know that he is accountable before Allah, his client and society. He should also hold himself to selfaccountability in all his acts.
Caliph ʿUmar said, “Hold yourself to account before you are held to account, for it is easier for you to account and measure your deeds before they are measured for you.” Self-accountability would have no meaning if it is not linked to faith and belief in the hereafter, and accountability is for one’s deeds, reward and punishment.
f) Fulfilling Promises
In dealing with clients, a planner will inevitably have to be skillful in meeting the client’s needs.
Promises would have been given in order to attract more people to use his service. However, there might be cases where a planner is not able to keep his promise resulting in his image being tarnished; especially, when the promises are broken, intentionally. In fact, the Shariah is very much against not keeping one’s promises and regards it as a sign of hypocrisy. Conversely, the Qur’ān praises those who observe and fulfill their promises and considers such quality as that of a prophet. Therefore, a planner should not make promises to his client which he may not be able to fulfill purely to seek material reward. In short, ethical behavior takes priority over
material gains. Allah says in on the obligation of Muslims to fulfill obligations and promises, “Oye who believe, full all obligations” (alMā’idah (5): 1).
2.2 Ethics: Legal versus Moral Obligation
The previously mentioned qualities of a financial planner are mostly self-motivated and driven by the awareness to be an impeccable planner. To have feelings of guilt in the event of not discharging his duties properly, shows that a planner has reached an ethical level that is enough to safeguard him from further wrongdoings such as, overcharging, taking bribes or practicing favoritism. However, there are instances and circumstances in which self-awareness alone is not sufficient to stop unethical practices. In these cases imposing punishment can be perceived as a deterence to eliminate or at least to reduce malpractices by the planners. Clients or parties involved can take their dissatisfaction to court in the case of unethical practices, provided that the complaints are substantial.
2.3 Ethics and the Economy Ethics is important for two reasons. Firstly, it defines the rules of acceptable behaviour by which a person should follow in the course of living with others. Hence, ethics set the standards for behaviour in society, without which the society will break down. Being unethical is not acceptable because this will violate the rights and expectations of others in a very fundamental way. In general, people are always fighting for their rights, and in doing so they should understand that rights come together with duties. In other words, although a person is free to exercise his rights, it is his duty to ensure that his rights should not be at the expense of others.
Secondly, ethics is what holds the whole business community together. A lack of ethics will lead to moral problems and it can even bring a strong government to its knees. In the financial sector, for instance, we have witnessed numerous crises where investors have withdrawn their funds from countries or regions that they have lost their confidence or trust in.
3.2 PROFESSIONAL DUTIES IN FINANCIAL PLANNING
A financial planner guides an individual to make his/her major financial decisions. He helps the individual understand the consequences of each of his/her financial decision. This function is part of function and duties of every person that seeks benefit and welfare to others. It is part of
the ethics and value embedded in the Qur’ān.
Allah the Almighty says:
“And let there be [arising] from you a nation inviting to [all that is] good, enjoining what is right and forbidding what is wrong, and those will be the successful” (Óli-ʿImrān (3): 104).
A financial planner helps an individual assess his/her financial assets, determine his/her financial goals and consider his/her economic resources to make investment decisions.
The duties of a financial planner include setting financial goals with the client, gathering the client’s financial information, analyzing the information and designing a financial plan for the client. It is a financial planner’s duty to implement the planned financial strategies and monitor the client’s financial decisions.
The above task of the financial planner is driven by the Shariah value and ethics such honesty, transparency and truthfulness to comply with the ḥadīth reported by the Prophet that promote honesty and amānah without any cheating or misconduct.
There is a ḥadīth reported that the Prophet (s.a.w.) said, “Truthfulness leads to righteousness, and righteousness leads to Paradise. A man continued to tell the truth will he becomes a truthful person. Falsehood leads to al fujur (i.e., wickedness, evil-doing), and al fujur (wickedness) leads to the (Hell) Fire, and a man may continue to tell lies till he is written before Allah, a liar”. In regard to honesty, the Prophet (s.a.w.) said: “The merchants will be raised on the Day of Resurrection as evil-doers, except those who fear Allah, are honest and speak truth”.
A financial planner helps the client in risk management by assisting him/her in choosing suitable insurance schemes. He helps plan for the client’s future by providing well-suited investment options. A financial planner helps the client ensure financial independence upon retirement by helping him/her with choosing the proper retirement investment plan. A financial planner will advise the client on how to reduce his/her tax liabilities and enhance cash flow. A financial planner also deals with the conservation and distribution of the client’s financial assets.
This part of consultation, especially when making decision, has been emphasized by Shariah and has been spelled out clearly in the Qur’ān as
Allah the Almighty says:
“And those who have responded to their lord and established prayer and whose affair is [determined by] consultation among themselves, and from what We have provided them, they spend” (alShūrā (42): 38).
In terms of job description, a financial planner studies the different aspects of the financial picture of his/her client and provides a suitable financial solution. Some financial planners deal with the various facets of personal finance, while others specialize in fields like risk management or retirement planning.
The job of a financial planner can be described by means of a 6step process given by the ISO.
The first step is of setting financial goals with the client. The second step includes the gathering of relevant financial information from the client. The third step is analyzing the gathered information. The fourth is the creation of a financial plan. The last two steps include tasks such
as implementing the plan’s strategies and monitoring the implementation of the plan.
3.3 CODE OF ETHICS FOR FINANCIAL PLANNERS
4.1 RFP Code of Ethics, Professional Obligations and Practice Standards
The RFP Code of Ethics, Professional Obligations and Practice Standards (hereafter called the “Code”) has been embraced by the Malaysian Financial Planning Council (MFPC) to furnish principles, standards and rules to all persons whom it has approved to use any of its professional designations; prior and subsequent designations devised by the Certification and CPD Board (CCB). The CCB will recommend to the MFPC National Council to determine who is recognized and approved to use any of the RFP designations. Implicit to receiving this approval is a commitment on the part of the RFP Designee not only to comply with the decrees and requirements of all relevant laws and regulations in Malaysia, but also to take responsibility to act in an ethical and professionally responsible way in all services and activities in the course of conducting his or her business.
The RFP Code of Ethics, Professional Obligations and Practice Standards embody the following two components:
The Code of Ethics (COE)
The COE provides a reference point for guiding designees on how to behave ethically in the conduct of their business. The COE must be read in conjunction with the RFP Practice Standards.
The RFP Practice Standards (RPS)
The RPS is intended to provide detailed benchmarks as to the level of professional practice and competence that is expected of a RFP Designee. The RPS must be read in conjunction with the COE and GPP.
The Code of Ethics (COE)
a) Integrity
RFP Designees shall always act in the best interests of the client, the public generally, and shall act with the utmost degree of integrity in all professional engagements.
Interpretive Notes: RFP Designees are responsible for behaving in a way that is appropriate professionally when serving their clients, the public at large and the MFPC. As guardians of public trust and confidence, RFP Designees are required to use the uppermost degree of impartiality, integrity, and transparency in all professional dealings.
b) Transparency
RFP Designee shall stay transparent and objective in all dealings and shall explain clearly to clients the rationales where objectivity is compromised due to practical reasons.
Interpretive Notes:
A RFP Designee should uphold objectivity, honesty and shall disclose all conflicts of interest in the client planner relationship. In instances where commitments to employers or principals make objectivity difficult, the RFP Designee is required to make known this to the client. In the course of performing his professional duties the RFP Designee shall make known to the client whether he/she is independent, representing a principal(s) or employer.
c) Putting Client’s Interests First
RFP Designee shall put the client’s interests above their own interests at all times.
Interpretive Notes:
The RFP Designee is required to place the client’s interest above his own in all professional engagement with clients. The RFP Designee agrees to accept the responsibility that in situations where due to prejudicial influences or conflicts of interests that may affect objective judgment, he hall declare such influences or conflicts to clients and take actions that are appropriate in protecting the clients’ interests.
d) Making the Code of Ethics Available to Clients
A RFP Designees shall, upon request, provide a copy of this Code of Ethics and shall explain to clients the meaning of its provisions.
Interpretive Notes:
A RFP Designee should make available to the client a copy of the COE and is able to explain how the COE function in the professional relationship and what his/her role and obligations are with respect to the client, his/her principal and the MFPC.
e) Continuing Professional Development
RFP Designees shall continue to develop themselves professionally and maintain relevancy and competence at a level required to serve clients professionally.
Interpretive Notes:
A RFP Designee shall continuously acquire maintain and use the standards of knowledge and due care relevant to his/her role as a financial planning professional and to meet guidelines and rules set by the authorities and relevant self-regulatory organizations.
f) Confidentiality
RFP Designees shall keep all client information confidential according to guidelines, practice standards and laws set by the relevant authorities (e.g. SC, BNM) and Self-Regulatory
Organizations (e.g. LIAM, MFPC, NAMLIFA, etc)
Interpretive Notes:
A RFP Designee shall request all relevant records and documentation as is necessary to satisfy
the requirements of the client and the RFP Designee shall respect confidentiality of all information obtained in the performance of his/her professional services unless otherwise required or permitted by law or in the course of a civil dispute.
g) Professionalism
RFP Designees shall act with professionalism and shall act in a manner that brings honour and dignity to the profession.
Interpretive Notes:
A RFP Designee shall behave in an honest and courteous manner towards all persons in business relationships and shall enhance the standing of the profession in the community in which he/she serves.
h) Diligence
RFP Designees shall be diligent in discharging responsibilities to clients and the public and shall render such services promptly, carefully, and thoroughly.
Interpretive Notes:
A RFP Designee is expected to diligently plan and supervise any professional activity for which he/she is responsible in an adequate and comprehensive manner.
i) Professional Undertakings
RFP Designees shall only undertake tasks for which they have the proper experience, knowledge, skills, competence and authorization.
Interpretive Notes:
A RFP Designee shall only undertake business related to his business within the limits of his/her competence and authorization. The RFP Designee must recognize circumstances where knowledge and competence are not sufficient for the task and inform the client of such deficiencies, and where appropriate, recommend to the client professionals who are qualified to complete the task.
j) Charges, Fees and Costs
RFP Designees shall declare all charges, fees and cost arrangements with clients prior to entering into a contract of engagement.
Interpretive Notes:
A RFP Designee shall make known to the client and explain to him the basis of charges, fees nd or other remuneration related to services performed on behalf of the client.
The RFP Practice Standards (RPS)
Preamble
The RFP Practice Standards (RPS) is an evolving set of specific professional benchmarks and principles introduced by CCB of the MFPC that are intended to help RFP Designees understand the level of competence and acceptable professional behaviour expected of them in various situations and in dealings with clients and associates. Where there are no clearly defined benchmarks or principles listed in the RPS to measure performance or to guide behaviour in a particular situation or dealing, the designees are to refer to the General Practice Principles for general guidance.
It should be noted that these practice standards and principles provided in the RPS are not meant to be bases for legal liability to be used against a designee who is in violation of these practice standards and principles. Notwithstanding, these practice standards and principles do
provide a basis for the Disciplinary Officer of the Ethics and Compliance Board of the MFPC to take disciplinary action against the designee who has brought bad practices and disrepute to the profession.
The RFP Practice Standards (RPS) deals with the job aspects of financial planning and the financial planner. The design of the standards is guided by researches and job analyses made over the years by professional bodies and discussions with financial planning professionals. The RPS provides guidance and benchmarks to financial planning practitioners on how they should perform their job to meet internationally accepted practice standards and to meet clients’ expectations.
Purpose of the RPS
The RFP Practice Standards (RPS) determines the quantity of professional practice that is expected of a RFP Designee who practices financial planning, regardless of his/her job status or work title. All RFP designees are expected to conform to the RPS.
‘Financial Planning’ Defined Under the RPS
The RPS defines financial planning or personal financial planning as “a process or methodology of assisting clients in determining their financial goals, objectives and priorities and the resources to meet them in an optimal and practical manner.”
From the definition, it may be deduced that financial planning is a process of doing things and not a product.
The ‘Financial Planning Process’ Under the RPS
The RPS has adopted the established six-step financial planning process fashionable within the financial planning circle. The RPS considers the role of defining and redefining of the client-planner relationship as a continuous part of the engagement with the client, which starts from
the pre-planning, planning, to the monitoring period. Since, it is an on-going activity that last throughout the relationship after the initial engagement and is interwoven into the fabric of everyone of the six-step financial planning process, the RPS does not list it as one of the six-step process. Instead, separate guidelines are provided under the RPS recommendations to define the activity.
Notwithstanding the above, the RPS does recognize and support any financial planning process that matches its adopted model in serving clients’ needs at the professional level.
Purpose and Format
The RFP Practice Standards (RPS) are represented by a series of RPS Codes, which are ‘Defining Statements’ associated with the continuing professional relationship of the planner with the client and the process of dealings associated with financial planning.
To ensure clarity to the purpose and meaning of the statements made, an Interpretive Note is provided to support each Defining Statement. In addition, the intended outcomes for the client, public and the financial planning practitioner of each category of defining statements where the elements are carried out accordingly, are stated to give an indication of their benefits.
3.4 DEALING WITH CLIENTS’ COMPLAINTS
The Ethics and Compliance Board (hereinafter referred to as “the ECB”) is responsible for the
enforcement of the RFP Code of Ethics, Professional Obligations and Practice Standards
(hereinafter referred to as the “Code”) which Code was developed by the Certification and CPD
Board (hereinafter referred to as “CCB”) of the MFPC and approved by the National Council of
the MFPC. The ECB is also responsible for dealing with complaints made against Members
including setting the guidelines within which disciplinary proceedings against Members are to be
conducted.
The National Council is empowered to take such disciplinary action against any Member,
pursuant to inter-alia any regulations made by the National Council from time to time.
Accordingly:-
(1) Guidelines have been set by the ECB, which have been approved by the National Council of the MFPC;
(2) Regulations have been established by the National Council incorporating the above guidelines, for which will be known as the MFPC Disciplinary Proceedings Regulations.
5.1 Investigation Committee
An Investigation Committee (IC) shall be formed comprising of at least one (1) member of the ECB and not more than three (3) members of the ECB (the IC) whose function shall be to investigate any complaint concerning a Registered Financial Planner (RFP) and make the determination set out in Regulation 3(f) below;
 Subject to sub-regulation (a) above, the composition of the IC including the Chairman of the IC, shall be determined by the Chairman of the ECB. If the IC comprises only one (1) member of the ECB, references in these Regulations to the Chairman of the IC shall be
deemed to refer to such single member of the IC;
 The term of any member of the IC shall be for a period of two (2) years subject to the power of the Chairman of the ECB to: extend the term for further period(s) of two (2) years each; or remove or release any member of the IC, in such circumstances as the Chairman of the ECB deems fit.
5.2 Complaints
(a) Any complaint concerning a RFP designee shall be in writing and shall be made or referred to the ECB;
(b)Any member of the National Council of the MFPC shall be entitled to refer to the ECB of any alleged breach of the Code that comes to his notice or that is brought to his attention. The ECB shall then liaise with any or all relevant persons in order that a complaint complying with the requirements of subregulation (c) below is made to the ECB. The member of the National Council who has so referred any such alleged breach of the Code shall not participate in the
disciplinary proceedings against the RFP designee concerned;
(c) A complaint shall contain/be accompanied by the following:
i. The full name, Identity Card/Passport No. and address of the complainant;
ii. The facts of the complaint;
iii. Copies of any document that the complainant proposes to rely on in support of his complaint; and
iv. The signature of the complainant.
5.3 Investigation
(a) A written complaint in compliance with Regulation 2(c) above shall be forwarded by the ECB to the IC within fourteen (14) days of the receipt of the written complaint;
(b) The IC shall commence its investigation into the complaint and report its findings to the ECB as expeditiously as may be reasonably expected of it but not later than two (2) months after the receipt of the written complaint by the IC or within such further period
as the Chairman of the ECB may in writing specify upon an application made by the IC for an extension;
(c) For the purposes of any investigation, the IC may:
i. require the RFP designee concerned to produce for the inspection by the IC of any document which may relate to or be connected with the subject matter of the investigation and may require the RFP designee involved to give information in relation to any such document;
ii. Require the RFP designee concerned to give all information which may relate to or be connected with the subject matter of the investigation.
(d) The IC shall refer to the National Council the RFP designee concerned who without lawful excuse refuses or fails to comply with either of the requirements in sub-regulation (c) above whereupon the National Council shall be entitled to:
i. Suspend the membership of the RFP designee concerned with the MFPC for such
period as the National Council deems fit;
ii. Notify all Members of the MFPC and all relevant regulatory authorities of such
suspension. Any such reference to the National Council and/or suspension by the
National Council shall not affect the investigation by the IC which shall continue.
(e) Before the IC considers the complaint, the IC shall cause to be posted by prepaid
registered post or delivered to the RFP designee concerned at his last known address
according to the records of the MFPC:
i. a copy of the written complaint and all accompanying documents (if any); and
ii. a notice inviting the RFP designee concerned within fourteen (14) days of the
notice or such further period as allowed by the IC, to give to the IC any written
explanation he may wish to offer to the IC on the complaint.
(f) The IC shall allow the time specified in the notice referred to in sub-regulation (g) above
to elapse and shall give due consideration to any written explanation made by the RFP
designee concerned;
(g) The IC shall meet at such place and on such date and at such time as the Chairman of
the IC shall determine from time to time in order to consider the complaint and to fulfill its
functions in sub-regulation (f) above;
(h) The IC shall prepare a report stating its findings and the determination as reached by it.
The report of the IC (together with copies of the complaint, letter of explanation (if any)
by the RFP designee concerned and any and all correspondence between the IC and
the complainant and/or the RFP designee concerned) shall be forwarded to the
Disciplinary Committee.
5.4 Disciplinary Committee
The Disciplinary Committee (DC) shall comprise:
(a) two (2) RFP designees who have been involved in financial planning for not less than
five (5) years;
(b) a person with a legal qualification recognized under the Legal Profession Act, 1976;
Subject to sub-regulation (a) above, the ECB shall nominate for the consideration of the
National Council the persons who are to comprise the DC. The DC shall comprise such
nominees who meet with the approval of the National Council;
(c) The term of each member of the DC shall be for a period of two (2) years subject to the
power of the National Council to:
(i) Extend the term for further period(s) of two (2) years each;
(ii) remove or release any member of the DC,
in such circumstances as the National Council deems fit;
(d) The Chairman of the DC shall be as determined by the President of the National Council
from time to time;
(e) The DC shall meet at such place and on such date and at such time as the Chairman of
the DC shall determine from time to time;
(i) Where the IC has determined that no proper cause for the complaint exists or no
cause of sufficient gravity exists; or
(f) Where the complainant has withdrawn the complaint and the IC has referred the matter
to the DC with a recommendation that the complaint be considered closed, the DC may
concur with the determination or recommendation (as the case may be) of the IC and
the complaint shall thereafter be considered closed. However, where the DC disagrees
with such determination or recommendation of the IC (as the case may be), the DC shall
proceed to hold a formal investigation in relation to the complaint;
(g) Notice of the hearing of the DC shall be sent to the complainant and to the RFP
designee concerned by prepaid registered post or delivered to the last known address of
the complainant and the RFP designee concerned based on the records of the MFPC.
The notice shall specify the date, time and place of the hearing of the DC;
(h) The DC may adjourn the hearing from time to time. No written notice of an adjournment
is required to be given to any party when the adjournment is made in the presence of
that party;
(i) Where on the date fixed for the hearing and investigation of the complaint, the
complainant or the RFP designee concerned or both fail or fails to attend before the DC,
the DC may, upon being satisfied that the notice of the hearing has been posted or
delivered to the person or persons concerned, proceed to hear and investigate the
complaint in the absence of such person or persons without further notice to such
person or persons and make its determinations;
At any hearing before the DC:
(i) the RFP designee concerned may cross-examine the complainant and his witnesses,
if any, in relation to the complaint;
(ii)the complainant may cross-examine the RFP designee concerned where he gives
evidence, and his witnesses, if any.
(j) Where the DC is not unanimous on any question or matter to be determined, the
decision of the majority shall be deemed to be the decision of the DC;
(k) After hearing and investigating any matter forwarded to it, the DC shall in its report
record its findings in relation to the facts of the case and according to those facts shall
determine if the RFP designee concerned is in breach of the Code;
(l) Where the DC determines that the RFP designee concerned is not in breach of the
Code, the matter shall then be considered closed;
(m) Where the DC determines that the RFP designee concerned is in breach of the Code,
the matter shall then be considered by the National Council;
(n) The report of the DC together with the record of the proceedings shall be sent to the
President of the National Council within two (2) months from the receipt by the DC of the
report of the IC on the complaint or within such further period as the Chairman of the
ECB may in writing specify upon an application made by the DC for an extension;
(o) A copy of the report of the DC together with the record of the proceedings shall be sent
to the complainant and the RFP designee concerned by prepaid registered post or
delivered to their respective last known addresses based on the records of MFPC.
5.5 Proceeding before the National Council
(a) In the event the RFP designee concerned has been determined by the DC to be in breach of the Code, at least seven (7) working days notice shall be given to the RFP designee concerned, the complainant and the Chairman of the DC of the place, date and time of the meeting of the National Council for the consideration of the matter. The place, date and time of the meeting of the National Council shall be as determined by the President of the National Council from time to time;
(b) Where on the date fixed for the proceedings before the National Council, the complainant or the RFP designee concerned or both fail or fails to attend before the National Council, the National Council may, upon being satisfied that the notice of the same has been posted by prepaid registered post or delivered to the person or persons concerned, proceed with the matter;
(c) The National Council may adjourn its proceedings from time to time. No written notice of adjournment is required to be given to any party when the adjournment is made in the presence of that party;
(d) At the proceedings before the National Council, the National Council shall consider the report of the DC and give an opportunity to the RFP designee concerned to raise any matter concerning the report of the DC. However, the RFP designee concerned shall not be allowed to adduce any further evidence or call any witnesses for the purpose of the proceedings before the National Council;
(e) The National Council may invite the Chairman of the DC and the complainant to express their views on the matters as raised by the RFP designee concerned. The National Council may, as it deems fit, require the DC to submit within such time as determined by the National Council a further or supplementary report on such matters and issues that the National Council deems fit for the purpose of the proceedings before the National Council and Regulation 4(e), (g), (h), (i), (j) and (k) shall, to the extent necessary, apply for any hearings before the DC for that purpose;
(i) The National Council shall thereafter determine if it concurs with the determination of the DC;
(ii) If the National Council does not concur with the determination of breach by the DC, the National Council shall rule accordingly and the matter shall then be considered closed;
(iii) If the National Council concurs with the determination of breach by the DC, the National Council shall then hear the plea in mitigation (if any) that the RFP designee concerned chooses to make. Thereafter or soon thereafter as is possible, the National Council may impose any one of the following disciplinary actions:
(iv) reprimand the RFP designee concerned;
(v) impose such fine upon the RFP designee concerned as the National Council deems appropriate to be paid to the MFPC within such time frame as determined by the National Council provided that such fine does not exceed the sum of RM50,000.00.
In the event such fine is not paid within such time frame, the RFP designee concerned shall be suspended from membership with the MFPC until such fine is paid;
(vi) suspend the RFP designee concerned from membership with the MFPC for such period as the National Council deems appropriate in the circumstances; or (vii) order the removal of the name of the RFP designee concerned from the Register of Members.
(f) The complainant and the RFP designee concerned shall be notified of the determination of the National Council and the disciplinary action imposed by the National Council (if any) within fourteen (14) working days of the decision of the National Council in relation to the same by a notice in writing issued by or on behalf of the National Council and sent by prepaid registered post or delivered to their respective last known addresses based on the records of the MFPC;
(g) The National Council may publish or cause the publication in any manner it shall deem appropriate, the name of the RFP designee concerned who has been subject to disciplinary action pursuant to these Regulations including the penalty imposed on him provided that such publication shall not be effected pending the disposal of an appeal made in accordance with Regulation 6 below:
(h) The RFP designee concerned may apply for a stay of the disciplinary action as imposed by the National Council provided that an appeal has been made by the RFP designee concerned in accordance with the requirements of Regulation 6(a) below. The application for stay shall be made to the President of the National Council who shall also determine such an application.
5.6 Appeal Committee
(a) The RFP designee concerned may, within a period of fourteen (14) days after been notified of the disciplinary action imposed by the National Council, appeal to the Appeal Committee set up hereunder. The appeal shall be in writing and addressed to the President of the National Council and shall:
(i) state the intention of the RFP designee concerned to appeal against the decision of the National Council and indicating whether the appeal is against the determination of breach of the Code and/or the disciplinary action imposed by the National Council; and
(ii) be accompanied by payment in the sum of RM500.00 to offset the expenses incurred for the purposes of the appeal. This payment shall not be refundable.
(b) An appeal that does not comply with the above requirements shall be incompetent and any determination that the appeal is so incompetent shall be made by the President of the National Council who shall inform the RFP designee concerned of such determination;
(c) The Appeal Committee (the AC) shall be appointed by the National Council from time to time so as to hear any particular appeal as lodged. The AC shall comprise:
(i) a practicing lawyer who is an Advocate & Solicitor of the High Court of Malaya; and
(ii) two (2) persons who are members of bodies (whether statutory, corporate or otherwise) which bodies are involved in or connected with financial planning and/or financial services;
(d) The Chairman of the AC shall be as determined by the National Council;
(e) The AC shall meet at such place and on such date and at such time as the Chairman of the AC shall determine from time to time;
(f) The AC may confirm or reverse the determination made by and/or confirm, reverse or vary the disciplinary action imposed by the National Council;
(g) The AC shall, as soon as practicable after its constitution, give the RFP designee concerned an opportunity to make a written representation within such time as may be stipulated by the AC;
(h) After receiving the written representations of the RFP designee concerned (if any), the AC may invite the President of the National Council and/or the Chairman of the DC to give their respective written comments on the written representations of the RFP designee concerned, with such comments to be given within such time as may be stipulated by the AC;
(i) The AC shall upon receiving the written comments of the President of the National Council and/or the Chairman of DC, give the RFP designee concerned an opportunity to give his written comments on the same within such time as may be stipulated by the AC;
(j) After receiving the written representations of the RFP designee concerned, the written comments of the President of the National Council and/or the Chairman of the DC and the written comments of the RFP designee concerned on the same, or in the event there is a failure to submit to the AC any or all of the written representations/comments referred to above, the AC may proceed to consider the appeal based on:
(i) The report of the DC together with the record of the proceedings before the DC;
(ii) The determination of the NC; and
(iii) The written representations and written comments referred to hereinabove and received by the AC.
In order to avoid any doubt, there shall be no oral hearing before the AC.

Self-Assessment
Circle the letter of the correct choice for each of the following.

1. Which of the following statements is NOT TRUE on the operation of Appeal Procedures when a Financial Planner is reported to the Disciplinary Committee?
A. The Appeal Committee consists of, among others, a practicing lawyer and 2 persons of the member of the bodies.
B. Oral Hearing before the Appeal Committee is allowed on the circumstances allowed by the National Council.
C. The AC may confirm or reverse the determination made by and/or confirm, reverse or vary the disciplinary action imposed by the National Council.
D. Financial Planners should appeal within 14 days after been notified of the disciplinary action.

2. Which of the following statements is TRUE on Charges, Fees and Costs charged by a Financial Planner?
A. Financial Planners may charge only fees to their clients.
B. Financial Planners should not charge commissions as it will result in financial planners not acting in the best interest of the client.
C. Financial planners should declare all charges, fees and costs arrangements with clients prior to entering into a contract of engagement.
D. Financial planners may impose fees on the clients at the end of the assignment without having to declare the charges upfront based on the work done.

3. Who are the members of the Disciplinary Committee?
i. 2 RFP designees who have been involved in financial planning for not less than 5 years.
ii. The President of MFPC.
iii. A person with a legal qualification recognized under the Legal Profession Act, 1976.
iv. A Shariah Scholar who has been nominated to be in the Committee.
A. i, ii, iii
B. i and iii only
C. i, iii, iv
D. All of the above

4. The following are the purpose of RFP Practice Standards (RPS) EXCEPT:
A. To determine the quantity of professional practice that is expected of a RFP Designee who practices financial planning.
B. To provide guidance and benchmarks for financial planning practitioners on how they should perform their job to meet internationally accepted practice standards.
C. To provide a list of the compulsory Six-Step process of financial planning activities.
D. To become the basis for the Disciplinary Officer of the Ethics and Compliance Board of the MFPC when the need arises.

5. Why do the financial planners owe the client the duty to perform the 6-step process?
i. To make sure that the financial planner lets the client achieve his objectives.
ii. To ensure that the financial planner undertakes a comprehensive view of the client’s financial circumstances.
iii. To ensure that the financial planner recommends the right products that generate highest income to the financial planner.
iv. To ensure that the financial planner performs his duties with diligence and in a professional manner.
A. i, ii, iii
B. i, ii, iv
C. i, iii, iv
D. i and ii

6. Why would a financial planner require professional liability insurance?
A. To protect himself against possible or alleged negligence.
B. To protect himself against loss of income from the dwindling number of clients.
C. To protect himself against any corrupt practices of financial planners.
D. It is the requirement under the Capital Market and Services Act 2007

7. Which principle in the Code of Ethics best describes a careful, persevering and industrious approach to work?
A. Professionalism
B. Diligence
C. Transparency
D. Objectivity

8. Why must the financial planner not be ignorant of his professional responsibilities?
A. To avoid conflict of interest.
B. To avoid unintentional omission of his duty of care, fiduciary duty and contractual duty.
C. To be able to be objective when providing recommendations to clients.
D. To be able to put the clients’ needs first.

9. The following are reasons for a financial planner to gather correct and accurate data from the client EXCEPT:
A. To understand the risk tolerance level.
B. To know whether the client has enough fund to pay the financial planner.
C. To plan according to the client’s goals.
D. To understand the client’s time frame for planning.

10. To be a financial planner, one should comply with the following requirements of the Capital Markets and Services Act 2007:
i. Possess an Investment Adviser License issued by Securities Commission
Malaysia.
ii. A member of a financial planning association.
iii. Having a minimum net worth of RM100,000.
iv. Not a bankrupt.
A. i, ii, iii only
B. i, ii,iv only
C. i, ii only
D. All of the above

Answer: 1-b, 2-c, 3-b, 4-c, 5-d, 6-a, 7-b, 8-b, 9-b,10-c

MODULE 1 / CHAPTER 4
PERSONAL FINANCIAL STATEMENT AND CASH FLOW MANAGEMENT
Chapter/Topics Outline:
4.0 Introduction
4.1 Objective and Nature of Personal Financial Statements
4.1.1 Sources of Information for Constructing a Client’s Personal Financial Statements
4.2 Construction of Statement of Net Worth
4.2.1 Assets Section
4.2.2 Liabilities
4.2.3 Net Worth
4.3 Cash Flow Statement Construction
4.3.1 Cash Inflows
4.3.2 Cash Outflows
4.4 Cash Flow Management in Budgeting
4.4.1 Cash Flow Analysis
4.4.2 Cash Flow Planning
4.4.3 Budgeting
4.5 Personal Financial Ratio Analysis
4.6 Conclusion
Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Objective and Nature of Personal Financial Statements
(b) Construction of Statement of Net Worth
(c) Constructing a Cash Flow Statement
(d) Budget Cash Flow Management
(e) Personal Financial Ratio Analysis

4.0 INTRODUCTION
Financial planning relates to prudent handling and investment of one’s finances in order to achieve one’s financial objectives. A financial planner needs to make a careful assessment and understand the financial scenario pertaining to the client. In carrying out this process, a financial planner is in need of mechanisms to evaluate his client’s financial situation. Personal financial statements are some of the fundamental information bases that the financial practitioner can use for this purpose.
Financial statements are of crucial importance as far as business enterprises are concerned, as they are the key source of information to understand the well-being of the organization’s finances. In addition, the law also requires businesses to report their operations through financial statements. As for personal financial planning, the purpose of financial statements is analogous to that of a business except that, it is not a regulatory obligation. The data on the various financial statements provides important quantitative information regarding the client. Unlike the business financial statements, there is no fixed model for personal financial statements. The financial practitioner will have to select those that suit his purpose and needs for use.
As preparation of financial statements and construction of cash flows are essentially technical in nature, these processes do not vary to any great extent even under Shariah financial planning.
The basic classifications are similar to a conventional statement. Despite this, there are differences pertaining to certain important aspects in the financial statements prepared for Islamic financial institutions and other Islamic commercial ventures. These relate to areas such as the objective of FSs, form of capital, equity-based investments that reflect in a unique manner on assets and liabilities, etc.
However, as far as personal financial statements prepared for the purpose of financial planning are concerned, these do not vary significantly from the normal format. Nevertheless, there are some Shariah areas to be observed with regard to the content of such statements. In offering Shariah based financial planning services to a Muslim client, the practitioner should ensure that the statements do not embody any prohibited (ḥarām) element, and the assets, liabilities, etc, are properly reflected in line with Shariah guidelines. Proper attention should be given to obligations such as unpaid zakāt, and incidental ḥarām accruals such as, interest income, which have to be given away as soon as possible. In what follows, we shall discuss the technical aspects pertaining to financial statements, drawing attention to relevant Shariah aspects where necessary.
4.1 OBJECTIVE AND NATURE OF PERSONAL FINANCIAL STATEMENTS
The activity of assessing the client’s current financial resources and obligations is fundamental to financial planning. For such performance to be possible, the financial practitioner will need organized records of the client’s finances. This is where personal financial statements come into play. They are key documentation tools for evaluating, measuring and monitoring the client’s finances. As such, they should be continuously updated to reflect the client’s most recent financial status.
2.1 Sources of Information for Constructing a Client’s Personal Financial Statements The following are some of the sources where the financial practitioner can obtain the necessary information for the construction of the personal financial statements:
(a) Fact-finding form
(b) Planner’s notes
(c) Income & property tax documents
(d) EPF statements
(e) Life insurance/takāful policies
(f) Will documents
(g) Assets and liabilities valuation documents
(h) Any other relevant sources
4.2 CONSTRUCTION OF STATEMENT OF NET WORTH
The most important personal financial statements to be constructed include the statement of net
worth and the cash flow statement. These financial statements will be discussed in this section.
The statement of net worth or balance sheet presents a snapshot of the client’s financial
position at a particular date. It shows how the assets of the client are financed, which is either
from his own savings and accumulations or from outside sources, for example, banks and credit
card companies.
It also shows the net worth of the client, which represents his real wealth holdings at that point
of time.
The balance sheet is divided into three broad sections as follows:
 The assets section which shows what the client possesses on that date;
 The liabilities section which shows what the client owes others on that date, and
 The net worth section which is the equity ownership the client possesses over
his/her assets at that date.
The basic formula for the statement of net worth may be shown as follows:
(Possessions) (Assets Financing Sources)
Assets = Liabilities + Net Worth (Capital/Equity)
“has” “owes” “owns”
The net worth is the measure of the client’s wealth. The net worth comprises resources that may
be used to fund the client’s current and financial needs. How does net worth increase or
decrease? Any decrease in liabilities or increase in assets or assets’ values will boost the
personal net worth and vice versa.
For contingent liabilities or assets, the financial practitioner may include them in the footnotes.
This provides a clearer representation of the client’s position on potential financially disruptive
issues. An example of a contingent liability may be a pending lawsuit that may cause the client to
pay a huge sum of money. An example of a contingent asset may be some inheritance pending
probate.
3.1 Assets Section
The assets section will cover three broad categories of financial items. Financial items are those
items that are financially valuable to people. They are economic resources that have monetary
values that are possessed by the client. Those assets that are financed using debt instruments
such as bank loans are also listed as an item in the statement of net worth.
Cash/Cash Equivalents
These are liquid assets, i.e. cash assets or those assets that can easily be converted to cash
with minimal lost of value. They are low risk assets that are fairly easily available when cash is
needed. These assets are tagged to meet current, emergency or unexpected needs.
The following may be classified as cash or cash equivalent assets:
 Savings account
 Current account
 Fixed-deposit accounts
 Life insurance cash values
Note on accounting for bank deposits and insurance premiums:
It should be noted that in all the above are liabilities within a conventional system. Any return to
be received from the bank in excess of the original amounts invested is interest (ribā), and is
prohibited. Since depositing monies in such funds involves entering into an interest based
transaction, such deposit is not permissible, except in current accounts, where no interest
accrues. Therefore, from an Islamic perspective, only the original amounts invested in the above
accounts should be counted as assets of the depositor. Any interest accrued is not an asset, as a
Muslim is not permitted to draw such amounts. For current accounts, the principle used usually is
the wakālah concept. The bank will act as the agent, managing the depositors’ monies. A variant
of the concept is wakālah yad ḍamānah or agency with guarantee. This indicates that the bank is
guaranteeing the depositors deposit, but the return accrued to the deposits.
If the deposit was made in accounts maintained by Islamic banks under a Shariah approved
mode such as muḍārabah, the total amounts to the credit of the depositor/investor could be
regarded as assets. This asset will be invested by the bank on the principal of muḍārabah on a
pre-agreed profit ratio with the depositors. In this case, the capital invested as well as the profit
share can be claimed by the investor. Losses accrued to the muḍārabah accounts will be borne
by the rabb al-māl or the capital provider, in this case, the depositors.
It should be further noted that deposits in muḍārabah investment accounts represent investment
of capital in a venture, which is subject to potential loss. This means that such funds are risk
capital. Therefore, they should not be treated as similar in every manner to loans extended.
However, while this aspect demands a different treatment in FSs of Islamic banks etc, in FSs
prepared merely for financial planning purposes, it need not be a reason for altering the format,
unless convenient. Nevertheless, the essential nature of such deposits should not be lost sight of
Participation in life insurance policies is not permissible for a Muslim. If such a policy has been
obtained, the original amount paid could be reflected under assets, as it is a loan. In family
takāful, amounts to the participant’s credit in the muḍārabah portion which comprises
muḍārabah capital invested and profits realized, could be accounted under assets.

Investment Assets
These are financial items that have been reserved for a specific purpose, for example,
retirement funding or to be accumulated for the purpose of increasing wealth. These assets
usually provide earnings that are above that of cash or cash equivalent assets. Except for EPF
savings, the tradeoff carries a higher risk for the client.
The following may be classified as investment assets:
(a) EPF account balance
(b) Equities (shares)
(c) Fixed-income securities (bonds)
(d) Real properties (those held for investment purpose)
(e) Unit trusts
(f) Managed funds
(g) Business & business assets
(h) Jewellery/Collectibles (those held for investment purpose)
(i) Home Contents (for sale at retirement)
(j) Capital invested under mushārakah / muḍārabah
Note on investment assets:
In all the above, both capital and profit will be regarded as assets if invested in Shariah compliant accounts. If the investment is non Shariah compliant, only the principal will be regarded as assets.
Assets for Personal Use These are valuables that are generally meant for personal usage or for safe keeping and not to be liquidated to finance other needs. Two examples are the client’s home and car.
The following may be classified as personal use assets:
(a) Residence
(b) Personal vehicles
(c) Jewellery/Collectibles (those meant for safe keeping)
(d) Home Contents (those meant for safe keeping)
Certain items can fall into either investment assets or personal-use assets, depending on the purpose for holding them. For instance, the client may have many valuable antiques items.
When a future financial need arises, a portion can be sold to raise cash, while the rest can be kept. In such a case, the first lot would be termed investment assets, while the latter would be known as personal-use assets.
Valuation of Personal Assets
Normally, the assets shown in the balance sheet are presented in their fair market value, i.e., the value these assets can reasonably fetch today if sold under normal conditions. The value could be actual, higher or lower. In the case of business ownership, where it is difficult to determine its value, a conservative approach is recommended. There may also be assets of which the value is insignificant or questionable. In such cases, the value may be credited as zero.
Table 4.1: Statement of Net Worth: Personal Asset Items

3.2 Liabilities
The liabilities section is the ‘payables’ side of the client’s statement of net worth. It provides a listing of items that will result in an outflow of financial resources in the future. The items listed in the liabilities section are as follows:
Table 4.2: Statement of Net Worth: Personal Liability Items

There are two main categories of liabilities:
(a) Short-term liabilities: Those financial obligations that must be settled within one year are classified as short-term or current liabilities. These would include items like income tax payable and credit card bills.
(b) Long-term liabilities: Those financial obligations that can be settled outside the realm of one year are called long-term liabilities. These could include items like housing loans and education loans.
Both the outstanding balance and those due but not paid items (including the interests and penalty charges) at the date of statement should be listed. As a general recommendation, the financial practitioner should target progressive reduction and finally, fully eliminating existing
liabilities as the client moves closer to his retirement.
Note on zakāt payable and interest accrued:
Zakāt of individuals that has become due but has not yet been paid should be included under short term liabilities.
Interest that had accrued through means such as deposit of funds in interest-bearing bank accounts, funds, unit trusts etc, and had been already drawn from those accounts, should be
compulsorily disposed of by giving them away as charity (ṣadaqah).This is prescribed as an alternative because the original requirement, which is to return the interest money to its proper owners, who in this case, happened to be thousands of other depositors, is not feasible. Such compulsory disposal should be carried out for eliminating the burden of interest from one’s shoulders, without any intention of reward for charity, as charity per se is not possible from ḥarām income. In addition, sincere repentance is necessary, as a serious violation of Shariah has been committed through deposit of funds in an interest-bearing medium.
It must be noted that this should be done only if one had inadvertently drawn the interest amounts from the account. If interest had accrued on one’s deposits but had not yet been drawn, they should not be taken out of the account. Interest amounts drawn in cash should not be mixed with one’s ‘other money’ but should be disposed of in the above manner as soon as
possible. If they had been mixed, then an equivalent amount could be given away. Their reflection on the financial statement is relevant to this situation, where such amounts may be represented under short-term liabilities.
3.3 Net Worth
The net worth is the equity portion of the client’s wealth holdings. It is the residual amount after all the liabilities of the client have been settled and it is the real portion of the total asset values that the client owns.
In order to help the client enhance his net worth, the planner must know the ways it can be increased. The following are some possible ways:
(a) Spending reduction – Reduce the amount of spending.
(b) Appreciation – Rise in the value of the client’s existing assets.
(c) Surplus earnings – Allocation of surplus earnings of the client to purchase financial assets, real estate, shares etc.
(d) Bequests and windfalls – Assets acquired through bequest (will) or where the client receives a windfall, e.g. the client receives a prize;
Note: Winning a lottery is not a windfall, as lottery is prohibited and gains from it should not be accepted. If the gains have already been received, they should be returned. If this is not possible, they should be compulsorily disposed of by way of charity.
(e) Debts cancellation – Financial obligations are released, such as, when the client’s creditors forgive his debts.
It should be noted that personal-use assets are not targeted for funding future needs, such as funding the client’s retirement needs. Since the client’s net worth consists of personal-use assets that may be substantial, it would be useful to compute his needs-funding net worth. The funding portion net worth is computed as the total net worth minus the personal use assets of the clients.

The funding portion of net worth will provide a clearer indication of the client’s resources that can be tagged for funding current and future financial needs. It should be reiterated that the net worth is usually not composed totally of cash but merely represents the client’s current financial position on a given date.
An example of a Comprehensive Net Worth Statement of a client is shown below.
Statement of Net Worth of Yakob and Shima as at 30th November 20xx

4.0 CASH FLOW STATEMENT CONSTRUCTION
The cash flow statement provides information of the client’s movement of cash, i.e. his cash receipts and cash disbursements, over the past one year period. It provides a one-page report on the client’s inflows and outflows of cash, identifying all his sources of income and his pattern
of disbursing those incomes.
4.1 Cash Inflows
Cash inflows would include all the sources of cash takings accorded to the client, either in the form of actual receipts or credits to his account. The cash inflows can be derived from earned or unearned sources. As pointed out earlier, some of these sources could be prohibited in the case
of Muslims.
Table 4.3: Cash Flow Statement: Cash Inflows

(ii) Actual Cash Receipts
Gross employment income

Proceeds from matured endowment policies

Rental and dividend income

Proceeds from sale of personal assets

Gratuities
(ii) Credits to Account

Employer’s contributions to client’s retirement account
4.2 Cash Outflows
Cash outflows would include all the cash disbursements by the client. It provides a pattern of his spending, savings and investment activities. Outflows can be further divided into committed or fixed outflows or variable outflows. Some of these are not permissible for Muslims.
Table 4.4: Cash Flow Statement: Cash Outflows

Net Cash Flow
Net cash flow is the difference between the total cash inflows and the total cash outflows. There
are three net cash flow positions the client can be in, and each has a bearing on the net worth of
the client.

If the total cash inflows (receipts and credits to accounts) are more than the cash outflows (spending), the net cash flow of the client is said to have a surplus net cash flow. The surplus is the amount available for savings, investing or the settlement of debts. As such assets are increased, while liabilities are decreased. This will increase the net worth of the client.
On the other hand, if the cash outflows are more than the cash inflows, the client is experiencing a deficit net cash flow situation. In this case, the client will have to draw on his savings or increase on credit spending. The result is a lower net worth because assets are depleted while liabilities are increased.
If the cash inflows are equal to the outflows, the client is in an equilibrium net cash flow position. In such a case, his net worth stays as it is. There are no additional funds for savings, investing and settlement of liabilities.
Once the data gathering process is completed, it is time to analyze the data to help determine the client’s current financial situation, his retirement needs and the deficiencies in meeting those needs.

The financial practitioner should take a holistic approach when analyzing the client’s retirement
situation so that at the plan design stage, the outcome will be an effective retirement funding
plan with strategies that optimize the client’s needs and wishes on his retirement. A sample
personal financial statement and a cash flow statement are given below. When preparing
statements for Muslim clients, the points referred to under previous notes should be observed.
The following is an example of a comprehensive net worth statement of a client.
Table 4.5: Statement of Net Worth for Yakob and Shima as at 31.12.20xx

4.4 CASH FLOW MANAGEMENT IN BUDGETING
People tend to prefer spending to satisfy current needs to saving for future needs. Cash flow
management is the process of budget planning and controlling to ensure that short-term
spending does not jeopardize long-term goals.
A budget is basically a short-term report. The purpose is to help the client achieves his shortterm goals as part of his journey towards his long-term goals. It is a basic tenet in financial
planning that the client’s short-term problems must be solved before long-term issues when facing cash flow problems in his current state. Cash flow management comprises three components, namely:
 Cash flow analysis
 Cash flow planning
 Budgeting
The cash flow management technique is the most basic tool in financial planning. It should be noted that because this technique involves delving deeply into the client’s spending habits, the client often resists divulging the relevant information to the financial practitioner who handles the work. Asians are generally more guarded on issues with regards to their personal affairs, and this could make matters more difficult for the financial practitioner. Nonetheless, this problem can be overcome with skillful handling.
The cash flow statement we have learned earlier is the basic tool for cash flow management.
The personal cash flow statement provides the financial practitioner with a picture of the client’s cash receipts and cash disbursement over a selected period of time. It shows the client’s major spending habits and gives a summary of the client’s inflows and outflows of cash. Cash flow
management is helpful to the client in many ways. It provides the financial practitioner a means to measure the client’s goals within a particular time period. It can also be used as an instrument to communicate a strategy to others affected by the budget and also to evaluate the different elements of cash flow.
5.1 Cash Flow Analysis
The first step in cash flow analysis is to determine the cash flow position of the client. To start the ball rolling, the financial practitioner should gather enough information on the client’s cash
flow position. This could be done through a series of questions posed to the client with the help of a fact-finding questionaire. Once this is done, the next step is to use the data to prepare a cash flow statement for analysis.
The financial practitioner will have to analyze the cash flow statement to identify any weakness or strengths in the clients cash position. Cash flow analysis is the starting point for the client and the planner to develop objectives. Properly done, it can reveal any inefficiency and ineffectiveness in the utilization of financial resources. It can also help to highlight an alternative course of steps to replace the current inefficient and ineffective steps.
5.2 Cash Flow Planning
The next step is cash flow planning. The purpose of cash flow planning is to recognize the sequence of activity that will assist in optimizing net discretionary cash flow. Net discretionary cash flow is the residual amount after expenses have been deducted from the income. If there is
a positive residual amount, it can be used for a number of purposes, but primarily, it is used for investment to meet financial goals and objectives.
Optimization strategy entails the balancing between an acceptable lifestyle while striving to get the most out of the income for investment and other purposes. The maximization strategy involves more painful actions that may not appeal to the client. For instance, the client may have to settle for a smaller home and eat out less in order to maximize net discretionary income. A strategy that is too austere is not likely to work as it reduces meaningful current lifestyle. In other words, the client’s lifestyle must be maintained in the pursuit of the financial goals and objectives.
Some practitioners consider cash flow planning as an intertwined aspect of every step of the financial planning process. However, the common approach is to use this method as an extension of the cash flow analysis step we have just discussed. For instance, it can help to identify expense items that can be reduced thus, increasing the net discretionary income.
5.3 Budgeting
What is a budget? A budget is a record or set of records used to keep track of both projected and actual income and expenditures over a period of time. On the other hand, budgeting is the process of projecting, monitoring and controlling future income and expenditure. Hence,
budgeting is an important technique used in cashflow management. Inherent to budgeting is reconciliation of income and expenditure to achieve short-term goals that are in alignment with long-term goals.
The budgeting process represents the major mechanism through which financial plans are carried out and goals are achieved. A point to note, budgeting is narrower in scope than financial planning because it is primarily concerned with projecting future income and expenditure and
reconciling the two. The fundamental purpose of budgeting is to help the client realize long and short-term goals and objectives that are consistent with his overall financial plan.
Establishing the Cash Flow Statement and Budget
An effective budget tacks along certain guidelines. For instance, the budget should not be too rigid and gives room for adjustment to unforeseeable situations. Some of these situations could be corridor opportunities, emergencies, etc. The flexibility ensures the budget remains effective when unplanned events occur. To ensure the process mapped out is followed, the budget should be simple to understand. This requires it to be written in short, clear and simple format.
In order not to clutter the plan, the budget should be checked for irrelevant information and where they are found, should be removed. For small items, an estimation of its value will do.
There is little point in detailing items that have little impact on the budget. The budget must be set in such a way that it will meet the goals and objectives in the financial plan. If it is not directed towards the goals and objectives, then adjustments are needed. The budget is a mere guideline to help measure results and should be treated as such.

Steps in Developing the Budget
To create a budget, the common five-step approach is adopted. In following this five-step
approach to budgeting, the earlier discussions on the construction of a cash flow statement will
be referred to. The five steps in this approach are briefly discussed below:
Step 1:
Identify and Compute the Family’s Annual Income
All the sources of income should be listed and the quantum for each source determined. The
source could include employment, business, shares and property investments, trust, etc. Income
could include salary and bonus, dividends, rental, interest, annuity and other income. For those
with irregular income, the most practical way is to establish the amount based on two estimates,
i.e., worst-case and reasonable-case estimates.
Table 4.7: Cash Flow Statement: Cash Inflows

Step 2:
Form Assessment for both Fixed and Discretionary Expenses
Annual expenditures may be classified as either fixed or discretionary. However, “fixed”
applies only in the short-run and can often be altered without striking an excessive variation in
the client’s lifestyle. Even the most rigid of all expenditures can be swapped if there is a need.
Discretionary expenditures, by implication, can be checked or released in a timed manner so
that sufficient income is available.
Table 4.8: Cash Flow Statement: Cash Outflows

Step 3:
Ascertain the Surplus or Deficiency of Income within the Budget Duration
The client’s net cash flow can be determined by subtracting total expenses from total income.
Discretionary expenses already include listings for savings, investments, and education fund. If forecasted net cash flow is clearly positive the client can earmark even more to these categories. However, this decision will have to compete with the human tendency to prefer spending the surplus money.

Step 4:
Identify Ways of Increasing Income and Reducing Expenses
The only route to counter negative cash flow is to either increase income or decrease expenses.
The client will probably does not like the news, but he has to know and to act accordingly, or else the plan may fail. It is important that the client and the financial practitioner adopt a congruous attitude when revising the goals of the budget. Shortsighted confidence is detrimental to achieving the goals set. Within reason, the financial practitioner must motivate and keep the client going in the direction of more savings, investments, and education-planning figures. At the same time, he should be guided to reduce his spending in those areas that do not adversely
affect his current lifestyle.

Here are some of the ways to increase income and reduce expenditures.
Ways to Increase Income
o A part-time job to supplement income.
o Home business to supplement income.
o Look for a better-paying job.
o Increase rentals by getting better tenants.
o Invest funds that are not invested.
o Increase investment earnings through prudent switching.
Ways to Reduce Expenditure
o Curb expensive habits.
o Reduce usage of credit cards.
o Pay outstanding credit cards bills before interest is charged.
o Hold on to using car which is fully paid-up.
o Reduce unnecessary insurance payments.
o Reduce tax liabilities.
o Eat at home to reduce spending
o Reduce utilities bill.
Step 5:
Compute Income and Expenditure as a Percentage of the Total to Allow for Planning
Reallocation of Resources
The final step is to compute the percentage of each of the income and expenditure items against the total. This will provide the financial practitioner the perspective to make adjustments to the budget by reallocating the resources to align with the long-term goals of the client. Table 4.9
Cash Flow Statement: Income and Expenditure Percentages on the next page is an example of the format that could be used for this purpose.
Table 4.9: Cash Flow Statement: Income and Expenditure Percentages

4.5 PERSONAL FINANCIAL RATIO ANALYSIS
It is important that the financial practitioner understands the client’s overall financial health when he plans the client’s finances. For instance, it would be impractical to recommend a retirement fund program when the client is currently facing a liquidity crisis. In such a case, the priority would be to solve the immediate problem first. One of the usual ways of evaluating the client’s financial health is through the use of financial ratios.
Financial ratios are numerical benchmarks derived from financial formulas designed to measure the client’s financial situation. In order to diagnose the client’s financial health using this approach to be thorough, all the key financial ratios should be used. These ratios will be discussed further on.
The overall health of an individual can be evaluated using financial ratios. By computing and analyzing the following personal financial ratios with the support of answers to the right questions, the financial practitioner will be able to understand the different facets of the client’s current financial health.
a) Liquidity Ratio
This ratio shows the number of months the client can settle his normal expenses from his liquid assets if for some reason he loses his income. To provide a clearer perspective of the client’s liquidity position, the liquidity ratio can be divided into basic liquidity ratio (involving only cash/cash equivalent assets) and standby liquidity ratio (involving only liquid investment assets).
Basic Liquidity Ratio
The basic liquidity ratio measures the client’s liquidity position over the short-term. The recommended range for the client to be considered being in a healthy liquid position is between 3-6 months of cushion, without having to invade into his investment assets (since investment
assets are generally tagged for retirement or other long-term purposes). Generally, less cushion is required if the source of income is stable or there are more sources of income.
If the result shows less than 3 months, the client should be advised to top it up to at least the minimum amount and to slowly move it to the optimum 6 months level. If the client has a figure higher than 6 months, he should consider investing the excess in higher yielding investments,
albeit those that are within the client’s risk tolerance level. Other than cash, which is the ultimate liquid asset, the cash equivalent assets are included in the computation of the basic liquidity assets because these financial assets can be converted to cash easily and without any significant loss of value.

In Yacob’s case, he is in a healthy liquid position as he can withstand 5.89 months without his
current income. The figure is close to the optimum amount of 6 months.
Standby Liquidity Ratio
The standby liquidity ratio provides a deeper insight of the client’s liquidity position. It shows how
many more months the client may be able pay his expenses if he is caught in a severe financial crisis that lasts longer than expected and the cash/cash equivalent assets are completely depleted. In such a situation, some of the more liquid long-term assets (that can be cashed out
with or without loss of value), will have to be invaded into to fund the client’s living expenses.
Liquid investment assets would usually include items like unit trust, managed funds (those with a favorable exit clause) and quoted shares. Unquoted shares of public or private businesses should be excluded, as they are generally not very saleable for its true value in emergency. EPF
or other locked funds are excluded, as they are not available for immediate use. Real properties are generally excluded, as they are highly illiquid. Jewellery and art collections should also be excluded, as their loss of value is generally too great in a forced sale situation.
There is no recommended maximum figure since this ratio involves productive investment assets. This category of assets is, in fact, those assets that are tagged for fulfilling future needs of the client. Hence, we may assume that the larger the figure, the better will be the client’s
financial position.

The result shows a healthy liquidity position as Yacob’s standby liquidity ratio shows he can weather approximately another 7.85 months without income after his cash/cash equivalent assets are completely depleted.
Even when his assets are liquidated at a reduced value, he can still finance his expenses for many more months.
b) Savings Ratio
The purpose of the savings ratio is to show what percentage the gross income of the client is set aside for future consumption. This will provide information to the planner as to what amount is available to meet other purposes, such as meeting retirement goals. Experts recommend a minimum of 10% as a guide, and the higher the value, the better it is.

In this case, Yacob has a very high savings ratio of 38.86%, which is way above the recommended minimum of 10%. This is a healthy position.
Liquid-Assets-to-Net Worth Ratio
This ratio provides information as to the amount of the client’s net worth that is in the form of cash or cash equivalents. Experts recommend a minimum of 15% as the adequacy benchmark.
This is how the ratio is computed:

It is shown that Yakob has recorded 17.21%, which is more than meets the recommended minimum of 15%.
c) Debt Ratio
Debt-to-Asset Ratio
This ratio is used to measure the client’s ability to pay debts with his total assets available. As all liabilities must eventually be settled, this is a broader measure of the client’s liquidity position and provides a view of the client’s solvency. Experts recommend a ratio of 50% or below as the benchmark.

Yacob has a 33.7% ratio, which stays below the recommended 50% benchmark. This indicates that he is in a healthy debts payment position.
Debt Service Ratio
This ratio compares the client’s annual or monthly payments to service debts with his take-home income. The recommended ratio is 35% or lower.
The first step is to obtain the Total Monthly Loan Repayment amount, which is derived by dividing the Total Annual Loan Payment by 12.
Total Monthly Loan Repayments
= (RM 24,000 + RM 29,000) ÷ 12
= RM 53,000 ÷ 12
= RM 4,417
The next step is to derive the Monthly Take Home Income. This is how the monthly take-home income is derived:
Monthly Take-Home Income = [Total Cash Inflows – Employee’s EPF Contributions – Employer’s EPF Contribution – Income Tax Payable] ÷ 12.
Monthly Take-Home Income,

= (RM350,000 – RM15,000 – RM18,000 – RM65,000) ÷ 12
= RM252,000 ÷ 12

= RM21,000

The computation reveals that Yacob’s Debt Service Ratio is 21%, which is below the
recommended ratio of 35%. This reflects that Yacob is in a healthy position with regards to his
Debt-Service ability as his Total Monthly Loan Repayments is about 1/5 of his Total Monthly
Take-Home Income.
However, it should be noted that the following items have not been taken into consideration or
more information is required:
 Outstanding Credit Card Debt
 Outstanding Personal Overdraft
 Outstanding Family/Personal
 Outstanding Education Loan
 Investment Property and Property Renovation Loan
 Hire Purchase Loan.
The above information should be verified with the client and proper adjustments should be made
accordingly.
Non-Mortgage Debt Service Ratio
This ratio compares the client’s annual payments to service all debts (excluding mortgages) with
his take-home income. It provides insight into the amount of after-tax income that the client uses
to service non-mortgage debts. A healthy ratio would be 15% or lower. If the ratio reaches the
20% mark, the client should be warned that he has reached a danger level and should take
steps to correct the situation.
Annual Take-Home Income = Total Cash Inflows – Employee’s EPF Contribution – Employer’s
EPF Contribution – Income Tax Payable.
Annual Take-Home Income,

= RM 350,000 – 15,000 – 18,000 – 65,000 = RM 252,000
The Annual Non-Mortgage Loan Repayment of Yacob is computed as follows:
Credit Card Outstanding + Car Loan Outstanding + Personal Overdraft = RM 5,000 + 65,000 + 10,000

= RM 80,000

Yacob’s ratio is computed at 44.26%, which is slightly less than the recommended 50% benchmark. He should take steps to improve his situation until it reaches 50% and continue to move it upwards as his age moves nearer to the targeted retirement date.
e) Solvency Ratio
This ratio is to show the extent the client is exposed to insolvency. It helps determine the asset cushion the client has to protect himself against insolvency. As long as the net worth remains positive, the client is considered technically solvent, and vice versa. Generally, the higher the percentage, the greater the cushion and the safer the client is positioned against insolvency.

Yacob has recorded a solvency ratio of 66.3%, which should put him in a safe position well protected against insolvency. It indicates that he can withstand a fall in asset value of 66.3% before insolvency sets in.

Self-Assessment
Circle the letter of the correct choice for each of the following

1. Which of the following statements is NOT TRUE about zakat?
A. Payable zakat is 2.5 % of liquid assets.
B. Zakat is calculated upon the completion of one year from the date the person became the owner of the asset (completes haul).
C. Zakat should be distributed to eligible recipients as soon as possible, at least before the next zakat date.
D. Payable Zakat is 2.5% of any assets regardless of the value.

2. Individuals can benefit from examining Net Investment to Net Worth ratio for the following purposes EXCEPT:
A. To highlight needed funds for retirement.
B. To evaluate the financial solvency of an individual.
C. To learn the value of investments held by an individual.
D. To project for future investment.

3. What does Standby Liquidity Ratio signify?
A. The ability of an individual to pay short term debt.
B. The ability of an individual to pay his expenses out of his easily cashable investments.
C. The ability of an individual to pay long term debts.
D. The ability of an individual to pay his expenses out of his investments.

4. The following are steps involved in budgeting cash flow EXCEPT?
A. Identify and compute the family’s annual income
B. Analyze Liquid Assets to Net Worth Ratio
C. Evaluate receivable returns from investment
D. Assess fixed and discretionary expenses

5. The following are items under Fixed Outflows in cash flow analysis EXCEPT:
A. Credit card minimum payment
B. Mortgage
C. Maid’s salary
D. Car loan repayments

6. Ways to increase Needs Funding Net Worth are all of the following EXCEPT:
A. Reduce spending
B. Debts cancellation
C. Appreciation of the value of investment assets
D. Appreciation of the value of owner-occupied house

7. Which of the following does NOT form part of Cash and Cash Equivalents?
A. Family takaful monthly tabarru’ contribution
B. Savings account balances
C. Current account balances
D. Fixed-deposit

8. Which of the following statements about interest payment received from an investment is TRUE?
A. Allah will reward for the donation/sadaqah made from interest.
B. The individual may spend the interest received if it is less than 5% from the total income.
C. The individual must repent being involved in riba related investing activities.
D. The interest amount can be used for non-food purchases.

9. The recommended basic liquidity ratio is:
A. 2 months of living expenses
B. 3 months of living expenses
C. 6 months of living expenses
D. 9 months of living expenses

10. Which of the following statements regarding solvency ratio is TRUE?
A. Solvency ratio must be more than 50%.
B. An individual is a good investor if he has a positive financial solvency ratio.
C. A ratio of 50% means that an individual can withstand a fall of 50% of the value of assets before insolvency sets it.
D. Nearly positive solvency ratio is good enough for a client.
Answer: 1-d, 2-b, 3-b, 4-b, 5-a, 6-d, 7-a, 8-c, 9-c,10-c.

MODULE 1 / CHAPTER 5
SHARIAH CONCEPTS IN MUAMALAT
Chapter Outline:
5.0 Introduction
5.1 Nature of Money in Shariah
5.2 Riba and Its Prohibition
5.2.1 Classification of riba
5.2.2 Verses on absolute prohibition of Interest
5.2.3 The Nature of Loan in Shariah
5.2.4 Overall Effects of Interest
5.3 Gharar: Concept and Forms
5.3.1 Gharar in modern contracts
5.4 Qimar: Concept and Forms
5.4.1 Conditions of Qimar
5.4.2 Forms of Qimar
5.5 Shariah Perspective on Time Value Of Money
5.6 Calculation of time value of money
5.6.1 Simple Interest
5.6.2 Compound Interest
5.6.3 Nominal Interest Rate
5.6.4 Effective Interest Rate
5.6.5 Present Values & Future Values
5.6.6 Net Present Value (NPV)
5.6.7 Internal Rate of Return (IRR)
5.6.8 Amortization
5.7 Conclusion
Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Nature and Identity of Money in Shariah
(b) Ribā and Its Prohibition
(c) Gharar: Concept and Forms
(d) Qimār: Concept and Forms
(e) Time Value of Money from the Perspective of Shariah
(f) Calculation of Time Value of Money
5.0 INTRODUCTION
Financial planning is about managing one’s finances and planning for future financial activities.
This involves monetary transactions and various computations pertaining to money. In Shariah
financial planning, a financial planner should have a clear idea about the nature and function of
money in accordance with Shariah. Shariah has imposed various controls in the form of
prohibitions to ensure that money performs its expected function in the economy and is not
abused in a manner that leads to exploitation and injustice. A major prohibition in Shariah with
regard to financial dealings is ribā, followed by gharar (uncertainty in contracts) and qimār
(gambling). This chapter aims at explaining briefly the essential concepts pertaining to these.
Financial planning is to set financial goals relating to the future. In order to meet such financial
goals, investments have to be made at present, which results in sacrificing present money for
monetary returns in the future. This is why the time value concept of money is important in
financial planning. In setting financial goals, it is helpful to express the client’s goals
quantitatively and numerically. Using time value concept, values related to retirement planning,
education planning for children, assessing the adequacy of existing financial resources and
assets to meet various goals, etc., could be measured in a clear manner. The outline of the time
value concept as presented in modern commerce and finance, together with the basic
computation models related to financial planning, namely, the single sum model and the annuity
(regular cash flow) model are discussed in this chapter with examples. Finally, some clarification
is provided on the Shariah perspective of the time value of money.
5.1 NATURE OF MONEY IN SHARIAH
One of the presumptions on which all theories of interest are based is that money is treated as a
commodity. It is, therefore, argued that just as a merchant can sell his commodity for a higher
price than his cost, he can also sell his money for a higher price than its face value; or, just as
he can lease his property and charge a rent against it, he can also lend his money and claim
interest thereupon.
Islamic principles, however, do not subscribe to this presumption. Money and commodity have
different characteristics and therefore, they are treated differently.
The basic points of difference between money and commodity are as follows:
(a) Money has no intrinsic utility. It cannot be utilized in direct fulfillment of human needs. It can
only be used for acquiring goods or services. A commodity, on the other hand, has intrinsic
utility and can be utilized directly without exchanging it for some other thing.
(b) Commodities can be of different quality while money has no quality except as a measure of
value or a medium of exchange. Therefore, all units of money of the same denomination,
are hundred per cent equal to each other. This means an old and dirty note of RM100.00
has the same value as a brand new note of RM100.00.
(c) In commodities, the transactions of sale and purchase are effected on an identified
particular commodity. If A has purchased a particular car by pin-pointing it, and the seller
has agreed, he deserves to receive the same car. The seller cannot compel him to take
delivery of another car, though of the same type or quality. Money, on the contrary, cannot
be pin-pointed in a transaction of exchange. If A has purchased a commodity from B by
showing him a particular note of RM100.00 he can still pay him another note of the same
denomination.
Based on these basic differences, Islamic Shariah has treated money differently from
commodities, especially on two scores:

Money (of the same denomination) is not held to be the subjectmatter of trade or lease, like
other commodities. Its use has been restricted to its basic purpose i.e., to act as a medium
of exchange and a measure of value.
If for exceptional reasons, money has to be exchanged for money or it has to be borrowed,
the payment on both sides must be equal and such that it is used for the defined purpose
only. The trading of money is prohibited, unless when money is traded at par at the current
exchange value, which is termed as al-sarf in Islamic finance. Any premium on the
exchange of money amounts to ribā.
5.2 RIBĀ AND ITS PROHIBITION
The word ribā means excess, increase or addition. This term, in Shariah terminology, implies
“any excess compensation which is not matched by a counter value/consideration”.
A more comprehensive definition of ribā could be “an excess not matched by a return, according
to Shariah criteria, that is stipulated for one of the contractors”.
The meaning of ribā has been clarified in the following verses of Qur’ān:
“Those who devour interest will not stand except as stands one whom Evil One by his touch hath
driven to madness. That is because they say: ‘Trade is like usury’, but Allah hath permitted trade
and forbidden usury. Those who, after receiving direction from their Lord, desist, shall be
pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are
Companions of the Fire: they will abide therein (for ever)” (al-Baqarah (2): 275)
“O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are
indeed believers. If ye do it not, take notice of war from Allah and His Messenger: but if ye turn
back, ye shall have your capital sums: deal not unjustly, and ye shall not be dealt with unjustly”
(al-Baqarah (2) :278-279)
The verses clearly indicate that the term ribā means any excess compensation over and above
the principal which is without due consideration. However, the Qur’ān has not altogether
forbidden all types of excess as it is present in trade, which is permissible. The excess that has
been rendered prohibited (ḥarām) in Qur’ān is a special type termed ribā. Prior to Islam, the
Arabs used to accept ribā as a type of sale, which unfortunately, is still being an accepted
meaning at present times. Islam has categorically made a clear distinction between the excess
in capital resulting from sale and excess resulting from interest. The first type of excess is
permissible but the second type is forbidden and rendered ḥarām, as clearly laid down in the
Qur’anic verse: “They say: ‘Buying and selling is but a kind of interest’, even though Allah has
made buying and selling lawful, and interest unlawful” (al-Baqarah (2): 275)
5.2.1 Classification of Ribā
There are two types of ribā, namely ribā al-nasī’ah and ribā al-faḍl.
a) Ribā al-Nasī’ah
Ribā al-Nasī’ah is defined as excess against deferment. This result from predetermined interest
that a lender receives over and above the principal sum lent (ra’s al-māl). It is defined with
regards to financial transactions as any contractual increment in a loan or debt due to the time
element, for example, lending RM100.00 for repayment in a month, where the borrower is
required to pay RM110.00.
This is the real and primary form of ribā. Since the verses of the Qur’ān have directly rendered
this type of ribā as prohibited, it is also called ribā al Qur’ān. It is a loan where against a
specified repayment period an amount in excess of capital is predetermined. The Holy Prophet
(s.a.w.) said:
“Every loan that draws interest is Ribā”
Ribā al-Nasī’ah refers to the addition of the premium which is paid to the lender in return for his
waiting as a condition for the loan and is technically the same as interest. The prohibition of
Ribā al-Nasī’ah is one of those issues which have been confirmed in the revealed laws of all
Prophets (peace be upon them). (See Exodus 22:25, Leviticus 25:35-36, Deuteronomy 23:20,
Psalms 15:5, Proverbs 28:8, Nehemiah 5:7 and Ezekiel 18:8,13,17 & 22:12). Also, various
verses of the Qur’ān stated its prohibition of ribā. It warns those who persist in practicing it of a
war which is certain to be declared on them by Allah Himself and His messenger, especially on
those engaged as writers, witnesses and dealers in ribā transactions.
According to the above definition of ribā al-nasī’ah, the giving and taking of any excess amount
in exchange of a loan at an agreed rate is included in interest irrespective of the rate. The fact
that ribā al-nasī’ah is categorically prohibited has never been disputed in the Muslim community.
In short, the ribā of today which is supposed to be the pivot of human economy and features in
discussions on the problem of interest is nothing but this ribā, the unlawfulness of which stands
proven on the authority of the seven verses of the Qur’ān, more than forty ḥadīth or the
Prophet’s sayings and of the consensus of the Muslim community.
The wisdom of the prohibition of ribā al-nasī’ah is that it prohibits the overall effect of loss
resulting in a debtor having to pay an addition to the amount owed. In ribā al-nasī’ah, the
consumer of ribā does have some casual and transitory profits apparent to him, but its curse in
this world and in the Hereafter is much too severe compared to this benefit. The ribā consumer
suffers such spiritual and moral loss that it virtually takes away the great quality of being
‘human’ from him. No sane and just person will say that personal and individual gain which
causes loss to the whole community or group is useful. The evil effects of ribā on the economy
are outlined below under “overall effects of interest”.
b) Ribā al-Faḍl
The second classification of ribā is ribā al-faḍl. Since the prohibition of this ribā has been
established on Sunnah, it is also called ribā al-ḥadīth.
Ribā al-Faḍl is defined as excess compensation not matched by a countervalue/consideration in
the sale of goods. This means an excess which is taken in the exchange of specific
homogenous commodities in their hand-to-hand purchase and sale.
The Prophet (s.a.w.) said, “Sell gold in exchange of equivalent gold, sell silver in exchange of
equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of
equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent
barley, but if a person transacts in excess, it will be usury (ribā). However, sell gold for silver
anyway you please on the condition it is hand-to-hand (on the spot) and sell barley for dates
anyway you please on the condition it is hand-to-hand (on the spot)”.
The six commodities, if they are exchanged among the same category/genus, can only be
exchanged in equal quantities and on the spot. An unequal sale or a deferred sale of these
commodities will constitute ribā. These six commodities in Islamic legal terminology are called
amwal ribawiyyah.
These commodities refer in general to what is used as mediums of exchange (such as, gold and
silver) and eatables. Therefore, this law will apply to everything edible or having the natural
ability of becoming a medium of exchange (currency). Any exchange of these items should be
done in equal quantities only when the exchange involves homogenous items. For example, 1
ton of wheat may be exchanged only against 1 ton of wheat. Any excess on one side would form ribā.
Similarly, when eatables are exchanged with eatables of another genus, or currencies are exchanged with currencies of another denomination, the transaction must take place on the
spot. For example, exchanging 100kg of rice against 90kg of wheat is permitted, provided it is done on the spot. Selling 10g of gold for RM1000.00 is permitted, provided the transaction is carried out on the spot.
5.2.2 Verses on Absolute Prohibition of Interest
Allah Says: “O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are indeed believers. If ye do it not, take notice of war from Allah and His Messenger: but if ye
turn back, ye shall have your capital sums: deal not unjustly, and ye shall not be dealt with unjustly” (al-Baqarah (2): 278-279)
The above two verses demand one to abandon the amount of ribā and direct that only the principal amount should be paid back with nothing in excess. The second verse explains that any excess on principal, no matter how insignificant, is cruel.
The following ḥadīth also proves that interest is forbidden:
“Listen! All Ribā that were due in the pre-Islamic days have been completely eliminated. You have to pay back the principal amount only”.
Shariah prohibited the normal ribā, and also extend the prohibition to the compounding ribā. The compounding ribā occur normally when there is a delay or default. Hence both are prohibited in
Shariah.
Allah Says: “O believers, take not doubled and redoubled interest, and fear God so that you may prosper. Fear the fire which has been prepared for those who reject faith, and obey God and the
Prophet so that you may receive mercy” (Ól-ʿImrān (3): 130-132)
5.2.3 The Nature of Loan in Shariah
Another major difference between the secular capitalist system and the system based on Islamic principles is that under the former system, loans are purely commercial transactions meant to
yield a fixed income to the lenders. Islam, on the other hand, recognize qarḍ hasan but does not recognize loans as income-generating instruments. They are meant only for those lenders who
do not intend to earn a worldly return through them. They, instead, lend their money either on humanitarian grounds to achieve a reward in the Hereafter, or merely to save their money through a safer hand. So far as investment is concerned, there are several other modes of
investment-like partnerships and others which may be used for that purpose. The transactions of loans are not meant for earning income.
The basic philosophy underlying this scheme is that the one who is offering his money to another person has to decide whether:
(a) He is lending money as a sympathetic act; or
(b) He is lending money to the borrower, so that his principal may be saved; or
(c) He is advancing his money to share the profits of the borrower.
In the former two cases (a) and (b) he is not entitled to claim any additional amount over and above the principal, because in case (a) he has offered financial assistance to the borrower on humanitarian grounds or any other sympathetic considerations; and in case (b) his sole purpose is to save his money and not to earn any extra income.
However, if his intention is to share the profits of the borrower, as in case (c), he shall have to share the latter’s losses too, should such losses occur. In this case, his objective cannot be served by a transaction of loan. He will have to undertake a joint venture with the borrower, whereby both of them will have a joint stake in the business and will share its outcome on a fair basis.
For case (c), the advancing of money for the purpose joint venture is Shariah compliant as this is similar to the mushārakah contract in Islam.
5.2.4 Overall Effects of Interest
Conversely, if the intent of sharing the profit of the borrower is designed on the basis of an interest-based loan, it would mean that the financier wants to ensure his own profit, while he leaves the profit of the borrower at the mercy of the actual outcome of the business. If the business fails, the borrower will not only bear the losses of the business, but will also have to pay interest to the lender. This means the profit or interest of the financier is guaranteed at the price of the loss to the borrower, which is obviously, a glaring injustice.
On the other hand, if the business of the borrower earns huge profits, the financier will have a sizeable share in the profits. However, in an interest-based system, the profit of the financier is
restricted to a fixed rate of return which is governed by the forces of supply and demand of money and not on the actual profits produced on the ground. This rate of interest may be much less than the sizeable portion a financier might have deserved, had it been a joint venture. In this case the major part of the profit is secured by the borrower, while the financier gets much less than deserved by his input in the business, which is another form of injustice.
Thus, financing a business on the basis of interest creates an imbalance which has the potential of bringing injustice to either of the two parties in different situations. Hence, the Shariah does
not approve of an interest-based loan as a form of financing.
Once interest is banned, the role of “loans” as practiced in the conventional banks for commercial activities becomes very limited, and the whole financing structure turns out to be equity-based or transactions backed by real assets such as in case of raising finance through ṣukūk. In order to limit the use of loans, the Shariah has permitted the borrowing of money only in cases of dire need, and has discouraged the practice of incurring debts for living beyond one’s
means or to grow one’s wealth.
The Holy Prophet (s.a.w.) refused to offer the funeral prayer (ṣalāt al-janāzah) to a person who died indebted was, in fact, to establish the principle that incurring debts should not be taken as a
natural or ordinary phenomenon of life. It should be the last thing to resort to in the course of economic activities.
Abū Saʿīd al-Khudrī reported that a dead body was brought to the Messenger of Allah for his funeral prayer. He enquired. “Is there any debt due from your companion? Yes”, said them. He asked again. “Has he left anything for payment? No”, they said. He then said; “Pray for your companion”. ʿAlī ibn Abī Ṭālib said, “O Messenger of Allah! His debt is upon me”. Then, he stepped forward and offered his funeral prayer.
In a narration of the same meaning he said, “May Allah save your surety from Hell as you saved the loan of your brother Muslim. There is no Muslim who pays off the debts of his brother but Allah will save his surety on the Resurrection Day”.
Conversely, once interest is allowed, and advancing loans becomes a form of profitable trade, the whole economy turns into a debt-oriented economy. It will then not only dominate the real economic activities and disturb its natural functions, but will also put the whole of mankind under the slavery of debt. It is no secret that many nations in the world, including the developed countries, are drowned in national and foreign debts to the extent that the amount of payable debts in a large number of countries exceeds their total income.
Interest-based loans have a persistent tendency in favor of the rich and against the interests of the common people. It carries adverse effects on production and allocation of resources, as well
as on the distribution of wealth. Some of these effects are as follows:

a) Evil Effect on Allocation of Resources
Loans in the present banking system are given mainly to those who, on the strength of their
wealth, can offer satisfactory collateral. The banking system thus, tends to reinforce the unequal
distribution of capital.
b) Evil Effects on Production
Since in an interest-based system funds are provided on the basis of strong collateral and the
end-uses of the funds do not constitute the main criterion for financing, it encourages people to
live beyond their means. The rich do not just borrow for productive projects, but also for
conspicuous consumption. Similarly, governments borrow money not only for genuine
development programs, but also for their lavish expenditure and for projects motivated by their
political ambitions rather than by sound economic assessment.
c) Evil Effects on Distribution
In the present banking system, the injustice brought to the financier is more pronounced and
much more disturbing to the equitable distribution of wealth. In the context of modern capitalist
system, it is the banks which advance depositors’ money to the industrialists and traders. Almost
all giant business ventures are financed by banks and financial institutions. In numerous cases
the funds deployed by the big entrepreneurs from their own pockets are much less than the
funds borrowed from the common people through banks and financial institutions.
The net result, in this case, is that all the profits of the big enterprises are earned by persons
whose own financial input may be marginal, while the people whose financial contribution may
have formed the largest part of the investment get nothing in real terms. This is because the
amount of interest given to them is often repaid by them through the increased prices of the
products, and therefore, in a number of cases the returns received becomes negative in real
terms.
5.3 GHARAR: CONCEPT AND FORMS
Gharar is another factor that plays a role in deciding the Shariah validity or otherwise of a
transaction. The Arabic word gharar means risk, uncertainty, and deceit. While the prohibition of
ribā is absolute, some degree of gharar or uncertainty is acceptable in the Islamic framework.
Only conditions of excessive gharar need to be avoided.
Gharar is defined as any bargain where the outcome is hidden. Gharar sale is defined as the
sale of probable items whose existence or characteristics are not certain, due to the risky nature
which makes the trade similar to gambling.
The Qur’ān has clearly forbidden business transactions which cause injustice in any form to any
of the parties. It may be in the form of hazard or peril leading to uncertainty in any business; or
deceit, fraud or undue advantage.
Allah says: “And eat not up your property among yourselves in vanity, nor seek by it to gain the
hearing of the judges that ye may knowingly devour a portion of the property of others
wrongfully” (al-Baqarah (2): 188)
Allah says: “O ye who believe! Squander not your wealth among yourselves in vanity, except it
be a trade by mutual consent, and kill not one another. Lo! Allah is ever Merciful unto you”
(al-Nisā’ (4): 29)
There is no text in Qur’ān expressly concerning the ruling of gharar, whether of a general or
particular nature. However the Qur’ān contains a general ruling which include all the specific
rulings stated by the scholars about the gharar which is prohibited. The ruling indicates the
prohibition of consuming others property unjustly as mentioned in the above versus.
Forms of Gharar
Any bilateral transaction that comprises the following involves gharar:
 The liability of the party in the transaction is either uncertain or contingent.
 Consideration of either is not known.
 Ultimate outcome of any one party is uncertain.
 Delivery is not in the control of the obligor.
 Payment from one side is certain, but from the other side is contingent.
Typical examples of gharar include the sale of fish in the water, birds in the sky, an unborn calf
in its mother’s womb, a runaway animal, unripened fruits on the tree, etc. All these cases involve
the sale of an item which may or may not exist. In such circumstances, to mention but a few, the
fish in the sea may never be caught, the calf may be stillborn, and the fruits may never ripen. In
all such cases, it is in the best interest of the trading parties to be very specific about what is
being sold and for what price. The Prophet (s.a.w.) has forbidden the purchase of the catch of a
diver. The prohibition in this ḥadīth pertains to a person paying a fixed price for whatever a diver
may catch on his next dive. In this case, he does not know what he is paying for. On the other
hand, paying a fixed price to hire the diver for a fixed period of time (where whatever he catches
belongs to the buyer) is permitted. The object of this contract (the diver’s labour e.g. for one
hour) is well defined. In many cases, gharar can be eliminated from contracts by carefully stating
the object of sale and the price in order to eliminate unnecessary ambiguities.
5.3.1 Gharar in Modern Contracts
In contemporary financial transactions, the two areas where gharar most profoundly affects
common practice are insurance and financial derivatives. Jurists argue against the financial
insurance contract, where premiums are paid regularly to the insurance company, and the
insured receives compensation for any insured losses in the event of a loss. In this case, there is
a possibility that the insured may collect a large sum of money after paying only one monthly
premium. On the other hand, there is also the possibility of the insured making many monthly
payments without ever collecting any money from the insurance company. Since “insurance” or
“security” itself cannot be considered an object of sale, this contract is rendered invalid because
of the forbidden gharar. Of course, conventional insurance also suffers from prohibition due to
ribā since insurance companies tend to invest significant portions of their funds in government
bonds which earn them ribā.
The other set of relevant contracts which are rendered invalid because of gharar are forwards,
futures, options, and other derivative securities. Forwards and futures involve gharar since the
object of the sale may not exist at the time the trade is to be executed. Islamic law permits
certain exceptions to this rule through the contracts of salam and istiṣnāʿ. However, the
conditions of those contracts make it very clear that contemporary forwards and futures are not
permitted under Islamic law. Classical jurists called such contracts al-bayʿ almuḍāf, where both
the prices and the goods are to be delivered at a future date (for example, “I shall sell you this
car for so much at the beginning of the next month”) and considered them unconcluded and
thus, invalid. Contemporary options (e.g. “I shall sell you my house for so much if my father
returns”) were also discussed by traditional jurists who called them suspended conditional sale
(al-bayʿ al-muʿallaq). They have also rendered such sales invalid due to gharar.
5.4 QIMĀR: CONCEPT AND FORMS
Gambling (qimār or maysir) as well as speculation that falls under gambling in terms or Shariah
is not permissible in Islamic law. Therefore, a Shariah financial planner must possess an
understanding of the essential nature of qimār. Qimār or maysir has been clearly prohibited by
Qur’ān and the Sunnah (traditions of the Holy Prophet (s.a.w.). Gambling discourages honest
labour and encourages greed, materialism and discontent. It encourages ‘getrich-quick’ thinking
and reckless investment of God-given resources. It is, in its essence, a form of misappropriation,
which borders on stealing. Each gambler wants to get the prize money.
The Qur’ān specifically bans qimār or gambling in al-Mā’idah (5:90-91):
“O ye who believe! Intoxicants and gambling, sacrificing to stones, and (divination by) arrows,
are an abomination, of Satan’s handiwork: eschew such (abomination) that ye may prosper
Satan’s plan is (but) to excite enmity and hatred between you, with intoxicants and gambling,
and hinder you from the remembrance of Allah, and from prayer: will ye not then abstain?”.
Gambling has been defined as a transaction where a contractor gains contingent ownership of a
countervalue. Both sides of the transaction are equal; that is, its outcome is uncertain.
Consequently, there are two equal possibilities of gaining total profit or suffering total loss. For
instance, it is possible that the penalty may fall on A, and it is possible that it may fall on B. All
forms of transactions and deals that reflect these elements come under the domain of gambling.
Hence, gambling is an activity in which the players voluntarily transfer money or something else
of value amongst themselves, but this transaction is contingent upon the outcome of some
future uncertain event.
Examples of such activities are when A says to B: ‘If it rains today, I will give you RM100.00, and
if it does not rain today, then you will have to give me RM100.00’; or two people compete in a
race on the condition that the loser will have to pay the winner RM100.00.
5.4.1 Conditions of Qimār
There are four ingredients for a transaction to be categorized as qimār:
a) It is a transaction between two or more people;
b) In order to gain someone else’s wealth in the transaction, one places his wealth at stake,
whether actually, or by promising to pay later;
c) Gaining another’s wealth is contingent upon some uncertain event in the future, and both
possibilities of it occurring and not occurring are present;
d) The wealth which one puts at stake is either lost completely without anything in return (one
suffers a complete loss), or it brings with it some wealth of the other person without giving
anything in return (the other person suffers a complete loss).
Any transaction that has the above-mentioned four elements will be considered a transaction of
gambling, and hence unlawful.
5.2 Forms of Qimār
1) The first form of gambling is when no party is obliged to pay any amount for certain; rather,
the payment of each party is dependent upon an uncertain event in the future. That is the
payment and consequence of the event both only be known in the future. For example, A and B
compete in a race, with the promise of the loser paying the winner RM100.00. In this example,
there is no certainty of payment to/from any one party; rather the payment is contingent upon
winning or losing.
2) The second form of gambling is where payment is certain for one party and uncertain for the
other. The one paying for certain is actually staking his wealth, in that it may bring more wealth
or it may be lost totally. This is probably the most widespread type of gambling and has many
different forms.
In this category we have the prevalent forms of insurance, in that the premiums are paid for
certain, whereas the return is uncertain. One may lose all the premiums paid or may receive in
return more than the amount paid. This is one of the reasons why insurance has been declared
unlawful.

SHARIAH PERSPECTIVE ON TIME VALUE OF MONEY
It was discussed in the earlier sections on nature of money and ribā that Islamic principles
dictate that money and commodity have different characteristics. The commodities can be of
different qualities while money has no quality except that it is a measure of value or a medium of
exchange. Therefore, all the units of money of the same denomination are equal to each other.
Due to this, in an exchange of money against money, any excess amount charged against
deferred payment is ribā, since the excess is charged only against time.
In contrast, a seller may take into account the time factor in fixing a higher price for his commodity in a credit sale, but the increased price is being fixed for the commodity and not exclusively for the time element. However, once a commodity is sold, the resultant debt established on the buyer may not be increased in view of any further extension granted for payment; nor could a debt be sold to another at a discounted price in view of the latter’s cash payment.
This could indicate that the Shariah admits the effect of time on the value of commodities and recognizes the innate human preference of what is in hand to what is deferred. It is permissible to place a premium on time in credit sale of commodities. However, time valuation is possible only in business and trade of goods, and not in the exchange of monetary values or loans and debts. Thus, time in itself may not be the subject matter of a contract. Negation of the economic value of time in the case of a loan means that time is treated differently in loans and sales.
Shariah accepts the value of time in sale contract. One example is in the case of deferred payment sale or bayʿ al-muajjal. In deferred payment sale, credit price can be higher than the cash price. This is to compensate the seller for his inability to use the assets relinquished to the buyer, when he is not taking the full price of assets sold.

Another prove that Islam accepts the concept of time value of money in sale contract is the permissibility of bayʿ al-salam. Bayʿ alsalam is sale of goods to be delivered in the future with the price paid immediately by the buyer. The price of sold item is cheaper at the point of sale compared to when the goods are delivered to the buyer in the future. The concept also applies to bayʿ al-istiṣnāʿ where the buyer of manufactured items must pay immediately upon contract conclusion whilst the manufactured items to be delivered in the future.
As far as financial planning operations are concerned, for the purpose of computation of present and future values of cash flows etc, there could be no bar to considering time value of money among other factors. This is because here the valuation only serves the purpose of making a comparison of the relative values of assets and cash flows, which could assist a person in taking prudent investment decisions etc. Such valuation itself does not result in any ribā contract. What is disapproved in Shariah is time value of money being allowed to come into active play in a
transaction involving a monetary exchange or a loan, resulting in the actual occurrence of ribā.
As cleverly put forward by some, this means that what is prohibited in Shariah is monetary value
of time.
5.6 CALCULATION OF TIME VALUE OF MONEY
After learning about the Islamic approach to loans and interest, it is important to have an idea of how interest is explained in conventional finance. Interest is usually treated in modern commerce as a fee, paid on borrowed capital. Assets lent include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. Interest is calculated upon the value of the assets in the same manner as upon money. Interest can be thought of as “rent on money”. For example, if you want to borrow
money from the bank, there is a certain rate you have to pay according to how much you want to borrow.
The fee is explained as compensation to the lender for foregoing other useful investments that could have been made with the loaned money. These foregone investments are known as opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required
to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. The amount lent, or the value of the assets lent, is called the principal. This principal value is held by the borrower on credit. Interest is therefore the price of credit, not the price of money. The percentage of the principal that is paid as a fee (the interest), over a certain period of time, is called the interest rate.
Time Value of Money (TVM) is an important concept in financial planning. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM and its application in regular financial planning will be discussed first, and thereafter its Shariah perspective will be explained.
The time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. In particular, if one received the payment today, one can then earn interest on the money
until that specified future date.
TVM is based on the concept that a dollar that you have today is worth more than the promise or expectation that you will receive a dollar in the future. Money that you hold today is worth more because you can invest it and earn interest. After all, you should receive some compensation for foregoing spending. For instance, one can invest RM1.00 for one year at a 6% annual interest rate and accumulate RM1.06 at the end of the year. You can say that the future value of RM1.00 is RM1.06 given a 6% interest rate and a one year period. It follows that the present value of the RM1.06 you expect to receive in one year is only RM1.00.
A key concept of TVM is that a single sum of money or a series of equal, evenly spaced payments or receipts promised in the future can be converted to an equivalent value today.
Conversely, you can determine the value to which a single sum or a series of future payments will grow at some future date.
Time value computation is done with reference to principal and interest.
Principal is the amount the client has in possession, through savings, investments or borrowings. In savings and investments, the principal sum is an asset, while if borrowed, it is a liability (it is an asset for the lender).
Interest denotes the monetary return for the person who saved, invested or lent the principal sum. Interest is also the cost of borrowing money.
Interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring the use of funds, by lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one year.
To calculate interest, three elements should be known:
i. Amount of principal
ii. Rate of interest
iii. The period
Therefore: Interest = Amount of Principal X Interest Rate X Period Example: If a bank pays 10% interest per year, the annual interest on a deposit of RM 50,000 is RM 5000 (RM 50,000 X 10% X 1).
7.1 Simple Interest
Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days.

Where:
p = principal (original amount borrowed or loaned)
i = interest rate for one period
n = number of periods
Example:
You borrow RM10,000 for 3 years at 5% simple annual interest.
Interest = p X i X n = 10,000 X .05 X 3 = 1,500
Example 2:
You borrow RM10,000 for 60 days at 5% simple interest per year (assume a 365 day year).
Interest = p X i X n = 10,000 X .05 X (60/365) = 82.1917
7.2 Compound Interest
Compound interest is calculated for each period on the original principal and all interest accumulated during past periods. Although interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously.
You can think of compound interest as a series of back-to-back simple interest contracts. The interest earned in each period is added to the principal of the previous period to become the principal for the next period. For example, you borrow RM10,000 for three years at 5% annual
interest compounded annually:

Total interest earned over the three years = 500 + 525 + 551.25 = 1,576.25. Compare this to
1,500 earned over the same number of years using simple interest.
The power of compounding can have an astonishing effect on the accumulation of wealth. This table shows the results of making a onetime investment of RM10,000 for 30 years using 12% simple interest, and 12% interest compounded yearly and quarterly.

7.3 Nominal Interest Rate
This is the rate that is stated in a loan contract. It is the stated rate or the contractual rate.
E.g. Interest is paid by X bank on deposits at 8% per annum. This is the nominal rate.
7.4 Effective Interest Rate
Effective interest rate takes into consideration whether the nominal rate is subject to
compounding. It is an investment’s annual rate of interest when compounding occurs more often
than once a year.
Ieff = [1 + i/n]n – 1 Where:
Ieff = Effective interest rate
I = Stated nominal interest rate
= Number of compounding periods within a year, e.g. if quarterly, n = 4
Consider a stated annual rate of 10%. Compounded yearly, this rate will turn RM1000 into
RM1100. However, if compounding occurs monthly, RM1000 would grow to RM1104.70 by the
end of the year, rendering an effective annual interest rate of 10.47%.
Basically, the effective annual rate is the annual rate of interest that accounts for the effect of
compounding.
7.5 Present Values and Future Values
For comprehending present and future values pertaining to cash flows, it is necessary to know
the principles related to compounding and discounting.
Compounding is the process of computing how the future values of an amount will
become at the end of a selected period if it grows at certain assumed interest rates.
Discounting is the reverse of this process. It shows the value of a future amount in
today’s terms, reducing at a certain assumed interest rate over the relevant period.
Periods per annum are the frequency based on which interest is applied in a calendar year in the compounding or discounting process.
Compounding and discounting are influenced by some factors including the following:

The frequency or number of periods that interest is charged, such as annual, semiannual, and quarterly.
An increase in the number of compounding periods results in an increase of the future value (see below) and vice versa; increase in the discounting frequency results in a decrease of the present value (see below) and vice versa.

The interest rates assumed in the compounding or discounting process.
An increase in the interest rate increases the future value and vice versa; an increase of the interest rate decreases the present value and vice versa.
a) Present Value of a single sum Present Value is an amount today that is equivalent to a future payment, or series of payments, that has been discounted by an appropriate interest rate. Since money has time value, the present value of a promised future amount is worth less the longer you have to wait to receive it. The difference between the two depends on the number of compounding periods involved and the interest (discount) rate.
The relationship between the present value and future value can be expressed as:
PV = FV [ 1 / (1 + i)ⁿ]
Where:
PV = Present Value
FV = Future Value
i = Interest Rate per Period
n = Number of Compounding Periods
Example 1:
You want to buy a house 5 years from now for RM150,000. Assuming a 6% interest rate compounded annually, how much should you invest today to yield RM150,000 in 5 years?
FV = 150,000
i = 0.06
n = 5
PV = 150,000 [ 1 / (1 + .06)⁵]
= 150,000 (1 / 1.3382255776)
= 112,088.73

Example 2:
You find another financial institution that offers an interest rate of 6% compounded semiannually. How much less can you deposit today to yield RM150,000 in five years?
Interest is compounded twice per year, so you must divide the annual interest rate by two to obtain a rate per period of 3%. Since there are two compounding periods per year, you must multiply the number of years by two to obtain the total number of periods.
FV = 150,000
i = .06 / 2 = .03
n = 5 X 2 =10
PV = 150,000 [ 1 / (1 + .03)¹⁰]
= 150,000 (1 / 1.343916379)
= 111,614.09
b) Present Value of Annuities
An annuity is a series of equal payments or receipts that occur at evenly spaced intervals.
Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due.
Present Value of an Ordinary Annuity
The Present Value of an Ordinary Annuity (PVoa) is the value of a stream of expected or promised future payments that have been discounted to a single equivalent value today. It is extremely useful for comparing two separate cash flows that differ in some ways.
PV-oa can also be thought of as the amount you must invest today at a specific interest rate so that when you withdraw an equal amount each period, the original principal and all accumulated
interest will be completely exhausted at the end of the annuity.
The Present Value of an Ordinary Annuity could be arrived at by calculating the present value of each payment in the series using the present value formula and then summing the results. A more direct formula is:
PVoa = PMT [(1 – (1 / (1 + i)ⁿ)) / i]
Where:
PVoa = Present Value of an Ordinary Annuity
PMT = Amount of each payment
i = Discount Rate Per Period
n = Number of Periods
Example 1:
What amount must you invest today at 6% compounded annually so that you can withdraw RM5,000 at the end of each year for the next 5 years?
PMT = 5,000
I = 0.06
n = 5
PVoa = 5,000 [(1 – (1/(1 + .06)⁵ )) / 0.06]
= 5,000 (4.212364)
= 21,061.82

Example 2:
In practical problems, you may need to calculate both the present value of an annuity (a stream of future periodic payments) and the present value of a single future amount:
For example, a software dealer offers to lease a program to you for RM50 per month for two years. At the end of two years, you have the option to buy the program for RM500. You will pay at the end of each month. He will sell the same system to you for RM1,200 cash. If the going interest rate is 12%, which is the better offer?
You can treat this as the sum of two separate calculations:

The present value of an ordinary annuity of 24 payments at RM50 per monthly period, plus
The present value of RM500 paid as a single amount in two years.
PMT = 50 per period
i = 0.12 /12 = 0.01 Interest per period (12% annual rate / 12 payments per year)
n = 24 number of periods
PVoa = 50 [(1 – (1/(1.01)²⁴)) / .01]
= 50 [(1- (1 / 1.26973)) /.01]
= 1,062.17
FV = 500 Future value (the lease buy out)
i = 0.01 Interest per period
n = 24 Number of periods
PV = FV [ 1 / (1 + i)ⁿ ]
= 500 ( 1 / 1.26973 )
= 393.78
The present value (cost) of the lease is RM1,455.95 (1,062.17 + 393.78). So if taxes are not considered, you would be RM255.95 better off paying cash right now if you have it.
Present Value of an Annuity Due (PVad)
The Present Value of an Annuity Due is identical to an ordinary annuity except that each payment occurs at the beginning of a period rather than at the end. Since each payment occurs one period earlier, we can calculate the present value of an ordinary annuity and then multiply the result by (1 + i).
PVad = PVoa (1+i)
Where:
PV-ad = Present Value of an Annuity Due
PV-oa = Present Value of an Ordinary Annuity
i = Discount Rate Per Period
Example 1:
What amount must you invest today at 6% interest rate compounded annually so that you can withdraw RM5,000 at the beginning of each year for the next 5 years?
PMT = 5,000
i = 0.06
n = 5
PVoa = 21,061.82 (1.06)
= 22,325.53

a) Future Value of a Single sum
Future Value is the amount of money that an investment made today (the present value) will grow to by some future date. Since money has time value, we naturally expect the future value to be greater than the present value. The difference between the two depends on the number of compounding periods involved and the going interest rate.
The relationship between the future value and present value can be expressed as:
FV = PV (1 + i)ⁿ
Where:
FV = Future Value
PV = Present Value
i = Interest Rate per Period
n = Number of Compounding Periods
Example 1:
You can afford to put RM10,000 in a savings account today that pays 6% interest compounded annually. How much will you have 5 years from now if you make no withdrawals?
PV = 10,000
i = 0.06
n = 5
FV = 10,000 (1 + .06)⁵
= 10,000 (1.3382255776)
= 13,382.26

Example 2: Another financial institution offers to pay 6% compounded semiannually. How much will your RM10,000 grow to in five years at this rate?
Interest is compounded twice per year so you must divide the annual interest rate by two to obtain a rate per period of 3%. Since there are two compounding periods per year, you must multiply the number of years by two to obtain the total number of periods.

PV = 10,000
i = 0.06 / 2 = 0.03
n = 5 X 2 = 10
FV = 10,000 (1 + .03)¹⁰
= 10,000 (1.343916379)
= 13,439.16
b) Future Value of Annuities
An annuity is a series of equal payments or receipts that occur at evenly spaced intervals.
Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due.
Future Value of an Ordinary Annuity
The Future Value of an Ordinary Annuity (FVoa) is the value that a stream of expected or promised future payments will grow to after a given number of periods at a specific compounded interest.
The Future Value of an Ordinary Annuity could be arrived at by calculating the future value of each individual payment in the series using the future value formula and then summing the results. A more direct formula is:
FVoa = PMT [((1 + i)ⁿ – 1) / i]

Where:
FVoa = Future Value of an Ordinary Annuity
PMT = Amount of each payment
i = Interest Rate per Period
n = Number of Periods
Example 1:
What amount will accumulate if we deposit RM5,000 at the end of each year for the next 5 years? Assume an interest of 6% compounded annually.
PV = 5,000
i = 0.06
n = 5
FVoa = 5,000 [(1.3382255776 – 1) /.06]
= 5,000 (5.637092)
= 28,185.46

Example 2:
In practical problems, you may need to calculate both the future value of an annuity (a stream of future periodic payments) and the future value of a single amount that you have today. For example, you are 40 years old and have accumulated RM50,000 in your savings account. You can add RM100 at the end of each month to your account which pays an interest rate of 6% per year. Will you have enough money to retire in 20 years?
You can treat this as the sum of two separate calculations:
1. the future value of 240 monthly payments of RM100 plus
2. the future value of the RM50,000 now in your account.
PMT = RM100 per period
i = 0.06 /12 = 0.005 Interest per period (6% annual rate / 12 payments per year
n = 240 periods
FVoa = 100 [ (3.3102 – 1) /.005 ] = 46,204

PV = 50,000 Present value (the amount you have today)
i = 0.005 Interest per period
n = 240 Number of periods
FV = PV (1+i)²⁴⁰ = 50,000 (1.005)240 = 165,510.22
After 20 years you will have accumulated RM211,714.22 (46,204.00 + 165,510.22).
Future Value of an Annuity Due (FVad)
The Future Value of an Annuity Due is identical to an ordinary annuity except that each payment occurs at the beginning of a period rather than at the end. Since each payment occurs one period earlier, we can calculate the present value of an ordinary annuity and then multiply the result by (1 + i).
FVad = FVoa (1+i)
Where:
FVad = Future Value of an Annuity Due
FVoa = Future Value of an Ordinary Annuity
i = Interest Rate per Period
Example: What amount will accumulate if we deposit RM5,000 at the beginning of each year for the next 5 years? Assume an interest of 6% compounded annually.
PV = 5,000
i = 0.06
n = 5
FVoa = 28,185.46 (1.06)
= 29,876.59
7.6 Net Present Value (NPV)
NPV of an investment is the present value of the stream of cash inflows minus the present value of the stream of cash outflows. Both values are computed based on an assumed rate of interest or discount rate, which is normally the minimum rate that is acceptable to the investor based on the risk of the investment.
NPV = PV of Cash Inflows – PV of Cash Outflows
If NPV is positive, the investment is sound; if negative, it is unprofitable.
7.7 Internal Rate of Return (IRR)
IRR of an investment is the interest rate that equates the present value of the stream of cash inflows to the present value of the stream of cash outflows. The IRR is the interest rate that makes the net present value of all cash flow equal to zero. In financial analysis terms, the IRR can be defined as a discount rate at which the present value of a series of investments is equal to the present value of the returns on those investments.
Generally speaking, the higher a project’s internal rate of return, the more desirable it is to undertake the project.
7.8 Amortization
Amortization is a method for repaying a loan in equal installments. Part of each payment goes toward interest due for the period and the remainder is used to reduce the principal (the loan balance). As the balance of the loan is gradually reduced, a progressively larger portion of each
payment goes toward reducing principal.
For example, the 15 and 30 years fixed-rate mortgages are usually fully amortized loans. To pay off a RM100,000, 15 years, 7%, fixed-rate mortgage, a person must pay RM898.83 each month for 180 months (with a small adjustment at the end to account for rounding). RM583.33 of the
first payment goes toward interest and RM315.50 is used to reduce principal. But by the 179th payment, only RM10.40 is needed for interest and RM888.43 is used to reduce the principal.
An amortization schedule is a table with a row for each payment period of an amortized loan.
Each row shows the amount of the payment that is needed to pay interest, the amount that is used to reduce principal, and the balance of the loan remaining at the end of the period.
The first and last 5 months of an amortization schedule for a RM100,000, 15 year, 7%, fixed-rate mortgage will look like this:
Negative amortization occurs when the payment is not large enough to cover the interest due for a period. This will cause the loan balance to increase after each payment – a situation that should certainly be avoided. This might occur, for instance, if the rate of the adjustable-rate loan increases, but the payment does not.

Self-Assessment
Circle the letter of the correct choice for each of the following:
1. Which of the following is the type of riba that relates to the trade of goods of unequal quantities or unequal qualities?
A. Riba al-Nasiah
B. Riba al-fadl
C. Riba Al-Quran
D. Riba Al-Jahiliyyah
2. The following are examples of the application of discounting in project evaluation EXCEPT:
A. Net Present Value (NPV)
B. Internal Rate of Return (IRR)
C. Payback period
D. Discounted cash flow
3. The following statements on time value of money are TRUE EXCEPT:
A. Time belongs to Allah S.W.T. He will reward the reduction of money due to time factor.
B. The cost of capital used to compensate the loss of the value of money is the interest rate.
C. Time value of money is allowed as long as contractual reward determined ex-ante is stated in exchange for a loan.
D. Uncertainty of future events leads to the usage of rate of return on equity as the cost of capital.
4. Shariah prohibits all of these EXCEPT:
A. Risk taking
B. Maysir
C. Gharar
D. Riba
5. An investor would like to know the amount he would be receiving if he invests a sum of money at a certain rate of return. Which concept of discounting is to be used?
A. Future Value
B. Present Value of Annuity
C. Present Value of a Perpetuity
D. Present Value
6. Gharar exists in the following conditions EXCEPT:
A. Participative Islamic insurance
B. Insurance
C. Buying goods that do not exist at the time of purchase
D. When the price of goods is not specified
7. Which of the following DOES NOT amount to Qimar?
A. Buying lotteries.
B. Buying shares with the hope that their prices will increase in the future.
C. Selling goods to potential sellers using the random mechanism.
D. Betting on palm oil futures, buying low to sell it high in the future.
8. Insurance contract is haram because the contract contravenes the following Shariah principles, EXCEPT:
A. It involves maysir as payments will be paid to insurance holders upon certain occurrences, such as death or accidents.
B. It involves riba related activities.
C. It amounts to gharar as the price is determined via the use of uncertain variables.
D. Saving through insurance provides low percentage of returns as compared to other types of investment.
9. What is the opinion of money in the Shariah?
A. Money has no intrinsic utility.
B. Money cannot be a measure of value or a medium of exchange.
C. Money can be exchanged at different values.
D. Money of a currency can be exchanged with other currencies in the forward market.
10. You want to buy a house 5 years from now for RM150,000. Assuming a 6% rate compounded annually, how much should you invest today to yield RM150,000 in 5 years?
FV = 150,000
i = 0.06
n = 5
PV = 150,000 [ 1 / (1 + .06)⁵] = 150,000 (1 / 1.3382255776) = 112,088.73
The above calculation is __________________.
A. Correct in all years
B. Correct in 5th years only
C. Correct in the 1st year only
D. All the above
Answer: 1-b, 2-c, 3-b, 4-a, 5-d, 6-a, 7-b, 8-d, 9-a,10-a.

MODULE 1 / CHAPTER 6
RISK MANAGEMENT AND WEALTH PROTECTION
Chapter/Topics Outline:
6.0 Introduction
6.1 Basic Concepts of Risk Management
6.1.1 Basic risk management process
6.1.2 Related Concepts of ‘Risk’
6.2 The Islamic View on Risk Management
6.2.1 Basic Principles of Takaful
6.3 Comparison between Insurance and Takaful
6.4 Models for Takaful Operations
6.5 Basic Applications of Risk Management via Takaful Planning
6.5.1 Pitfalls in purchasing Insurance/Takaful
6.5.2 Calculating an Adequate Insurance Coverage
6.5.3 Products of Family and General Takaful
6.6. Conclusion

Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Basic Concepts of Risk Management
(b) Islamic View on Risk Management
(c) Comparison between Insurance and Takāful
(d) Models for Takāful Operations
(e) Basic Applications of Risk Management

Definitions:
The Concept of Risks
Peril and Hazard
Peril – means serious and immediate danger. It refers to a cause of loss. Common perils include fire, flood, collision, earthquakes, sickness and premature death. When a peril occurs, property may be destroyed or lost and persons could be injured or killed. Any loss of property or lives will invariably lead to financial losses.
Hazard – means a danger or risk. It refers to the condition that increases the chance of loss. There are four (4) types of hazards:
(a) Physical Hazard – It refers to physical conditions that increase the chances of loss, i.e. defective wiring in a building
that increases the chance of fire.
(b) Moral Hazard- It refers to the character defect (dishonesty) in an individual that increases the chance of loss.
Moral hazard is present in all forms of insurance and it is difficult to control, i.e. intentionally
burning unsold merchandise that is insured to collect from an insurer.
(c) Morale Hazard – It refers to carelessness or indifference to a loss because of the existence of insurance. Careless acts will likely increase the chance of loss, i.e. leaving a door unlocked, hence, allowing a burglar to enter the house because all the major household items are well- covered by insurance.
(d) Legal Hazard – It refers to the characteristics of the legal system or regulatory environment that increases the frequency or severity of losses, i.e. large damage awards in liability lawsuits.
The four types of risk management
Risk Avoidance – Avoidance of risk means withdrawing from a risk scenario or deciding not to participate.
Risk Reduction – The risk reduction technique is applied to keep risk to an acceptable level and reduce the severity of loss through.
Risk Transfer – Risk can be reduced or made more acceptable if it is shared.
Risk Retention – When risk is agreed, accepted and accounted for in budgeting, it is retained.
Note:
Risk Sharing – In takāful, the risk is shared among all the takāful participants. Instead of risk transfer, you share the risk with other participants.

6.0 INTRODUCTION
Risk management is the process of identifying, assessing and controlling financial, legal, strategic and security risks to an organization’s capital and earnings. These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters. If an unforeseen event catches your organization unaware, the impact could be minor, such as a small impact on your overhead costs. In a worst-case scenario, though, it could be catastrophic and have serious ramifications, such as a significant financial burden or even the closure of your business. To reduce risk, an organization needs to apply resources to minimize, monitor and control the impact of negative events while maximizing positive events. A consistent, systemic and integrated approach to risk management can help determine how best to identify, manage and mitigate significant risks.
Wealth matters. The assets we have acquired or created are critical in enabling us to lead the lifestyle we want. But it is natural that we’d also want to preserve our wealth and pass on as much as we can to the next generation. It is our legacy, providing the peace of mind that we’ve helped secure the future of our loved ones. How we protect and provide that legacy is what wealth protection is all about, and there are lots of different strategies that can help us achieve it. But it is not always an easy subject to discuss. After all, death or serious illness are not things we necessarily want to think about. It is emotional and complex, which is why it is a good idea to seek advice from an experienced and impartial wealth adviser. Wealth protection incorporates a variety of insurance/takaful products to protect you, and the wealth you are generated. For example, several type of insurance/takaful vary depending on your assets and personal circumstances, and can be evaluated with the assistance of a Financial Adviser.
Protecting your wealth is an important component of individual’s holistic financial plan. For example, appropriate insurance cover assists you in managing financial risks when unexpected problems occur, such as premature deaths, disabilities or employment disruption. At Blueprint Planning, we tailor insurance solutions to factor in the type and level of cover required to protect you and your family against a range of unexpected circumstances. There are various types of insurance cover we will consider for you include: (1) Life insurance, (2) Trauma cover, (3) Total permanent disablement insurance, (4) Temporary salary continuance, and (5) Income protection. Islamic Wealth Protection – In order to protect your wealth, appropriate Takaful cover is also necessary (especially for Muslims) to manage financial risks when unexpected problems occur, such as premature deaths, disabilities or employment disruption. At Blueprint Planning, we also tailor Takaful solutions to factor in the type and level of cover required to protect you and your family against a range of unexpected circumstances. The various types of Takaful cover you might be considered include: (1) Hibah Takaful or Life Takaful, (2) Critical Illness protection, (3) Total permanent disablement Takaful, and (4) Income protection.
The objective of financial protection and wealth preservation is to ensure that the client and his family are not left financially disadvantaged as a result of major disasters such as death, disablement, loss of assets through fire, prolonged injury and other events that result in financial
loss. Risk management through takāful is a form of cooperative insurance in which the participants share the risks. With that, the risks borne by each participant will be much less.
6.1 BASIC CONCEPTS OF RISK MANAGEMENT
2.1 Basic Risk Management Process
There are 4 essential steps in Risk Management Process. The risk management process consists of the following:
a) Establishing context and defining parameters.
b) Assessing the risk – by identification, analysis and evaluation.
c) Treating the risks – by transfering, sharing, reducing, avoiding or retention. During this step, the takāful solution becomes relevant.
d) Monitoring and reviewing.
There is no single definition of ‘risk’. The term has a variety of meaning in business and everyday life. At its most general, ‘risk’ is used to describe any situation where there is uncertainty about the outcome. Generally, ‘risk’ is always related to unfavorable outcomes or unfortunate events. On the other hand, ‘chance’ is something which relates to favorable outcomes.
However, traditionally, ‘risk’ is defined in terms of uncertainty. It is defined as uncertainty because there is a possibility of a loss. For example:
(1) The risk of having lung cancer among smokers is high and the cost of the treatment of the disease is costly.
(2) The risk of accident while driving a car.
Among the common definitions of ‘risk’ are:
(a) Variability in future outcomes
(b) Chance of loss
(c) Possibility of an adverse deviation from desired outcome
However, people working in the insurance industry often use the term ‘risk’ to mean the life or property being insured. Thus, we may hear statements from insurance agents, such as ‘a driver with drunken driving record is a poor risk’ or ‘that building is an unacceptable risk because it has poor wiring’.
2.2 Related Concepts of ‘Risk’
Concepts other than ‘risk’ that relate to risk management are ‘peril’ and ‘hazard’.
Peril
‘Peril’ means serious and immediate danger. It refers to a cause of loss. Common perils include fire, flood, collision, earthquakes, sickness and premature death. When a peril occurs, property may be destroyed or lost and persons could be injured or killed. Any loss of property or lives will invariably lead to financial losses.
Examples of ‘peril’:
a. If your car is damaged in an accident, the accident is the peril or the cause of loss.
b. If a restaurant is destroyed in a fire, the fire is the peril.
Hazard
‘Hazard’ means a danger or risk. It refers to the condition that increases the chance of loss. There are four (4) types of hazards:
a) Physical Hazard
It refers to physical conditions that increase the chances of loss, i.e. defective wiring in a building
that increases the chance of fire.
b) Moral Hazard
It refers to the character defect (dishonesty) in an individual that increases the chance of loss.
Moral hazard is present in all forms of insurance and it is difficult to control, i.e. intentionally
burning unsold merchandise that is insured to collect from an insurer.
c) Morale Hazard
It refers to carelessness or indifference to a loss because of the existence of insurance. Careless acts will likely increase the chance of loss, i.e. leaving a door unlocked, hence, allowing a burglar to enter the house because all the major household items are well- covered by insurance.
d) Legal Hazard
It refers to the characteristics of the legal system or regulatory environment that increases the frequency or severity of losses, i.e. large damage awards in liability lawsuits.
2.3 Types of Risk Management
Risk avoidance – One of the methods in managing risks is to avoid performing any activity that could carry risks.
The risk of getting lung cancer can be avoided by not smoking. One can also avoid car accidents by not using a car. Similarly, those who are afraid of being in a plane crash could avoid it by using land transportation. However, this is not the answer to managing all risks. An extreme example of managing risks by avoidance is that of a wealthy American in the 1970s who was so afraid of death that he avoided everything he could that presented a risk to his life. To remain
‘safe’, he kept himself in a sealed room. In the end, death still took him in that sealed room.
Avoidance may seem the answer to managing risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risks may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.
Loss control: Loss Prevention & Minimization
Loss control is to reduce the likelihood of financial loss occurring or lightening the severity of the occurrence of financial loss. For example, to reduce the risk of meeting with an accident, one has to wear a helmet when riding a motorcycle or fasten the seat belt when driving a car. One
can also drive a car within the specified speed limit to lessen the chance of being involved in a car accident. The concept of loss prevention and minimization is essential to minimization of financial loss. This concept is adopted in takāful and insurance by way of introducing access fee for the participants who do not observe the loss prevention measures. For examples, parking cars in the driveway where it may be exposed to greater danger as compared to if it is parked in the garage.
Risk retention – Risk retention is accepting loss when it occurs. This method may be an effective way of handling risk when the potential of loss is very minimal. For example, one can accept the risk of losing a pair of shoes which cost him only RM50 rather than try to manage the risk with takāful products
or insurance.
Risk Sharing – In takāful, the risk is shared among all the takāful participants. Instead of risk transfer, you share the risk with other participants.
6.2 THE ISLAMIC VIEW ON RISK MANAGEMENT
In Islam, risk has to be managed for a better future of the family during bad times and death of the breadwinner. Risk management in Islam is guided by the Qur’ān: “Would any of you wish to have a garden with date palms and vines, with rivers flowing underneath, and all kinds of fruits
for him therein, while he is striken with old age, and his children are weak (not able to look after themselves), then it is struck with a fiery whirlwind, so that it is burnt. Thus does Allah make clear His Ayat to you that you may give thought” (al-Baqarah (2): 26).
This Qur’ānic revelation speaks on the need of a breadwinner to take precautions regarding the wealth that will provide a living for his family when he is stricken by the old age and if his children are young and incapable of providing for themselves. In this case, risk management of
the assets as well as income-generation by the breadwinner is necessary.
In managing their daily life, Muslims are also encouraged to do their utmost to be prepared and seek protection for their activities as stated in the ḥadīth: “The Prophet (s.a.w.) told a Bedouine Arab who left his camel untied to the will of Allah: Tie the camel and then leave it to the will of Allah” (as reported by al-Tirmidhī and Ibn Mājah).
According to the ḥadīth, the Prophet (s.a.w.) urged Muslims to work hard to achieve their desired goals and blessings with the will of Allah. By managing risks, the breadwinner will provide financial protection to his beneficiary if an unexpected tragedy occurs. Another ḥadīth that
reiterates this practice is that narrated by Amir ibn Saʿad ibn Abī Waqqāṣ. The Prophet (s.a.w.) said: “Verily it is better for you to leave your offspring wealthy than to leave them poor asking others for help.”
The Prophet (s.a.w.) advises Muslims to safeguard the future welfare of family members. As death for example, is certain to everyone, the loss of income suffered by the beneficiary of the deceased can be reduced through the compensation awarded to them.
The concept of aqilah practiced by ancient Arab tribes before Islam resembles that of insurance.
Aqilah is a custom among Arab society whereby whenever one family member of a tribe kills a person from another tribe, the killer’s family, particularly a male, will donate money to the deceased’s family. It is a duty, especially of the paternal family of the accused or aqila, to help
him accumulate funds to be paid to the deceased’s relatives. The money paid to the deceased’s beneficiary is known as ‘blood money’. This practice shows the responsibility and willingness of family members in helping a fellow member in his time of need. Furthermore, the spirit of
brotherhood, solidarity and mutuality will flourish among the community.
The Prophet permitted this practice as shown in the following ḥadīth narrated by Abū Hurayrah:
“Once, two women from the tribe of Huzail clashed and one of them hit the other with a stone, which killed her and also the foetus in the victim’s womb. The heirs of the victim brought an action to the court of the Holy Prophet (s.a.w.), who gave a verdict that the compensation for the
infanticide is freeing of a male or female slave while the compensation for the killing of a woman is the blood money (diyah), to be paid by the aqilah (the paternal relatives) of the accused.”
While the aqilah concept is not practiced at present, the spirit of brotherhood, mutuality and solidarity can be extended through takāful practice. Every policyholder in a takāful scheme has agreed to pay a specified amount to a special fund known as tabarruʿ. In the event of an
accident to any policyholder, the compensation will be taken from this fund to ease the financial burden that might be experienced by the beneficiary of the deceased in the case of family takāful; as well as provide financial protection against damages and destruction to the properties in general takāful.
3.1 Basic Principles of Takāful
The prevalent use of gharar, gambling and ribā has rendered the activity of conventional insurance impermissible according to the Shariah. These three elements exist in the contract and investment activities of the insurance companies as explained below:

Gharar
In conventional insurance, contract of buying and selling between the policyholder and insurance operator contains gharar or uncertainty and ambiguity regarding the subject matter of the contract. While the policyholder act as a buyer by paying premium and the insurance company
operates as a seller by promising to pay compensation, both parties do not know when the subject matter of the contract, which is the insurance coverage, will occur and how much money will be involved in the compensation. Thus, gharar in conventional insurance pertains to three
issues, namely; the unknown outcome of the exchange, the unknown rate of exchange and the unknown time of exchange. In conventional insurance, these three issues are unknown thus introducing gharar to the contract, which renders the contract invalid.

Gambling
The SAC of SC in its 5th meeting on 23 August 1995 resolved that securities with gharar features are not ḥalāl. Company activities categorized as gharar include conventional insurance activities.1 Excessive uncertainty on the compensation to be paid to the policyholder leads to gambling.
Ribā
Insurance companies will invest the pool of funds accumulated from the premium paid by the policyholders to get a good return. Most of the financial instruments offered in the primary and secondary markets such as bonds, money market instruments and derivatives are based on interest rate which is prohibited in Islam. Because of this reason, conventional insurance is considered ḥarām by the jurists and takāful serves as the alternative.
Since conventional insurance practices contain the prohibitive elements of gharar, gambling and ribā, Islamic insurance has introduced the concepts of tabarruʿ and muḍārabah in the contract and investment activities, to eliminate these elements.
A tabarruʿ contract refers to an agreement to contribute a certain amount for donation or charity.
The policyholders in takāful schemes have agreed to channel a portion of premium paid to a special fund known as tabarruʿ fund. If catastrophe or untoward incidents occur to any of the policyholders during the period covered, the compensation will be taken out from this account.
The sense of brotherhood and solidarity among the policyholders will flourish because they are contributing towards helping unfortunate fellow members through payments to the tabarruʿ fund.
In addition, wakālah and muḍārabah contracts are also incorporated between the participants and takāful operators as commerce and investment activities are involved.
The investment ventures undertaken by takāful operators must also be free from the element of ribā as it is ḥarām in Islam. Takāful companies, thus, must place their funds only in Shariah compliant instruments such as ṣukūk and equities. To make sure the investment activities of takāful operators are fully compliant with the teachings of Islam, in Malaysia, it is mandatory for the companies to have Shariah Advisory Boards (SAB) to monitor and advise them in matters relating to Shariah. Besides its main role in supervising takāful operators in Shariah issues, SABs also play an important role in maintaining the confidence of Muslims in their participation in takāful plans.
6.3 COMPARISON BETWEEN INSURANCE AND TAKĀFUL
The word ‘takāful’ originated from the Arabic word “kafālah” which means “guaranteeing each other” or joint guarantee. The Takāful Act (1984) defines ‘takāful’ as “a scheme based on mutual assistance, which provides for mutual financial aid and assistance to the participants in case of
need whereby the participants mutually agree to contribute for the purpose”.
In takāful, participants contribute a sum of money to a common takāful fund in the form of participative contribution which is called tabarruʿ. Those who participate agree to become one of the participants by agreeing to mutually help each other, should any of the participants suffer a
defined loss. Some part of the contribution goes to participants’ accounts for savings or investment.
4.1 Types of Takāful Plans
(a) Term – The term plan provides protection for a specific period of time. The beneficiaries can only utilize the benefits when the participants pass away or suffer from total or permanent disability during the policy’s term. Despite the low amount of contribution, this plan offers the highest coverage compared to other takāful plans. However, it does not offer savings and investment elements. On top of that, the returns in the tabarruʿ accounts are very minimum as the main purpose of this plan is for protection.
(b) Whole life – This is a lifetime protection with a fixed death benefit. The contribution is fixed and paid throughout the participant’s life. This plan combines both protection and savings. The investment portion will accumulate savings (cash value) where the participants can withdraw for his personal use. Comparatively, this plan is more expensive as it has both protection and savings.
(c) Endowment – This plan combines the need for protection and also savings. The main advantage of this plan is it provides a stream of income
at the end of a specific period. If the participants die, then the money will be paid to the beneficiaries. Just as the whole life plan, an endowment plan is costly, too.
(d) Investment-linked – In an investment-linked takāful plan, part of the contribution will be invested in a variety of Shariah approved investment funds and the other part is used to provide the participants coverage against death and permanent disability. Participants have the right to decide on the allocation of the contribution between investment and protection, and also, in terms of the funds they prefer.
The following table illustrates the differences between insurance and Takāful:
Table 6.1: Differences between insurance and Takāful
The definition of insurance is given as: “A promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial wellbeing of an individual, company or other entity in the case of unexpected loss. Some forms
of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policyholder a sum of money upon the occurrence of a specific event. In most cases, the policyholder pays part of the loss (called the deductible) and the insurer pays the rest”. As for takāful, it is an Islamic alternative to traditional insurance, providing similar protection without violating the principles of Shariah. A group of participants mutually agree to pool donations in a fund that is used to indemnify each of the participants against certain losses.
6.4 MODELS FOR TAKĀFUL OPERATIONS
The following is an explanation on general takāful to illustrate the models for takāful operations.
General takāful schemes are contracts of risk sharing, on a shortterm basis (normally one year), between a group of participants to provide mutual compensation in the event of a defined loss. The schemes are designed to meet the needs for protection of individuals and corporate
bodies in relation to material loss or damage resulting from a catastrophe or disaster inflicted upon properties, assets or belongings of the participants.
In the event of a catastrophe or disaster resulting in a loss or damage to a property or bodily injuries or other physical disability to a person, the owner of the property or the person concerned may suffer substantial financial losses. For instance, if a house is destroyed or damaged by fire, the owner would certainly require a sum of money to repair the house or rebuild it. In addition, enough money is needed to replace the damaged furniture fixtures and fittings.
Similarly, a person who is injured in an accident would require an adequate sum of money to pay for medical treatment. By participating
in any of the various general takāful schemes offered in the market, that person will be assured of takāful benefits in case of misfortune which may result in loss or damage.
There are two types of general takāful models practiced in Malaysia, namely, muḍārabah (profit sharing basis) and wakālah (agency basis).
5.1 Muḍārabah Model
In this model, the contract stipulates the right and obligations of the participants as well as the company. Participants in this type of schemes agree to pay the takāful contributions as tabarruʿ.
The company manages the general takāful business including managing the investment of the general takāful fund assets. As the muḍārib (takāful operator), the takāful company will invest the general takāful fund in line with Shariah principles and all returns on the investment will be
pooled back to the fund. The participants, having putting their money in the General Takāful Fund, are now the rabb al-māl as portions of fund will be invested by the takāful operators. At the end of the year, after considering all claims and other expenses, they are entitled to share
the profit in the endeavor to the stipulated profit sharing ratio.
In line with the virtues of cooperation, shared responsibilities and mutual help as embodied in the concepts of takāful, the participants agree that the company shall pay from the general takāful fund, compensation or indemnity to fellow participants who have suffered a defined loss upon
the occurrence of a catastrophe or disaster.
The fund shall also pay for other operational costs of general takāful business, such as, for the re-takāful arrangements and the setting up of technical reserves.
This contract specifies how the profit from the operations of takāful is managed by muḍārib to be shared, in line with the principle of muḍārabah, between the participants as the providers of capital and the Muḍārib as the entrepreneur. The sharing of such profit may be in a ratio 60:40,
70:30, etc. as mutually agreed between the contracting parties.
Figure 6.2 below shows the process flow of the muḍārabah model for general takāful.

It shows how participants in any general takāful protection scheme, such as motor protection and fire protection, pay contribution as a donation (tabarruʿ) to help each other, to the takāful operator.
The funds will be put into a General Takāful Fund (GTF) which will be channeled by the takāful operator into Shariah compliant investment activities. All profits that come from the investment will be put back into the General Takāful Fund (GTF). Surplus, at the end of the year after
deducting claims, re-takāful and reserves, will be distributed to the takāful operator and participants based on the pre-agreed ratio as stipulated in the contract.
Figure 6.2: Muḍārabah model for general takāful

Figure 6.3 shows the wakālah contract process flow for general takāful. It should be noted that in a pure wakālah model, surpluses is not shared. In this contract, participants will pay contribution as a donation (tabarruʿ) to help each other and the contribution will be divided into two types of
accounts namely, Wakālah Fee (WF) and General Takāful Fund (GTF).
The allocation between Wakālah Fee and General Takāful Fund is based on the pre-agreed ratio between participant and the takāful operator as specified in the contract. Participants’ contribution to the General Takāful Fund will be invested by the takāful operators, resulting to
investment profit, which in turn to be deposited into the GTF. The surplus from GTF after deducting claims, retakāful and reserves will be distributed to the participants. The Wakālah Fee consists of commission and management expenses which will be paid to shareholders’ fund.
6.5 BASIC APPLICATIONS OF RISK MANAGEMENT
The main reason for participating in a takāful plan is protection.
The plan replaces income loss to a family upon death, temporary isability and permanent disability of the takāful participant. When these untoward circumstances happen, the funds from takāful can be used to pay for medical bills, pay off outstanding loans, provide for the children’s
education, etc. For example, participating in a takāful mortgage plan ensures that the house remain with one’s family if one dies.
Besides giving protection, a takāful plan also provides savings and as an investment plan. One can kill two birds with one stone: purchasing an appropriate takāful plan will ensure not only protection but also savings and investment which still provides returns on one’s contribution after
the takāful plan expires Tax shelter is also given to those who own takāful plans. For a family takāful plan, the maximum amount of tax relief is RM5,000 per year while for medical or education plans the relief is
RM3,000 per year.
6.1 Pitfalls in Takāful Participation
Purchasing too little (Little coverage)
The most common mistake that people make is having too little coverage. They go for the cheapest contribution or premium without considering the goals of buying the plan and underestimate the amount that is adequate for their family. This mistake is only realized when claims are made.
Purchasing too much (Too much coverage)
Another mistake that people tend to make is to be so obsessed with takāful plans that they buy whatever plans that are promoted to them. Takāful is not the only source of fund that one needs to have for protection. There are many other financial resources one can use to supplement temporary cut of income or for protection. Among them are EPF contributions, SOCSO,
investments and savings. Buying too much insurance can be very expensive. Some plans only permit one to claim once. For example, one is not allowed to claim from more than one insurance company for the same accident. In this case, it is useless to have the same plan from different takāful providers.
iii. Absence of “essential” covers (Not enough coverage: riders)
Having insufficient coverage is very detrimental to one’s financial planning. Many takāful providers offer a variety of riders for takāful participants to choose from. For example, you may need coverage for personal accident, critical illness, temporary disability etc. One must evaluate thoroughly the family’s needs and whether the riders offered are worth taking up for the additional small amounts of contribution.
Purchasing an inappropriate takāful plan (Plan does not match needs)
Since there are many takāful plans in the market, one needs to choose one which is most appropriate to suit one’s family needs. For example, a children’s education plan may not be appropriate for single takāful participants. Furthermore, one who cannot afford to pay higher contributions, but needs a high level of protection should not participate in a whole life plan but should, instead, go for a term plan.
Too late to participate in takāful plan Procrastination is the main enemy of human beings. Delaying in purchasing a takāful plan might result in higher amounts of contribution. In general, the older the person the higher would be the contribution for the same amount of coverage. This is so because of the concept of time value of money. The worst case scenario is procrastinating only to find that it is too late for one to purchase a takāful plan as one has been diagnosed with a critical illness.
6.2 Calculating an Adequate Insurance Coverage
The Need Analysis Method – Determine the Objective of Having a Takāful Plan

One can only know how much protection is required after one decides the purpose of purchasing the takāful plan. Some people may buy takāful plans because they want to prepare themselves in case they die before they can settle their housing loans.
Takāful may be needed to provide for one’s children’s education in case one (the breadwinner) is no longer able to work due to permanent disability. In summary, some of the reasons people opt for takāful plans are:
(a) To provide for children’s education.
(b) To pay any outstanding debts, e.g., housing loans, car loans etc.
(c) To provide a stream of income flow in case of permanent disability.
(d) To supplement family income in case of any misfortune.
(e) To provide retirement planning.
If one knows the reasons behind purchasing a takāful plan clearly, then one can decide how much coverage is enough for one’s family. For example, one may need to purchase a takāful plan with coverage of RM 500,000 if one expects that one’s children need this approximate amount for their future education. If one has other objectives, such as to pay for outstanding
debts, one may have to buy another takāful plan which is designed to provide funds to settle outstanding loans in case of death or permanent disability. Today, takāful providers have diversified their products by designing specific plans for specific purposes or objectives;
therefore, it is possible to identify the correct takāful plan to suit one’s needs.
Estimate Amount of Funds Needed
The next step is for one to decide how much the funds should cover. One has the option for the funds to cover all (100 percent) of one’s needs or partially. For those who can’t afford total cover, partial coverage will at least help to lighten the burden of having to deplete all sources of
funds or savings when the time comes.
Compute Amount of Financial Resources Available
Besides takāful plans, there are other financial resources that one can fall back on should the breadwinner dies. Examples of these resources are EPF, pension, insurance or takāful provided by employers, savings, properties, unit trust funds and other types of investment funds. One
needs to consider these resources to avoid participating in too many plans that one does not really need.
Estimate Amount of Takāful Cover Needed
After considering all of the above only the client can decide how much coverage is adequate for his family. However, this is not a one-off planning. One needs to review one’s family needs every three to five years as these needs may change. One may have additional family members
or new obligations or commitments.
Design the Takāful Plans
There are options for one to add to one’s takāful plan. This is called riders. There are many types of riders such as those for temporary disability, etc.
The Human Life Value Method/Multiple Earnings Method
This is the simplest method. Using this method one only needs to multiply an arbitrary number to the annual income. In general, 3-10 times of the annual income is used to estimate the amount
needed in the future (after retirement).
6.3 Products of Family and General Takāful
The products under family takāful are:
(a) family takāful
(b) investment-linked takāful
(c) child education takāful
(d) medical and health takāful
In general, takāful products under general takāful consist of home takāful, motor takāful and personal accident takāful. The table below illustrates further the coverage available under
general and family takāful.
The following financial information is related to a couple. The analysis of takāful protection is provided in this section.
For income protection, the amount of coverage should at least cover outstanding liabilities, such as, home mortgages, credit cards and other financing. Additional cover should depend on the client’s attitude towards the necessity of surviving spouse having to work for income, maintenance of lifestyle, number of dependents and the stage of life. Selection of type and amount of cover should be appropriate to client’s needs to cushion a crisis.
Other than that, the couple has to determine the purpose of risk management that they would like to cover, for example:
(a) For liability protection – MRTT, credit card balance coverage, motor vehicle takāful.
(b) Wealth target protection – vehicle to build assets immediately for ḥajj or education plan.
(c) Other income/disability protections – medical card for hospitalization and surgery.

Self-Assessment Test
Circle the letter of the correct choice for each of the following.

1. In Islamic insurance, financial losses are associated with ______.
A. Risk sharing
B. Depreciation
C. Loss sharing
D. Profit sharing

2. The following are the pitfalls of participating in takaful schemes EXCEPT:
A. Not having enough cover.
B. Too much cover.
C. Participating too early.
D. Not having enough riders.

3. Which of the following is a peril?
A. Defective wiring in a building.
B. Damage awards in liability lawsuits.
C. Burning unsold stocks intentionally.
D. An accident causes damage to a car.

4. Which of the following statements about Aqilah is NOT TRUE?
A. A concept of risk management practiced by ancient Arab tribes before Islam.
B. A situation where whenever one family member of the tribe kills a person from another tribe, the killer’s family donates money to pay to the deceased’s family.
C. This practice is not allowed in Islam.
D. Money paid in an aqilah situation is called blood money.

5. “This plan combines the need for protection and also savings that provides a stream of income at the end of a specific period.” This statement is true about which type of Takaful?
A. Term
B. Whole life
C. Investment-linked
D. Endowment

6. Gharar, in conventional insurance contract, exists in the following conditions, EXCEPT:
A. The outcome of the exchange
B. Unknown rate of return to the investment portion
C. The time of exchange
D. The rate of exchange

7. Which of the following is not a factor to consider when a person would like to participate in the ‘income-protection’ takaful scheme?
A. Amount of liabilities held
B. Necessity of surviving spouse having to work for income
C. Number of dependents
D. The amount of cover for car owned

8. From which account would compensation to a takaful participant be taken out from?
A. General Fund
B. General Takaful Fund
C. Special Fund
D. Special Investment Fund

9. All of the following are perils in family takaful EXCEPT?
A. Illness of the takaful participant
B. Liability lawsuits against the takaful participant
C. Disablement of the takaful participant
D. Premature death of the takaful participant

10. The following are products under family takaful, EXCEPT:
A. Investment-linked takaful
B. Damage to the shelter of the family
C. Medical and health takaful
D. All the above
Answer: 1-a, 2-c, 3-d, 4-c, 5-d, 6-b, 7-d, 8-b, 9-b,10-b.

MODULE 1/ CHAPTER 7
ISLAMIC INVESTMENT PLANNING
Chapter/Topics Outline:
7.0 Introduction
7.1 Concept and Nature of Investment
7.1.1 Investment Objectives and Considerations
7.2 Portfolio Efficiency and Diversification
7.2.1 Risk/Volatility of asset-based investments
7.2.2 Diversification
7.3 Investment Performance and Classifications
7.3.1 Performance Measurement
7.3.2 Efficient portfolio
7.3.3 Types of investment
7.4 Types of Investment Risks
7.4.1 Market risk and Company risk
7.4.2 Main financial assets and their risks and benefits
7.5 Various Market For Investment
7.5.1 Capital Market
7.5.1.1 Stock market
7.5.1.2 Debt market
7.5.2 Foreign exchange market
7.6 Shariah Concept of Investment
7.6.1 Socially Responsible Investing
7.7 Shariah Criteria for Equity Funds
7.7.1 Shariah-based investment products
7.7.2 Shariah requirements for equity funds
7.7.3 Progress of Shariah-based investment products
7.7.4 Ijarah, Murabahah and Commodity Funds
7.8 Investment in Sukuk
7.8.1 Types of sukuk
7.8.2 Tradability of Sukuk
7.8.3 Shariah Rules on Sukuk
7.9 Conclusion
Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Concept and Nature of Investment
(b) Portfolio Diversification
(c) Types of Markets for Investment
(d) Types of Investment
(e) Investment Performance
(f) Types of Investment Risks
(g) Shariah Concept of Investment
(h) Investment in Shariah Compliant Equities
(i) Investment in Ṣukūk

7.0 INTRODUCTION
Earning money and saving a part of it for the future may fail to serve the purpose intended if the
money saved is not invested prudently. This is because savings accumulated through sacrifice by forgoing current consumption, loses value over time. Investment is a means to secure not only safe custody and quick retrieval (liquidity) of the money saved when needed, but also to fetch added return by way of profit, dividends etc. In order to make one’s investments fruitful, an understanding of the essentials of investment is necessary.
A financial planner should have a good grasp of investment related issues, in order to provide proper guidance to clients in this vital area. In providing financial planning services in accordance with Shariah, modes of investment advocated should be Shariah compliant. Of the various modes of financial investment available, a Shariah financial planner should be able to choose those that do not involve a violation of Shariah principles. This demands knowledge and understanding of Shariah modes of investment, criteria for Shariah admissibility of stocks, etc.
After outlining the conventional investment process, this chapter attempts to introduce the theoretical Shariah aspects that are essential in this regard.
7.1 CONCEPT AND NATURE OF INVESTMENT
Prior to discussing the Shariah aspects relevant to investment, it is necessary to understand the essential nature of investment in conventional finance. Investment is usually explained as the choice by the individual to risk his savings with the hope of gain. The term “investment” is used
differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset. An asset is usually
purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it.
In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times the goal of the investment is for producing future cash flows, while at others it may be for purposes of gaining access to more assets by establishing control or influence over the operation of a second company (the investee). In real estate, Fundamentals of Shariah Financial Planning
investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk.
Financial investments are usually made through banks, intermediaries, stock brokers in case of investing in company stocks, mutual funds, pension funds and insurance companies. At the personal finance level, the terms “savings” and “investments” are used interchangeably as individuals can use their savings to invest in the capital markets in the forms of shares and equities. This also leads to an “investment risk” should the investment fails. On the contrary, idle cash in the form of savings can only devalue in the event of inflation.
2.1 Investment Objectives and Considerations
What motivates a person or an organization to buy securities, rather than spending their money immediately? The most common answer is savings – the desire to pass money from the present for future consumption. People and organizations anticipate future cash needs and expect that their earnings in the future will not meet those needs. Another motivation is the desire to increase wealth, i.e. make money grow. Sometimes, the desire to become wealthy in the future can induce one to take big risks. There are other motives for investment, such as charity. The dividends from the latter investments may not be economic in nature, and thus, they are difficult
to compare and evaluate. For most investors, the key measure of benefit derived from a security is the rate of return.
Savings accrue out of deferred consumption or unspent receivables or, in other words, a present forfeiture made for a future benefit. With regular savings, the need arises to ensure their safecustody, that is, to park them securely, so as to be readily available whenever needed.
When money is retained by postponing part of the present expenses, it is savings. When it is entrusted (deposited on the basis of a contract) with a financial or commercial agency it is investment. The decision to choose the particular investment agency and further to select a particular investment product it offers for holding such savings is termed as an investment decision.
When making the investment decision, a wise investor will keep in his consideration the three principal objectives below:
 Whether the money entrusted for investment will remain safe and secure (Security consideration).
 Whether the investor will be able to get back his savings without undue delay when demanded (Liquidity consideration).
 Whether he would gain and earn sufficiently from his investment (Profitability consideration).
Investment decisions are made by investors and investment managers. Investors commonly perform investment analysis by making use of fundamental analysis, technical analysis and gut feel. Investment decisions are often supported by decision tools. The portfolio theory is often applied to help the investor achieve a satisfactory return compared to the risk taken.
7.2 PORTFOLIO EFFICIENCY AND DIVERSIFICATION
In finance, a portfolio is an appropriate mix of or collection of investments held by an institution or a private individual. Judicious management of diversified investment spread over different outlets (securities) is called portfolio investment. It signifies investing in and regularly monitoring and managing a basket of securities.
Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular, specific risks) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.
The main classes of investment are:
(a) Cash (including short term bank accounts)
(b) Fixed Interest (bonds & mortgages)
(c) Shares (domestic and international)
(d) Property
Each asset class offers a varying degree of risk/volatility and return as indicated by Diagram 7.1 below:

Diagram 7.1: Asset Risk and Return for Various Types of assets
Different asset classes offer different types of income returns or growth returns, or a combination of both. An income return is the amount of money one earns from one’s investment (e.g. interest, dividends or rent) whereas a growth return is the amount one’s capital (original investment) grows over a period of time. Traditionally, people planned for their future by saving into bank accounts. Such cash investments have a very low level of risk and offer low average returns compared to other asset classes like shares and property. As a result, cash investments tend to produce income but no growth. The income is slowly eroded by the effects of inflation.
3.1 Risk/Volatility of Asset Based Investments.
Every investor should be prepared for risk/volatility of asset based investments. It is also important to adopt a long term view of market volatility and expected returns. Markets are by nature unpredictable, and each year the best performing asset class may change. Often, assets
yielding a good return in some years may not do so the following years. No one can predict the market movement and therefore, be confident of positive returns at all times. People who do try to time the market by making investment decisions on a day-today tactical basis are adopting a
very high-risk approach. Research has shown that tactical moves have an adverse effect on long-term returns.
Market movement and other factors influence the value of asset based investments at any point of time. Varying degrees of volatility can be expected from each asset class. Historically, highperforming asset classes like shares have a higher degree of volatility and returns associated with them. However, the level of volatility can be reduced by adopting a long term view.
3.2 Diversification
Spreading the risks by investing in different types of assets is called diversification. It ensures that one does not put “all of one’s eggs in one basket”. Diversified portfolios invest across all investment types – shares, property, fixed interest and cash. By diversifying one can receive a more consistent return each year and reduce one’s investment risk substantially.
Diversification allows an investor to reduce portfolio risk/volatility by ensuring that all the money is not in one asset class should that asset decrease in value. It also allows one to gain access to a greater range of investment opportunities in the future. Finding the right mix of each asset type allows one to make the most of the “ups” while limiting the “downs”.
In building up an investment portfolio a financial institution will, typically, conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services.
7.3 INVESTMENT PERFORMANCE AND CLASSIFICATIONS
Investment performance is the return on an investment portfolio. The investment portfolio can contain a single asset or multiple assets. The investment performance is measured over a specific period of time and in a specific currency. Investors often distinguish different types of
return.
One is the distinction between the total return and the price return, where the former takes into account income (interest and dividends), whereas the latter only takes into account capital appreciation.
Another distinction is between net and gross return. The ‘pure’ net return to the investor is the return net of all fees, expenses, and taxes, whereas the ‘pure’ gross return is the return before all fees, expenses, and taxes. Various variations between these two extremes exist.
4.1 Performance Measurement
Fund performance is the acid test of fund management. Institutions measure the performance of each fund under their management, and performance is also measured by external firms that specialize in performance measurement.
In a typical case (e.g. an equity fund), the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g., +4.6% total return). This figure would be compared with other similar funds managed within the institution, with performance data for peer group funds, and with relevant indices or tailor-made performance benchmarks where appropriate.
A common problem encountered is whether to measure beforetax or after-tax performance.
After-tax measurement represents the benefit to the investor, but investors’ tax positions may vary. Beforetax measurement can be misleading. One possible solution is to report the after-tax position of some standard taxpayer.
4.2 Efficient Portfolio
The efficient portfolio is the correct blend of investments as per the requirements of the investor that are sought after in portfolio investment. It is defined as a portfolio that provides the highest return for a stated level of risk, or, one that has the lowest risk for a stated level of return. When offered the choice between two identically risky investments with different rates of return, one is most likely to choose the investment with the highest returns. Where the two investments carry the same returns but with two different risk levels, usually the one with the lower level of risk would be sought. The fund manager would create the portfolio after verifying the client’s financial goals and objectives, and his disposition towards risk.
4.3 Types of Investment
There are many different types of investment. Broadly speaking, they fit into four asset classes:
(a) Short term deposits
(b) Debt instruments
(c) Properties
(d) Shares
Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity. There are also different ways of investing. One may opt to invest directly (direct/primary investment) in one or more of the asset classes. Alternatively, one can invest in a managed fund where fund managers make a wide range of investment decisions. A brief description of each type of investment is as follows:
Short Term Deposits
Cash Cash still remains our basic medium of exchange. It has the advantage of complete liquidity, i.e.
it can easily be converted into something else, such as goods or services. However, the value of paper money is solely a function of the general public’s confidence in it, and their willingness to accept it as payment for goods and services rendered.
Bank Savings Accounts
The simplest kind of short term (or cash) investment is a savings account. Returns are low compared to other investments but are guaranteed by the bank. These (inclusive of certificates of deposit), are the most liquid of all traditional investments, which means that they can be most
easily converted to cash. As opposed to cash on hand, savings accounts earn interest.
Bank Fixed Term Investments
A lump sum is deposited for a set period (a fixed term), usually three, six or 12 months, for a
higher interest rate than in a savings account. Premature withdrawal may involve a lower rate.
This can be a good short or medium term investment, depending on interest rates.
Debt Instruments
Debt instruments, which are bonds and notes, are obligations of a government, a business, or other entity. Their safety is a function of the financial strength of the issuer. The riskier the bond, the higher the interest rate it must pay. A bond is like an IOU issued by a government or a company. Capital with interest is paid on maturity. They can sometimes be traded.
Properties
Real Estate
Real estate includes land and the improvements thereon. As an investment vehicle, it is important to note that real estate is virtually always purchased with the use of “other people’s money”, i.e. on capital raised through borrowings etc. This form of leverage allows real estate to earn significantly higher rates of return than most other investment instruments.
Rental Property
Owning property rented to individuals or businesses can be a safe and profitable investment.
Returns from property investment come from rental income, after deducting expenses, and from the increase in the value of property over time.
Shares
Stocks
Because of their liquidity, stocks are subject to daily and shortterm price fluctuations. Such ebbs and flows may be due to international, national, industrial, economic, or corporate events and circumstances, e.g. new product introductions, corporate restructurings, interest rates, wars, etc.
Stocks have historically returned about 9% compounded annually for the last hundred years.
Precious Metals
Precious metals include gold, silver, and platinum, among others. Since ancient times, gold and other precious metals have been accepted as mediums of exchange worldwide. Many investors use precious metals, or their stocks, as a hedge against massive inflation. As the prices of the
metals themselves rise, so do their stocks. Generally speaking, precious metal stocks have the same advantages and disadvantages as other stocks.
By investing in shares in a public company listed on a stock exchange, one becomes entitled to share in the future income and value of that company. The return can come in two ways:
– Dividends paid out of the profits made by the company.
– Capital gains; this may reflect that the company has grown or improved its performance or that the investment community see that it has improved future prospects.
7.4 TYPES OF INVESTMENT RISKS
Risk can be thought of as the possibility that one’s investment will be worth less at the end of one’s period than it was at the time that one originally bought it. The volatility of the financial markets creates risk. The investor’s investment choices should be considered in terms of both reward and risk, and the trade-off that he is willing to make.
Risk is inherent in all financial decisions. Applicability of a type of risk to an investor depends on his objectives. Evaluating the relevant risks and factoring them into decisions form an essential part of the investment process. The longer the holding period of the investment, the lower would be the risk related to volatility of returns. Different tools have to be employed in reducing risks based on the length of the holding period.
5.1 Market Risk and Company Risk
In the stock and bond markets, there are actually only two types of factors that can cause a stock’s return to vary. One relates to changes in the company or the way that investors perceive the company. The other has to do with changes and movements in the overall securities markets. Consequently, this means there are two basic components to the risk that every investor faces: market risk, which is inherent in the market itself; and company risk, which encompasses the unique characteristics of any one stock or bond and the industry in which it operates. About 70% of the risk that an investor faces is company risk. This risk can be minimized and controlled by diversifying among different securities.
5.2 Main Financial Assets and Their Risks and Benefits
Each type of asset is subject to a different combination of risks and enjoys a different combination of benefits. Table 7.2 below lists the different classes of financial assets and their risks and benefits.
Table 7.2: Financial Assets: Risks and Benefits
7.5 VARIOUS MARKET FOR INVESTMENT
Capital Market
Capital market is the market for securities, where companies and governments can raise longterm funds. As for the Islamic capital market (ICM), market transactions are carried out in ways
that do not conflict with the conscience of Muslims and the religion of Islam. Here, there is assertion of religious law so that the market is free from activities prohibited by Islam such as usury (ribā), gambling (maysir) and ambiguity (gharar).
The capital market includes the stock market and the bond market. Financial regulators, such as the Securities Commission Malaysia, oversee the capital markets in their respective countries to ensure that investors are protected against fraud.
The capital market consists of the primary market and the secondary market. The primary market is where new stocks and bonds issues are sold (underwritten) to investors. The secondary market is where existing securities are sold and bought between one investor or speculator and another, usually on an exchange.
Savings can be transferred to those who need their deployment as capital in business. Here, the financial market is able to arrange longterm use of money (capital) in business and industry, while enabling the investor to make a short-term investment and retrieve his money much before
the long-term user is able to return. For the individual or provider of funds it is called savings, which is deposited in the banking institutions. For business and industry or even the Government
who seek use of these funds from the savers, it is called capital. The capital market links the capital savers and capital seekers, through the service of financial intermediaries.
Stock Market
A stock market, or equity market, is a private or public market for the trading of company stock and derivatives of company stock at an agreed price. These are securities listed on a stock exchange as well as those that are only traded privately. Participants in the stock market range
from small individual stock investors to large hedge fund traders who can be based anywhere.
The latter’s orders usually end up with a professional at a stock exchange, who executes the order.
The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides
affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.
Debt Market
The debt market is the market for trading debt securities. The debt market (also known as the bond market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. References to the “bond market” usually refer to the government bond market,
because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. The debt market, thus, involves corporate bonds, government bonds, municipal bonds, negotiable certificates of deposit, and various money market investments. The debt market also includes individual loans bought from lenders and often packaged together in large amounts. The debt market includes the primary market, where debts are first sold to the public; and the secondary market, where investors sell debts to each other afterward. On the secondary debt market,
debts can be sold on exchanges or on the over-the-counter market, but most are traded over the counter. Many debts are also packaged together into mutual funds. There are publications that publish the daily prices of bonds on the debt market.
Foreign Exchange Market
The foreign exchange (currency or forex or FX) market refers to the market for currencies.
Transactions in this market typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The FX market is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency
speculators, corporations, governments, and other institutions.
Importing foreign goods calls for payment in foreign currencies. Portfolio funds travel in and out of countries to capitalise on asset price inefficiencies. These funds also require the conversion of their home currency. Investment in foreign currency takes the form of foreign currency time deposits, and investing in foreign shares and foreign unit trusts.
7.6 SHARIAH CONCEPT OF INVESTMENT
After outlining the essential nature of investment and some aspects pertaining to modes of investment as explained in conventional finance, we can now appreciate Shariah aspects relevant to investment and entrepreneurship. First, we may consider how the Shariah perceives
investment as a concept. It is evident from a general study on the approach of Shariah to wealth, commerce and entrepreneurship that investment of one’s wealth in order to make it grow is not against basic Shariah principles. In fact, it is an aspect that is encouraged, as it
could enable a person to be independent of others at any stage in life and support himself and his family, while also helping other members of society. As in other human activities, investment and entrepreneurship should be undertaken with the correct objective, should take care of the
necessary Shariah parameters and avoid the use of false means.
Investment is also in line with the Shariah envisaged function of wealth. As explained in the previous chapters, the basic function of money is to serve as a medium of exchange. Goods and services, which are vital for the existence and progress of human society, can prosper and be available in abundance only when money facilitates their ready exchange and transfer from one to the other. The optimum realisation of this function is only possible when money is in constant circulation. Therefore, unnecessary hoarding and accumulation of wealth that curtails its core function is discouraged in Shariah. Guardians of orphans’ property, for instance, have been exhorted to invest wealth profitably, so that they do not become diminished through payment of zakāt, etc. The role of a truthful and honest trader and that of a provider of services is elevated, as their professions serve the purpose of fulfilling human needs. People are encouraged to leave some wealth for children and other dependants, rather than leaving them destitute.
The Shariah has also explained modes and forms of investment, which could ensure justice and fair play for the investors as well as the other members of the society. Shirkah and muḍārabah, among others, are the major forms of investment for gain upheld in the Shariah, of which the
framework has been explained in detail earlier. Other types of contracts, such as sale, lease, agency etc, too have been meticulously clarified. Forms of investment that are detrimental to the individual or the society, such as, interest-bearing loans and transactions involving uncertainty
and gambling have been prohibited.
A detailed and comprehensive system of law relating to commerce and finance based on ethical principles has been set in place, which ensures socially responsible investment and entrepreneurship. This precludes evils related to unbridled profit motive and profit maximization at the expense of the social and moral fabric of humanity. Financial and other obligations of the individual towards his parents, family and other members of the society have been defined, so that the fruits of investment may spread among members of the society. Thus, investment is a part of the comprehensive system advocated by the Shariah.
We can conclude that the investment from Shariah perspective is the growing, accumulation, and expansion of the wealth in various business and economics sectors in a manner that is consistent with Shariah rules and principles which realize the objectives of Shariah (Maqasid alShariah) and prosperity to the ummah.
Hence, the investment from Shariah perspective it is not an individual consideration driven by self-interest rather than it is a very comprehensive approach that take into consideration other self interest of the individual and the benefit of the ummah all together in one portfolio within the parameter of Shariah and guideline.
7.1 Socially Responsible Investing
The above makes it clear that Shariah upholds socially responsible investing. This means investing assets for the purpose of realizing not only financial but also social returns. Combining social and financial goals, which is also known as a double bottom line, is the heart of socially responsible investing. It means that the investment will take into account additional criteria beside profit which make the investment more ethical and responsible by avoiding any type of investment which may have negative implication on the society.
It can be mentioned here that in market practice pertaining to investment in commercial enterprises, there are three basic means used to implement social values. These are screening, shareholder activism, and community investing. Screening is the process of choosing securities based on social or environmental criteria, such as investing in green technology, healthy
environment, company’s policies and procedures with regard to animal rights or employee treatment. In shareholder activism, investors use their equity position in a company for advocating matters of social or environmental concern while community investing provides an avenue for investors to render aid to residents of low-income communities.
7.7 SHARIAH CRITERIA FOR EQUITY FUNDS
(1) Shariah-Based Investment Products
Apart from investment in bank operated accounts, there are other means of investment through which one may become entitled to gain a share of profit. A highly popular form of investment relevant to modern financial planning is investment in various forms of equity. This may take
place in the form of direct investment in stocks, or through investing in managed investment portfolios, such as, different types of equity funds. Investment in equity funds involves investment in all the companies whose stocks are held by that fund. In either mode, for Shariah permissibility of purchasing stocks, the relevant companies should fulfil certain criteria. In addition, the funds themselves should fulfil some Shariah requirements. In Malaysia, the Shariah-compliant securities are screened by the SAC of SC based on the qualitative criteria and non-qualitative criteria.
In what follows, the major criteria to be observed with regard to investments in equity are summarised. Requirements relating to the form of return, portfolio holdings, operational requirements, and to the contractual relationships between the parties involved in the working of
a fund are highlighted, so that financial planners may have a general understanding of the workings of a Shariah compliant equity. If the equity investment is made in mixed companies, the benchmark set by the SAC of SC must be observed.
(2) Shariah Requirements for Equity Funds
(a) Nature of the contract between investors and the fund manager
For operating a fund on Shariah approved lines, the fund management may be based on the basic investment mode of muḍārabah. Here, the individual or institution acting as the fund manager is the muḍārib, while the investors are rabb al-māl (providers of capital). Under this arrangement, the manager can only share in the profits generated, in accordance with the ratio spelled out in the prospectus and agreed to by the investors upon investment. Profits will be calculated based on the excess over the initial capital, which may be calculated, according to contemporary Islamic scholars, through constructive liquidation periodically. If losses occur, it will be solely borned by the rabb almāl.
Alternatively, the fund can be initiated based on the ijārah alaʿmāl (hire of service) relationship as the foundation. In this case, the manager is a hired worker of the fund for carrying out the collective will of the investors. Under this arrangement, the manager is entitled to fixed wages
against his managerial effort, as clearly stipulated at the inception itself. This could even be a percentage of the funds invested.
In Malaysia, most of funds are using wakālah concept. This renders that investors invest in the fund to be managed by the fund managers. Fund management companies will receive fees for the wakālah role it plays. This is expressed in form of management fees in proportion of net asset value of the funds.
(b) Returns to investors proportionate to actual gains
For Shariah acceptability of an equity fund, the returns to each investor should be based on the actual gains of the fund, according to the proportion of his investment. The subscribers must enter into the fund with a clear understanding that the returns on their subscription is tied up with the actual profit earned or the loss suffered by the fund. Investment in the fund may not take place against a stipulated return based on the capital invested. This means that the fund may not carry a predetermined rate of profit, expressed as a percentage of the investment. Similarly, investors should understand that the capital invested is exposed to loss, partially or in full, and is not guaranteed.
(c) Restrictions pertaining to permissible types of equities
Shariah restrictions on the types of equities in the fund can be divided into two categories:
a. Core business of the company
A company whose fundamental business activities are impermissible in Shariah is not suitable for an Islamic equity fund. Examples could be institutions primarily involved in interest-basedbanking, insurance, gambling, liquor, pornography etc.
b. Assets of the company
A company whose core business is not disapproved may still be unsuitable for an Islamic equity fund, due to unacceptable aspects pertaining to its finances. It is important that such companies are not engaged in non-permissible financial transactions. Contemporary scholars of Shariah
have set the following parameters for selection of companies with minimal involvement in such non-permissible financial transactions.
(i). Debt to equity ratio
Debt to equity ratio represents the relationship between funds supplied by creditors (debt) and investors (shareholders) of a company, i.e. equity. Borrowing on interest is not permitted; therefore, it is necessary that such borrowing is limited to a tolerable level. The problem with debt in the capital structure of a company from an Islamic point of view is that it is interest based. A company indebted through Murābaḥah, for instance, need not have any such restriction. Many contemporary Shariah scholars consider that a debt to equity ratio of less than 1/3 is tolerable.
(ii). Interest earnings
Companies whose core business is production of goods and services may be in receipt of a small percentage of income from interest, through depositing excess cash in interestbearing accounts or investing in money market instruments. Some contemporary Shariah scholars have set the highest percentage tolerable (for purposes of investing in the shares
of such companies) at 5%. The precise amount of prohibited income must be identified and investors should be advised to give away the proportionate amount out of the portfolio returns on investment as compulsory charity.
Percentage Cash and Receivables
As indicated in the previous chapters, Shariah distinguishes between sales of real goods and
sales of money and debt. In the latter, such sales can only be done at par value. A share of any company does not actually have an existence of its own; its value comes from the undivided portion of the assets of the company it represents. Therefore, purchasing a share of a company
has been equated with purchasing a proportionate amount of ownership in its assets. However, when the assets consist mostly of cash and receivables, the price of the share must be equal to the face value of these assets. Anything more (or less) may constitute interest in Shariah.
Contemporary Shariah scholars, thus, require that for the sales of shares at a price different from their face value, the tangible assets of the company should be more than the monetary assets.
(c). The securities in the mixed companies
Definition of the mixed company: A mixed company is the one which its core business activities are Shariah compliance, and involves in some other prohibited activities.
The mixed companies are included in the list of Shariah compliant securities with some conditions as follows:
a) The core activities of the company must be activities which are not outlined in the four primary criteria.
b) the ḥarām element must be very small compared to the main activities.
c) Public perception of the image of the company must be good.
d) The core activities of the company have importance and maṣlaḥah (benefit in general) to the Muslim ummah and the country, and the ḥarām element is very small and involves matters such as ʿumūm balwā (common plight).
5% Benchmark
This benchmark is used to assess the level of mixed contributions from the activities that are clearly prohibited:
(i) conventional banking;
(ii) conventional insurance;
(iii) gambling;
(iv) liquor and liquor-related activities;
(v) pork and pork-related activities;
(vi) non-ḥalāl food and beverages;
(vii) Shariah non-compliant entertainment;
(vii) Interest income from conventional accounts and instruments;
(ix) tobacco and tobacco-related activities; and
(x) other activities deemed non-compliant according to Shariah.
20% Benchmark
This benchmark is also used to assess the level of contribution from the following activities:
(i) hotel and resort operations;
(ii) share trading;
(iii) stockbroking business;
(iv) rental received from Shariah non-compliant activities; and
(v) other activities deemed non-compliant according to Shariah
(d). Financial Ratio Benchmark
Cash over total assets
Cash will only include cash placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments will be excluded from the calculation.
Debt over total assets
Debt will only include interest-bearing debt whereas Islamic debt/financing or ṣukūk will be excluded from the calculation.
Both ratios, which are intended to measure ribā and ribā based elements within a company’s balance sheet, must be lower than 33%.
(4) Guarantee of capital by the fund manager
The fund manager providing a guarantee to the investors for the nominal value of their investment is not acceptable in Shariah. This is because monies advanced to a manager who guarantees its return at the end of the period (or at any time in the future) could entail a lenderborrower relationship. Profit on such money may then become a form of interest. No such guarantee should be provided in an Islamic managed fund. Guarantee of Muḍārabah capital is permissible if the guarantee is made by third party of the contract.
(5) Pledge of assets
Pledging the assets in the fund for borrowing on interest and reinvesting to enhance the earning in the fund is clearly not acceptable in Shariah.
(6) Hedging market risks
Mechanisms to hedge risks in Islamic finance are available in form of Profit Rate Swap (to manage the interest rate risk) and forward exchange (FX) to manage currency risk. An Islamic Profit Rate Swap is basically an agreement to exchange profit rates between a fixed rate party and a floating rate party, or vice versa, implemented through the execution of a series of underlying Shariah contracts. In the current market a further contract called the wa’ad contract is being utilised so as to ensure the swap reaches maturity. Another underlying contract that is used to facilitate Profit Rate Swap is commodity murābahah.
As for the FX hedging, the concept of waʿad is used to create Islamic hedging. Forward FX entails that the rate of exchange is locked in today (the day of contract) but delivery of two counter values is being deferred to a future date where the delivery of these two counter values will be made on spot basis.
Shariah, however, requires delivery to be made on the day of the contract, that is, ‘hand to hand’ which is not the practice in the current FX market. However, Islamic law does not prohibit promise to buy and sell currencies on one date and delivery to be made on another date because the proper contract only concludes on the day of delivery. Under the waʿad structure, only one party (obligor/promisor) promises to buy/sell as
the case may be wherein he is bound by that promise (binding promise). The other party/promise/oblige however, is not bound to proceed with the promise undertaken by the promisor. Under Shariah binding, promise from only one party is not deemed as a contract.
Therefore, this can facilitate Islamic FX contracts.
(7) Cleansing of incidental foul income
An Islamic equity fund should assist the investor in cleansing his earnings from accruals through interest and from other prohibited activities. Measures should be adopted for the correct assessment of any incidental income through impermissible sources with regard to each
company in the portfolio, and to determine the amount of such income that falls to the share of each investor in the fund.
(8) Reserves
Reserves are maintained by some funds in order to ensure smooth functioning of the fund.
Reserves are deducted from the profit generated through the invested funds. The Shariah position on such reserves is still being debated. When these reserves are maintained, it should be through clear mention in the prospectus and signed on in the agreement with each investor. It is encouraged that such amounts be donated to charity at the closing of the fund, so as to avoid partiality to any contractor.
8.3 Progress of Shariah-Based Investment Products
Due to the involvement of various factors ruled offensive in Shariah, a large portion of the modern securities market is not investable by those wishing to abide by Islamic law. Currently available Shariah governed products include everything from investment and equitylinked products and commodity-based products, to residential mortgage-backed securities and currency swaps. The list keeps growing in line with demand. Innovations are announced at a speedy rate, and offers for various Shariah-based collateralized debt obligations, swaps, FX options, structured products, etc, appear continuously. As the secondary market for Islamic securities grows, institutions involved in asset management could be expected to develop and distribute additional portfolio management products.
In the midst of this volatile investment scenario, a Shariah financial planner should keep in mind that some of the currently offered products are seen to embody Shariah shortcomings at varying degrees. Despite the popularity of some investment avenues, respected Shariah scholars are
often observed to criticize them as non-Shariah compliant. Therefore, it is essential that a Shariah financial planner undertakes some evaluation of the claims to being shariah-based made by the operators of various investment products, and exercises prudence and caution in recommending them. In addition, he should try to maintain a robust relationship with recognized Shariah experts and consult them regarding the acceptability of investing through various products appearing in the market.
8.4 Ijārah, Murābaḥah and Commodity Funds
Apart from equity funds, various other funds are in existence, where investments could be made for gaining a return, such as ijārah funds and commodity funds. It is necessary for a Shariah financial planner to have knowledge about the possible forms of investment funds that could be structured according to Shariah criteria.
(a) Ijārah (lease) Funds
These are funds where investment is made in leased assets. In this fund the subscription amounts are used to purchase assets like real estate, motor vehicles, or other equipment for the purpose of leasing them out to their ultimate users. The ownership of these assets remains with
the fund and the rentals are charged from the users. These rentals are the source of income for the fund which is distributed prorated to the subscribers.
Each subscriber is given a certificate, usually called ṣukūk, to evidence his subscription and to ensure his entitlement to the pro rated share in the income. These ṣukūk represent the pro rated ownership of their holders in the tangible assets of the fund. As the ṣukūk do not represent debts, according to contemporary Shariah scholars, they are tradable in the secondary market.
Purchase of ṣukūk signifies replacing the seller in the pro-rated ownership of the relevant assets.
With the purchase, all the rights and obligations of the original subscriber are passed on to new owner. The price of these ṣukūk will be determined on the basis of market forces, and are normally based on their profitability.
It is important that the contracts of leasing must conform to Shariah principles, which differ substantially from conventional financial leases. Thus, it is required that the leased assets possess some realisable usufruct, and that the rental period commences from the time when the asset is handed over to the lessee. The lessor must undertake all the responsibilities consequent to the ownership of the assets. The rental must be fixed and known to the contracting parties from the beginning of the contract. In Ijārah funds, the management should act as an agent of the subscribers and should be paid a fee for his services, which can be in the form of a fixed amount or a proportion of the rentals received.
(b) Commodity Funds
In these funds, the subscription amounts are used to purchase different commodities for the purpose of resale. The profits generated by the sale are the income of the fund which is distributed pro rated among the subscribers. In order to make this fund acceptable in Shariah, it is necessary that all the rules governing the transactions be fully complied with. Thus, the commodity must be owned by the seller at the time of sale. A short sale where a person sells a commodity before he owns it is not allowed.
Forward sales are not allowed too, except in the case of salam and istiṣnāʿ. The commodities must be ḥalāl; therefore, dealing in wine, pork, or other prohibited items is not allowed. The seller must have physical or constructive possession of the commodity he wants to sell. The price of the commodity must be fixed and known to the parties. Any price which is uncertain or is tied up with an uncertain event renders the sale invalid.
In view of the above and other similar conditions, it is evident that transactions prevalent in the contemporary commodity markets, especially in futures, do not comply with Shariah. Therefore,
an Islamic commodity fund cannot participate in them. However, if there are genuine commodity transactions observing all the requirements of Shariah, a commodity fund may be established.
The certificates of such funds can be traded provided tangible assets form a major part of the pool.
(c) Murābaḥah Funds
In Shariah, murābaḥah refers to a particular type of sale where a commodity is sold on a costplus basis. This means that the seller fixes the price of the item on the basis of a profit margin added to his cost in procuring the goods. The buyer is, thus, able to know the exact profit made by the seller through the transaction. This sale has been adopted by contemporary Islamic financial institutions as a mode of financing. The bank here purchases the commodity that the client is in need of from a supplier, and then sells it to the client on the basis of deferred payment at an agreed margin of profit added to the cost. A fund could be created to undertake murābaḥah sales, where the capital of the fund is invested in purchasing assets and subsequently sold to people who require them on cost-plus basis.
However, in a fund of this nature there is a special restriction to be observed. A murābaḥah fund should necessarily be a closedend fund, where the original subscribers to the fund will remain its owners throughout its tenure. They may not sell their share to other parties. This means that the units of a murābaḥah fund are not negotiable in the secondary market. The reason is that in the case of murābaḥah, based on the current practice of financial institutions, the commodities purchased by the fund are sold to the clients immediately after their purchase from the original supplier. With the sale of the commodities in this manner, the price payable by the clients, being on deferred payment basis, is immediately established as a debt payable. Therefore, at any given time, the portfolio of murābaḥah does not own any tangible assets, rather it comprises of either cash or receivable debts. However, both these are not negotiable, as it would give rise to ribā. If they are exchanged for money, it must be at par value. Therefore, while monies could be invested in a murābaḥah fund at the inception, i.e. at initial subscription, no investment can be made for purchase of units of such a fund subsequently.
7.8 INVESTMENT IN ṢUKŪK
‘Ṣukūk’ is the Arabic name for financial certificates of equal value, representing proportionate ownership of tangible assets of a project or in an investment activity. Ṣukūk are securities that comply with the Shariah and its investment principles, which prohibits the charging and paying of interest. By purchasing ṣukūk, the subscribers become the owners of a proportionate share in the original pool of assets.
Along with ownership of their share, they become entitled to receive a proportionate share of any income, rentals, etc, that accrue through the asset. In some varieties of ṣukūk, the subscribers may sell their ṣukūk to other parties. The issuer and the subscribers are the main parties to the underlying contract, while the SPV, i.e., special purpose vehicle, usually a subsidiary of the original holder of the asset, is a legal entity for common representation of the subscribers.
7.9.1 Types of Ṣukūk
Ṣukūk can be structured along different techniques.
(a) Asset based ṣukūk
(b) Asset backed ṣukūk
7.9.2 Tradability of Ṣukūk
Financial assets that comply with the Shariah can be classified in accordance with their tradability and non-tradability in the secondary market. According to Shariah, certificates of debts are not tradable. Thus, ṣukūk representing receivables of cash or goods are nontradable,
e.g. ṣukūk of salam and murābaḥah. However, if a debt is a part of a business enterprise that is being sold in its entirety, it is tolerated. Ṣukūk representing tangible assets or a proportionate ownership of a business or investment portfolio are tradable, such as ṣukūk of ijārah and mushārakah /muḍārabah.
7.9.3 Shariah Rules on Ṣukūk
Since ṣukūk comprise several contracts such as sale, partnership, lease, agency, etc, numerous Shariah rules become relevant. Some important ones can be summarized as follows. It is necessary that the rules pertaining to the basic contract, e.g. mushārakah, ijārah etc. on the basis of which ṣukūk are created be fulfilled. Tradable ṣukūk must represent genuine ownership of ṣukūk holders in the respective pool of real assets or usufructs, with all of the rights and obligations that accompany ownership. The manager of ṣukūk may not continue to treat the assets as his own after transfer of ownership to the ṣukūk holders through issuance of ṣukūk.
Trading or redemption of ṣukūk is allowed only after closing subscription, allotment of ṣukūk and commencement of activity.
In ṣukūk of mushārakah/muḍārabah, the issuer can redeem the certificates on the market price or at any price mutually agreed on the spot.
Some ṣukūk are engineered based on the concept of the sale of debt and referred to in Arabic as bayʿ al-dayn. The common usage of this term indicates selling a debt or receivable due from one, such as a bill of exchange, to a different party, at a discount.
Shariah scholars have debated this issue, majority of the scholars do not permitted it as the prohibition of sale of debt is a logical consequence of the prohibition of interest. A debt or receivable, in monetary terms, corresponds to money. Every transaction where money is exchanged against the same denomination of money, must take place at par value, i.e. the amounts exchanged must be equal.
As for Malaysia there is a resolution that allowed bay al day in the Islamic capital market.
Illustration of the Malaysian position as follows:
At its 2nd meeting on 21 August 1996, the Shariah Advisory Council (SAC) unanimously agreed to accept the principle of bayʿ aldayn, i.e. debt trading as one of the concepts for developing Islamic capital market instruments. This was based on the views of some of the Islamic jurists who allowed this concept subject to certain conditions. In the context of the capital market, these conditions are met when there is a transparent regulatory system which can safeguard the maṣlaḥah (interest) of the market participants.
In the context of the Islamic capital market, bayʿ al-dayn is the principle of selling the dayn which results from muʿāwaḍāt māliyyah contracts (exchange contracts), such as murābaḥah, bayʿ bithaman ājil (BBA), ijārah, ijārah munthiyah bil-tamlīk, istiṣnāʿ and others.
9.4 Arguments that Support the Permissibility of Bayʿ al-Dayn
The bayʿ al-dayn principle has always been a point of contention among past and present Islamic jurists. However, there is no general naṣṣ or consensus (ijmāʿ) among those who forbid it. In general, the majority of Islamic jurists are unanimous in allowing the activity of selling debts to the debtor. They only differ in opinion about selling the debt to a third party for the reason that the seller will not be able to deliver the sold item to the buyer. At its 8th meeting on 25 January 1996, the IISG identified the ʿillah (reason) for why some Islamic jurists do not allow bayʿ aldayn. The ʿillah generally touches on the risks to the buyer, gharar, absence of qabḍ and ribā.

Self-Assessment
Circle the letter of the correct choice for each of the following.
1. The following are examples of systematic risks EXCEPT:
A. Risks that the economy is experiencing inflation
B. Interest rate risk
C. Default risk due to financing exposure
D. Currency risk
2. What is the main risk of venturing into international markets for portfolio diversification?
A. Systematic risks of the domestic market
B. Unsystematic risks of a specific portfolio
C. Currency risk
D. Risks of falsely interpreting the economic report of the foreign country
3. Which of the following statements best describe the optimal portfolio?
A. The efficient portfolio that has the highest utility for a given investor.
B. Lies at the point of tangency between the efficient frontier and the investor’s indifference curve.
C. The portfolio that gives investor the maximum level of return at a specified level of risks.
D. The portfolio that is fully diversified.
4. The following are reasons why investors may like to invest in shares EXCEPT:
A. Shares can be liquidated easily in the secondary market.
B. There is opportunity to make money through the appreciation of the price of shares bought.
C. Shares provide yearly fixed dividend to shareholders.
D. Share ownership can be a hedge against inflation.
5. Which of the following is NOT a fixed income security?
A. Ordinary shares
B. Loan stocks
C. Notes
D. Sukuk
6. In Malaysia, we have open-ended and close-ended Islamic trust funds. Listed below are some of them EXCEPT:
A. Equity unit trust
B. Fixed income unit trust
C. Property unit trust
D. Financial unit trust
7. Which of the following are advantages offered by unit trust funds?
i. Professional portfolio management
ii. Dividend reinvestment
iii. Consistent returns in excess of the overall market rate of return
iv. Modest capital outlay for investors
A. i and ii only
B. i and iv only
C. i, iii and iv only
D. i, ii and iv only
8. Investment in property can take various forms. It can be direct and indirect investment. Which of the following is NOT a direct investment in property?
A. Buying a unit of shop-lot in a new township in Nilai.
B. Buying a 750 sq. ft. office lot in an office complex.
C. Holding in joint name a piece of land along the Sepang, Selangor.
D. Holding RM1million worth of a 10-year Sukuk in a Malaysian development company operating in Shenzen Province of China.
9. Real property market does have its ups and downs as the stock market does. However, the property market is considered to have greater risks in general compared to the stock market due to:
A. Holding real property is less liquid than shares stock and requires greater outlay of capital.
B. Property is cash dealing and share is non-cash dealing.
C. Property cannot be sold for cash.
D. None of the above
10. 20% benchmark of non-permissible portion that is allowed to be present in Shariah-compliant shares is under___________:
A. Tobacco related activities .
B. Share trading business institutions.
C. Activities that involve gambling.
D. Activities in conventional insurance .
Answer: 1-c, 2-c, 3-c, 4-c, 5-a, 6-d, 7-d, 8-d, 9-a,10-b.

MODULE 1 / CHAPTER 8
ZAKĀT AND TAX PLANNING
Chapter/Topics Outline:
8.0 Introduction
8.1 Wealth Subjected to Zakat
8.1.1 Zakat on Gold and Silver
8.1.2 Zakat on Savings
8.1.3 Zakat on savings in EPF
8.1.4 Zakat on shares
8.1.5 Zakat on sukuk
8.2 Zakat on Employment Income
8.2.1 Types of income subjected to Zakat
8.2.2 Conditions to be fulfilled for Zakat to be compulsory
8.2.3 The Nisab, Rate and Hawl
8.2.4 Methods of calculating Zakat on employment income
8.2.5 Deductible expenses
8.3 Calculation of Tax on Income
8.3.1 Income Chargeable to Tax
8.3.2 Sample of Tax Computation on Income
8.3.3 Relationship between Tax and Zakat for Individuals
8.4 Planning Issues in Zakat and Tax
8.5 Conclusion
Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Wealth Subjected to Zakāt
(b) Zakāt on Employment Income
(c) Calculation of Tax on Income
(d) Planning Issues in Zakāt and Tax

8.0 INTRODUCTION
Zakāt is one of the pillars of Islam other than shahādah (oath), ṣalāt (prayer), ṣiyām (fasting) and ḥajj (Pilgrimage). Islam states that wealth of individuals, if it reaches a certain benchmark amount (niṣāb) and maturity of holdings of one year (ḥawl), zakāt must be paid on it. This is to share the wealth with other segments of society. Zakāt is defined as a determined portion taken from specific wealth and allocated to those deserving it, by Qur’ānic injunctions, “Of their goods, take alms, that so thou mightest purify and sanctify them; and pray on their behalf. Verily the prayers are a source of security for them: And Allah is One Who heareth and knoweth” (alTawbah (9): 103).
For Muslim individuals, the zakāt element is as vital as planning for tax in order to perform the compulsory ʿibādah as prescribed by the Shariah, as well as, observing their responsibility towards the country.
8.1 WEALTH SUBJECTED TO ZAKĀT
There are two types of zakāt levied on Muslims.
a. Zakāt al-Fiṭr
Zakāt al-Fiṭr is due from the starting of Ramaḍān and ends before the ʿīd al-fiṭr prayer.
b. Zakāt on Wealth
Zakāt on wealth (zakat al-māl) can be classified into:
(a) Farming (agricultural) produce (e.g. wheat, rice)

(b) Livestock (e.g cows, sheep, camel)

(d) Mining and treasure (maʿādin, rikāz and kunūz)

(e) Business (e.g. sole proprietor, partnership, company)

(f) Savings (including EPF savings)

(g) Shares

(h) Employment income

(i) Ṣukūk

Zakāt, applicable to modern Muslim society includes zakāt payable on gold and silver, savings, shares and employment income, will be explored further in the chapter. Note that zakāt on employment income is considered zakāt on wealth notwithstanding the traditional definition of income being different from wealth. The reason for making zakāt on employment wājib
(compulsory) is derived from the qiyās of scholars. Employment income is similarly treated as that of wealth created from agricultural activities which is a form of wealth subjected to zakāt. We will not investigate in detail zakāt on business income as the main attention of this module is on
personal financial planning.
In addition to the above, some Islamic scholars also suggest the inclusion of mustaghallāt sources in zakāt. Mustaghallāt sources are fixed properties such as land for agricultural purpose and house or buildings which are not meant for trade. Originally, these properties were not
subjected to zakāt. However, they are subjected to zakāt should there be benefits arising from their renting or leasing. The argument is based on the Qur’anic verse in which Allah the Almighty states: “O ye who believe! Give of the good things which ye have (honourably) earned” (al-Baqarah (2): 267).
There are different opinions on the method of zakāt calculation on mustaghallāt sources:
a. Zakāt on mustaghallāt wealth has to be treated equivalent to zakāt on trade materials. The assets will be evaluated at the end of the ḥawl, and zakāt will only become payable if they meet the niṣāb. The rate of the zakāt is 2.5% and the niṣāb is the current value of 85 grams of gold.
b. The wealth is deemed as assets which are not subjected to zakāt and thus, only the revenue is subjected to zakāt once it is gained and meets the niṣāb. There is no ḥawl condition to be met and the rate of zakāt is 2.5%.
c. The assets will be treated as assets which are not subjected to zakāt and only the revenue is subjected to zakāt at the rate of 5% or 10% once it is gained. The rate of zakāt in the third method is similar to the rate for agricultural produce. However, it still needs to fulfil the niṣāb
requirement.
There is also an opinion suggesting that the actual cost of maintaining the mustaghallāt sources, such as quit rent and assessment, maintenance of the property, be deducted against the revenue before calculating zakāt.
2.1 Zakāt on Gold and Silver
Gold and silver are subjected to zakāt because they have value. For instance, they can be used as money, gifts or souvenirs. It is compulsory to pay zakāt if gold and silver meet the niṣāb of 85 grams for gold and 595 grams for silver. It must also meet the ḥawl. In the Holy Qur’ān, Allah the Almighty indicates that it is compulsory to pay zakāt on gold and silver: “…and there are those who bury gold and silver and spend it not in the way of Allah: Announce unto them a most grevious penalty” (al-Tawbah (9): 34).
The types of gold and silver items that are subjected to zakāt are:
a. Gold and silver items which are not worn
b. Gold and silver items which are worn (even once or occasionally during the ḥawl)
It is also compulsory to pay zakāt on gold or silver utensils, decorations, and equipment. The niṣāb and ḥawl conditions are the same as that of jewellery.
Methods of calculating zakāt on gold and silver are as follows:
a. Gold and silver items which are not worn even once during the year. Its zakāt payable is 2.5% on the current value of gold or silver.
b. Gold and silver items which are worn are subjected to two conditions:
i. If it is less than ʿurf (standard amount of gold or silver or jewellery worn by people in that area), therefore, it is not subjected to zakāt.
If it is more than ʿurf, it is subjected to zakāt on the excess of the ʿurf. The zakāt is imposed at 2.5% on the difference between the current values of gold or silver less any gems (diamonds. jade, sapphire, pearls, rubies etc.) attached to the jewellery.
2.2 Zakāt on Savings
Since money is used for business transactions, thus, it is subjected to zakāt. It has the ‘buying power’ like gold. ‘Money’ means ‘money which is deposited or kept in saving accounts, fixed deposit, current accounts, shares, unit trust and other kinds of savings’.
Zakāt on money is imposed if the amount of the lowest balance of the saving meets the minimum quantity (niṣāb) and it is kept for one year (complete ḥawl). The niṣāb for zakāt is the current value of 20 mithqal of gold which is 85 grams or silver of 595 grams. The rate of zakāt is
2.5%.
For example, the calculation of zakāt on savings based on the amount in Table 8.1 is provided:
Table 8.1: Al Wadiah Account Balance of a Client

Additional note: The niṣāb for the ḥawl is approximately RM8,500 (85g of gold at RM100 per gram).
Included in the lowest balance is RM200 which is hibah (gift by the banks to the depositor after performing business for a year). Thus, the calculation of zakāt is as follows:
Period of ḥawl: 1 Muḥarram – 30 Dhul-Ḥijjah
Niṣāb = RM8,500
Lowest amount = RM16,700
Rate of zakāt = 2.5%
Thus, zakat on money/savings = RM16,700 x 2.5% = RM 417.50
Based on the Shariah, the hibah is permitted and hence, it is not deducted from the lowest balance amount. If a person has multiple savings accounts, a standard ḥawl for all accounts has to be determined. The lowest balance from each account will be added up. If the total amount is more than the niṣāb, zakāt on money will be imposed. A similar method is also applicable to calculate zakāt on other savings accounts such as, fixed deposit and muḍārabah accounts.
Zakāt on investment in unit trusts is imposed on the value of the investment if it meets the minimum niṣāb and ḥawl.
2.3 Zakāt on Savings in EPF
Zakāt on savings in Employees Provident Fund (EPF) or any funds similar to it, is imposed if it completes the ḥawl and meets the minimum niṣāb. There are three views in calculating zakāt on savings from EPF:
a. Incomplete Ownership
Zakāt is only imposed on the retirement day when the saving is retrieved from the EPF or when some money is withdrawn from the EPF accounts, for instance, withdrawal made to buy a house. Zakāt is imposed on the whole amount of savings withdrawn from the EPF and the rate on zakāt is 2.5%.
For example, if the EPF savings is RM100,000, thus the zakāt is RM100,000 x 2.5% = RM2,500
b. Complete Ownership
Zakāt is imposed when it has complete ḥawl and niṣāb. Zakāt is only imposed on the amount of savings contributed by the employees only. Thus, every year zakāt is payable on the amount of contribution by the employees if it meets the ḥawl and niṣāb even though the money is still in the
EPF. The rate for zakāt is 2.5%.
For example, if the employee’s contribution during the year is RM 10,000, thus, zakāt at the end of the year is RM10,000 x 2.5% = RM250.
c. Consensus by the Fatwā Council in 1982
According to Imam al-Shāfiʿī, zakāt on savings in EPF or any similar funds is compulsory for Muslims once it completes the ḥawl which is after a year of receipt.
2.4 Zakāt on Shares
According to Dr. Yūsuf al-Qaraḍāwī in his Fiqh al-Zakāt, shares refer to “valuable papers which are traded specifically in trade transactions in the shares market”. Zakāt on shares will not be imposed if the company which issued the shares has already paid zakāt on its business.
However, if the company does not pay zakāt on its business, the holder of the shares has to pay zakāt on those shares. As for listed shares, zakāt may be imposed on the dividend received.
There are two ways of calculating zakāt on shares:
a. Shares which are still in hand at the end of the ḥawl.
If the value of shares is lower than the acquisition cost, then, the market value of shares is applied.
b. Shares which are traded during the period of the ḥawl.
Zakāt is imposed on the selling price of shares after deducting the market value.
Example 1:
Encik Samad has the following information regarding his shares:
i. 200 lots of shares are still in hand in company Q and the price is RM1, therefore, the value of shares is RM200,000
-Thus, zakāt is = RM 200,000 x 2.5% = RM5,000
ii. Shares traded during the year:
-Total value of shares sold – acquisition cost
-RM500,000 – RM400,000 = RM100,000
-Thus, zakāt is = RM100,000 x 2.5% = RM2,500
iii. Total zakāt on shares paid by Encik Samad is RM5,000+RM2,500 = RM7,500
If the shares are kept for a year, zakāt is payable on the lower amount: the capital or the lowest value of the shares. If the shares are kept up to a year, they will be deemed as savings.
Shariah non-compliant shares are not subjected to zakāt since they are from doubtful sources.
If shares are bought through loan, the loan cost will be deducted if the shares are traded in a year’s time. If the shares are kept for a year, the cost of loan will be deducted from the lowest value of the shares during the year.
2.5 Zakāt on Islamic Bonds
Other than equity-based financial instruments, investment can be made in debt-based securities
such as Islamic bonds. Since bonds are part of an individual’s assets, zakāt is payable on them.
As explained before, zakāt is not payable on ḥarām sources; no zakāt is to be levied on bonds that are not Shariah compliant. The same rate of zakāt is imposed on bonds, i.e. 2.5%. If the shares are for investment and held during the year of zakāt payment, zakāt is payable on its original value plus any profits earned on them. But if they are meant to be traded, then zakāt is payable on their current value. The cost of purchase and the financing amount is deductable as in the calculation of zakāt on shares.
8.2 ZAKĀT ON EMPLOYMENT INCOME
Zakāt on employment will be discussed separately due to its extensiveness, although it falls under zakāt on wealth dealt with in the previous section. ‘Income’ to zakāt means “gains” and this is inclusive of employment income and income from professional services. Islamic scholars
such as Prof. Dr. Yūsuf al-Qaraḍāwī and Prof. Dr. Shawqī Ismāʿīl Shahātah, suggest that employment income and income from rendering professional services are among wealth from the mustafād sources or from the expansion of the wealth. There is no specific Qur’anic verse nor Prophetic tradition pronouncing that zakāt on the mustafād sources are compulsory.
However, Islamic scholars agree that zakāt on mustafād sources are compulsory based on the following: “O ye who believe! Give of the good things which ye have (honourably) earned” (al-Baqarah (2): 267).
Islamic scholars also agree that zakāt on the mustafād sources were initiated by Caliph ʿUmar al Khaṭṭāb. During his days, the Caliph had asked Muslims to pay zakāt on lambs born to those sheep which have met the ḥawl and niṣāb. The order was imposed even on newly born lambs.
The discussion on whether zakāt is compulsory on wealth from mustafād sources has not reached a solid consensus. It is considered a matter of mukhtalaf fīhi (subject to argument).
Hence, the implementation is up to the authorities (Islamic Religious Council in each state in Malaysia) to determine whether it is compulsory to pay zakāt on employment and professional services. If the Islamic Religious Council in a state decides that it is compulsory to pay zakāt on
income from employment and professional services, then the people in that state who receive income from the said sources have to abide by the decision. At the national level, the National Fatwā Committee Conference (Special) which was held on 22nd June 1997, agreed that zakāt on
salary is compulsory for those who qualify (met the ḥawl and niṣāb).1
3.1 Types of Income Subjected to Zakāt
a. Employment income which is subjected to zakāt refers to:
(i) Annual salary
(ii) Deferred salary
(iii) Various allowances (related to employment)
(iv) Others (e.g. bonus or any other income which could be considered as income related to employment)
b. Income from professional services
(i) Income from undertaking tasks or rendering professional services (e.g consultants)
3.2 Conditions of Zakāt to be Compulsory
It is compulsory to pay zakāt on employment and professional income if the following conditions are met:
(i) The individual is a Muslim
(ii) Full Ownership
(iii) Income/gains in nature
(iv) Complete niṣāb (the amount differs from each state)
(v) Complete ḥawl

3.3 The Niṣāb, Rate and Ḥawl
The niṣāb of zakāt on employment income and professional services is based on zakāt on gold.
Thus, the niṣāb is equal to the current value of 85 grams of gold. The rate of zakāt on employment income and professional services is based on zakāt from mustafād sources which is 2.5% from the net income. The rate is 2.5% because the source is in the form of cash (nuqūd) and it is not in the form of ʿayn (in-kind).
Since the employment and professional income fall under zakāt from mustafād sources, the niṣāb is calculated before determining the commencement of ḥawl. If the niṣāb is already fulfilled, only then will calculations be started on the ḥawl. Priority should be given to the niṣāb
rather than the ḥawl. For instance, for one who starts working in January, one’s income will only meet the niṣāb in October; thus, the ḥawl will be calculated starting from October until the next 12 lunar months (qamariyyah). Zakāt could be paid prior to the ḥawl since it will not affect the amount of zakāt that has to be paid as long as the income is not less than the niṣāb in a year.
This approach is known as taqdīm or taʿjīl al-zakāt.
3.4 Methods of Calculating Zakāt on Income
There are two approaches in determining the amount of zakāt payable:
Approach 1: Multiply the rate of 2.5% on gross income for that respective year.
Approach 2: Multiply the rate with the income chargeable to zakāt after deducting allowable expenses. The allowable expenses are defined according to the decisions made by the respective Islamic Religious Councils. For instance, Pusat Pungutan Zakat Selangor adopts the guidelines on personal reliefs from the Inland Revenue Board as the basis to deduct expenses.
The deduction could be based on the basic needs or the actual amount of expenses incurred.
3.5 Deductible Expenses
i. Basic needs (e.g. food, clothing, education, medical expenses)
ii. Allowable expenditure
(a) Self – RM8,000
(b) Spouse- RM3,000
(c) Children (unlimited)- RM1,000 each
(d) Parents (unlimited)- amount contributed to parents
(e) Others under the responsibility of zakāt-payer (e.g. siblings, maid, adopted children)
(f) Payments made to institutions that pay zakāt (e.g. monthly savings deduction to Tabung Haji)
(g) Payment made to Employees Provident Fund (EPF). Money contributed to EPF is considered “fully-owned” since the employee will only receive the money after retirement.

4.0 CALCULATION OF TAX ON INCOME
4.1 Income Chargeable to Tax
The scope of the Malaysian Income Tax is specified under Section 3 of the Income Tax Act 1967 as “Subject to and in accordance with this act, a tax to be known as Income Tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia”.
Income Tax Act 1967, in Section 4 explains six headings of income that are chargeable to tax.
They are:
Section 4 (a): Gains or profit from a business for whatever period of time carried on.
o Section 4 (b): Gains or profit from employments.
o Section 4 (c): Dividends, interests and discounts.
o Section 4 (d): Rents, royalties or premiums
o Section 4 (e): Pensions, annuities, or other periodical payments not falling under any of the foregoing paragraphs.
o Section 4 (f): Gains or profits not falling under any of the foregoing paragraphs.
4.2 Sample of Tax Computation on Income
For married individuals, they are given the option whether to file their tax returns separately on jointly. The following example illustrates both situations for a couple, Yacob and Shima for the
Year of Assessment 2008.

The full lists of relief can be referred to in the self-assessment forms available on the net at www.lhdn.com.my.

4.3 Relationship between Tax and Zakāt for Individuals
The first incentive is on the Schedular Tax Deduction (STD) payment which is imposed on those salaried individuals who meet the minimum criteria stipulated by the Income Tax Act 1967.
Effective from January 2000 an employed individual who deducts zakāt from his employment income on a monthly basis and at the same time is also subjected to STD payment by the IRB could request from the employer to deduct the amount of monthly zakāt from the STD.
Therefore, the amount of STD remitted to the IRB is the net amount after deducting the zakāt paid. If the amount of zakāt deducted on a monthly basis is more than or equal to the amount of STD, thus there is no STD remitted to the IRB.
The amount of zakāt paid is entitled to be claimed as rebates pursuant to Section 6A (3) of the Income Tax Act 1967. In addition to that, any payment due which is related to Islamic religious purposes such as zakāt al-fiṭr is also entitled to rebates under the same section. However, if the
amount of zakāt paid is more than the final tax due, no refund will be granted by the IRB.
8.4 PLANNING ISSUES IN ZAKĀT AND TAX
Tax planning are planning schemes of tax affairs by the taxpayers or the company with the objectives of minimising current or future tax obligations. In general, tax planning involves efforts in reducing the overall tax rate and to take advantage of the tax exempt provisions in the Income Tax Act 1967. Tax planning is referred to as tax avoidance activities that involve looking for loopholes and weaknesses in the Act and some specific tax provisions to the advantage of taxpayers. This is different from tax evasion which amounts to cheating and misleading the tax authorities thus, rendering the taxpayers involved liable to tax evasion practices punishable under the Act.
There are two elements of tax planning:
(a) to take advantage of all deductions and exemptions available and allowable under the act
(b) to plan the right timing to make economic decision so that maximum deductions and exemptions may be utilised in an efficient manner
Several strategies normally employed in tax planning activities are:
(a) To shift income or profit between assessment years -normally forward.
(b) To change the nature of income or profit from taxable to exempt.
(c) To take advantage of incentives and concession in tax provisions to reduce tax obligations.
(d) To take advantage of the privileges provided to certain ‘persons’ or ‘entities’ from the viewpoint of taxation; for example, whether to form a sole proprietorship or a limited company to reduce tax.
(e) To split income or profit between several tax ‘entities’ to reduce effective rate.
(f) To even out effective tax rate between entities by shifting income or expenses between entities. This is usually done by companies having sets of subsidiaries under a holding company, or by individuals shifting expenses to the spouse whose income is lower in order to enjoy a lower tax bracket.

Self-Assessment
Circle the letter of the correct choice for each of the following.

1. Which of the following is NOT a condition for zakat payment?
A. Complete nisab
B. Complete hawl
C. Income/gains in nature
D. All taxpayers

2. Which concept is zakat on employment levied on Muslims based?
A. Mustaghallat sources
B. Mustafad
C. Mithqal
D. Nisab
3. Zakat on savings in the Employees Provident Fund (EPF) is compulsory when it meets the nisab and hawl. It can be calculated by multiplying 2.5% with all of the following EXCEPT:
A. Annual contribution by the employees.
B. All amounts of savings withdrawn from EPF and after deducting the employers’ contribution.
C. All amounts of savings once they are withdrawn from the EPF.
D. All amounts of savings after a year of receipt.

4. Which one of the following statements is NOT TRUE?
A. Zakat on shares is compulsory if the company that issues the shares has not paid zakat
on its business.
B. Zakat on traded shares is calculated by multiplying 2.5% with the total value of shares held at the end of the period.
C. Zakat on shares can be calculated based on holding shares or traded shares.
D. Zakat on listed shares can be calculated based on the dividend received.
5. Encik Shahrul has multiple savings accounts and the lowest balances of the accounts at the end of the year 2019 were as follows:-
Conventional savings accounts in Public Bank Berhad = RM3,400
Al-Wadiah accounts in Maybank Berhad = RM7,500
Al-Wadiah accounts in Bank Muamalat Berhad = RM900
Included in the above balances was interest from a conventional bank of RM100, hibah from Maybank Berhad and Bank Muamalat Berhad of RM200 and RM40 respectively. How much zakat on savings does Encik Shahrul have to pay?
A. RM295.00
B. RM292.50
C. RM266.25
D. RM270.00
6. Halima has 5 sets of gold rings, necklaces and bracelets that she wears whenever she attends functions like weddings or dinner. At the end of year 2019, the weight of the gold from her 5 sets of rings, necklaces and bracelets was 220 grams. The current price of a gram of gold was RM101.50. It is a norm to wear gold jewellery worth RM10,000 in her place. How much zakat on gold does Halima have to pay for the year 2019?
A. RM453.75
B. RM205.60
C. RM308.25
D. Nil
7. How much is the nisab of the amount of financial assets payable to zakat?
A. 75g of gold
B. 85g of gold
C. 80g of gold
D. 70g of gold
8. All of the following are reasons why gold is used as the indicator for zakat payments EXCEPT:
It reflects the purchasing power in the economy.
A. It takes into account inflation in the economy.
B. Its value is more stable as it is backed by gold commodity.
C. Its value is determined by the demand and supply of money in the economy.
9. Ali Jinnah has a balance of RM 230,000 in his account in 2019. His contribution to EPF is RM 130,000 and the balance is his employer’s contribution. In accordance with the concensus of Majlis Fatwa, after completing hawl on one year, how much zakat on his EPF balance does Ali Jinnah have to pay if he does not make any withdrawals from
his account? The nisab level is RM 8585 (85g of gold at RM101.00 market value).
A. RM 3250.00
B. RM 3500.00
C. RM 5750.00
D. Nil
10. Which statement is TRUE on the value that should be taken to calculate zakat payable on shares traded during a year?
A. Cost of purchase – financing cost
B. Market value – financing cost
C. Dividends received
D. Total value of shares sold – acquisition cost – financing cost
Answer: 1-d, 2-a, 3-b, 4-b, 5-b, 6-c, 7-b, 8-c, 9-c,10-d.

MODULE 1 / CHAPTER 9

ISLAMIC ESTATE PLANNING
Chapter Outline:
9.0 Introduction
9.1 Importance of Estate Planning
9.1.1 Definition of Islamic estate planning
9.1.2 Importance of Estate Planning
9.1.3 Shariah’s Opinion on Estate Planning
9.2 Instruments of Estate Planning
9.3 Faraid Law
9.3.1 Classification of heirs
9.4 Islamic Will and Estate Administration
9.4.1 Wasiyyah, wisoyah and its effect on estate administration
9.4.2 The Administration of Estates: A common problem
9.5 Conclusion
Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Importance of Estate Planning
(b) Instruments of Estate Planning
(c) Faraid Law
(d) Islamic Will and Estate Administration

9.0 INTRODUCTION
Islamic estate planning can be regarded as the final stage of planning where the distribution of wealth upon one’s death is planned according to one’s objectives and wishes using the Shariah guidelines on farā’id, as well as, other instruments such as hibah, waṣiyyah, waqf. Wealth
accumulated can be enjoyed while alive, as well as, when one is deceased as the planning horizon for Muslims is extended beyond the worldly life. The principles and instruments of wealth distribution are useful for pious Muslims to achieve al-Falāḥ or success both in the worldly life and in the hereafter.
9.1 IMPORTANCE OF ESTATE PLANNING
2.1 Definition of Islamic Estate Planning
Islamic estate planning means planning carried out by a person in his lifetime with regard to the distribution and disposal of his wealth upon his death in accordance with the principles of Islamic law. It includes the determination of the recipients, the manner of distribution and the
quantum of the share the beneficiaries would receive.
Those who should have estate planning are:
a) Those who have unsettled debts. This is to make sure that before his estate is distributed, the legal heirs would know that there are debts that must be paid. It facilitates the legal heirs in identifying the creditors and the amount of debts which must be paid.
This is in line with the Qur’ānic injunction which states that all debts must be settled before the legal heirs can start distributing the deceased’s estate according to the deceased’s waṣiyyah and as detailed under the farā’id system.
b) Those with no children or no sons. According to the farā’id system, the property of a deceased who has no children would go to his father and mother, or siblings. This may be against his intention to include other relatives, or close friends, or even the poor and the needy. And if he has no sons, his daughter(s) would not receive the whole estate, as priority would go to his father or siblings. His intention of giving more to the daughter(s) can only be fulfilled if estate planning in their favour had been executed.
c) Those who have young or adopted children. By making a waṣiyyah/wiṣāyah which is a bequest, it is the portion of your estate over which you have freedom of testation and appointing someone as a trustee, the rights of the young beneficiaries are protected. An adopted child is not entitled to inherit under the farā’id system; therefore, a bequest must be explicitly made in his/her favour.
d) Those who live in non-Muslim countries. An individual who lives in a non-Muslim country must prepare a document of bequest by stating that his property must be distributed according to the farā’id system. Otherwise, his wealth would be distributed according to the laws of the country which may not recognize Islamic law.
e) Those with dependent parents. Estate planning will ensure that parents who are financially dependent on an individual would be provided for after his death.
f) The distribution of jointly-acquired properties. This would prevent any dispute in court in terms of claims on harta sepencarian (jointly-acquired property) which could disrupt the daily life of the claimants, especially in the case of a spouse.
2.2 Importance of Estate Planning
Estate planning is useful for a person to plan the distribution of his wealth after death, in addition to the rules of farā’id. This is particularly important if the need for a special fund is called for in
cases of individuals with disabled children or relatives that need special care after the death of the breadwinner. Individuals may distribute a third of their estate as they wish for ʿamal jāriyah by employing the instrument of waṣiyyah. As Prophet Muhammad (s.a.w.) stated, such ʿamal
jāriyah will be providing for the contributor even after death.
Other reasons for estate planning are as follows:
a) It would prevent any disputes among the legal heirs, beneficiaries and creditors.
b) It would save the time and cost in applying for the distribution of estate.
c) Property which is put under waqf could be properly managed for the benefit of the Muslim community.
d) Planning could ensure the needs and interests of an adopted son/daughter, minors and poor relatives are protected.
e) To prevent any invalid claims which could arise after the owner of the property dies.
f) To protect the rights of the spouse in their claims for harta sepencarian.
g) To ensure the rights of the spouse or children from an unregistered marriage to the deceased’s estate.
According to the statistic, more than one million cases of estate dispute amounting to RM38 billion, where distribution was not properly managed by legal heirs, are waiting to be heard in courts. This shows that planning estate distribution is very significant, failing which, it could cost
the Muslim ummah the loss of billions of ringgit.
2.3 Shariah’s Opinion on Estate Planning
There is a ḥadīth of the Prophet (s.a.w.) in which the Prophet (s.a.w.) advised Saʿad ibn Abī Waqqāṣ not to bequeath his whole estate but instead, to bequeath only up to 1/3 of the estate and the remaining be left to his legal heirs.
Narrated by Abū Isḥāq ibn Abī Waqqāṣ: Messenger of Allah (s.a.w.) visited me in my illness which be case severe in the year of ḥajjat al-wadā’. I said, “O Messenger of Allah, you can see the pain which I am suffering and I am a man of means and there is none to inherit from me except one daughter. Should I give two-thirds of my property to charity? He (s.a.w.) said, “No”. I asked him, “Then half?” He said, “No”. Then I asked, “Can I give away one-third?” He said, “Give away one-third and that is still too much. It is better to leave your heirs well-off than to leave them poor, begging people. You will not expend a thing in charity for the sake of Allah, but you will be rewarded for it; even the morsel of food which you feed your wife: I said, “O Messenger of Allah, would I survive my companions”. He said, “If you survive others and accomplish a thing for
the sake of Allah, you would gain higher ranking and standing. You will survive them. Your survival will be beneficial to people (the Muslim) and harmful to others (the enemies of Islam).
You will survive others till the people will derive benefit from you, and others would be harmed by you”. Messenger of Allah (s.a.w.) further said, “O Allah, complete for my Companions their emigration and do not cause them to retract”. Saʿad ibn Khawlah was unfortunate. Messenger of
Allah (s.a.w.) lamented his death as he died in Makkah (al-Bukhārī and Muslim).
This ḥadīth shows that it is important to plan for the financial benefit of relatives after one’s death. One should think about the future financial prospect of one’s legal heirs especially that of one’s dependants after one’s death. Even though making a bequest is highly recommended in Islam, priority should be given to one’s close relatives.
The ḥadīth also shows that estate planning does not contradict Islamic law. If it is against the Islamic principle of taqdir, for example, the Prophet (s.a.w.) would not have advised his Companion to consider the latter’s relatives after his death, but to leave them to face the fate as
determined by Allah the Almighty.
Allah the Almighty says: “Yūsuf said: ‘For seven consecutive years, you shall sow as usual and that (the harvest) which you reap you shall leave it in the ears, (all) except a little of it which you may eat. Then will come after that, seven hard (years), which will deveour what you have laid by in advance for them, (all) except a little of that which you have guarded (stored). Then thereafter will come a year in which people will have abundant rain and in which they will press (wine and oil)” (Yūsuf (12): 47-49).
The above verse tells us the story of the planning undertaken by the Prophet Yūsuf (peace be upon him). He planned for the seven fertile years when food was to be preserved except for the insubstantial amount that the people needed daily. He advised staying away from extravagance,
so that people might benefit from what remains for the duration of the seven years of drought that would followed the seven fertile years.1 This shows that planning does not contradict the concept of taqdīr in Islam which means that even though Allah the Almighty has already fixed the
fate of mankind, yet He orders them to prepare and plan for what might happen in the future.
Another ḥadīth states: “Grab five things before another five things come; your youth before you become old, your health before you become sick, your wealth before you become poor, your free time before you become busy and your life before you die”.
There is an Islamic legal maxim which states, “A thing without which an obligation could not be carried out completely, that thing accordingly becomes an obligation.” It is understood from this maxim that distribution of property according to Islamic law is compulsory. Since distribution
according to Islamic law cannot be carried out smoothly and completely without making a plan, and there are possibilities that without such a plan relatives and creditors would be left in dispute over their respective claims; planning becomes compulsory in order to execute the original religious duty.
Another maxim states, “Anything which leads to the prohibited is also prohibited”. An example is consuming wine is clearly prohibited by the Qur’ān, therefore, selling grapes with the purpose of producing wine is also prohibited. As far as Islamic estate planning is concerned a person is religiously prohibited from not undertaking estate planning if he is sure that failing to do so would result in relatives falling into a serious dispute over estate distribution that could break up the family.\

9.2 INSTRUMENTS OF ESTATE PLANNING
The main features and application of the following instruments will be provided in this subchapter. These instruments can be applied if one wants to successfully plan one’s estate.
3.1 Waṣiyyah
Waṣiyyah or bequest literally means ‘connection’. The connection here refers to the good deed
accomplished by the deceased during his lifetime; and upon death, he will continuously receive
the rewards for that. Technically, it is a gift of property by its owner to another contingent on the
giver’s death. In other words, it is an act of giving away one’s property in his lifetime but it is
effective upon the death of the giver.
Section 2 of the Enactment of Bequest of Selangor 1999 defines waṣiyyah or will as an iqrār of a
person made during his lifetime with respect to his property or benefit thereof, to be carried out
for the purpose of charity or for any other purpose permissible by Islamic law, after his death.
The same section defines iqrār as an admission made by a person, in writing or orally or by
gesture, stating that he is under an obligation or liability to another person in respect of some
rights. Therefore, when a person says: “When I die, my car is to be given to C”, this is a valid
pronouncement of the waṣiyyah. The effect of this pronouncement is that when the owner dies,
the car will be given to C. Generally, the benefit that the testator will receive is in terms of reward
for that action, in his lifetime as well as after he dies.
The ruling of making a will was originally compulsory in light of the explanations in al-Baqarah
(2):180). However, according to Muslim scholars, with the revelation of the verses of inheritance
(alNisā’ (4): 11, 12 and 176), that ruling was abrogated and accordingly, the making of a bequest
becomes recommendable. The abrogation of the ruling is supported by an authentic ḥadīth of
the Prophet (s.a.w.) in which the Prophet (s.a.w.) was reported as saying “Indeed, Allah has
given to Muslims their rights; therefore, there is no bequest in favour of legal heirs”.
In making a bequest, two important rules must be observed:
1) The bequest should not be made in favour of entitled legal heirs.
This principle means that when a waṣiyyah is made in favour of an entitled legal heir, the
bequest is not valid. The bequest becomes effective only after other entitled legal heirs give
their consent as stated in the ḥadīth, which says that “there is no bequest in favour of legal
heirs”. The scholars argued that the meaning of legal heir or “waris” in that ḥadīth refers to
the entitled legal heirs. There is no need to get consent from non-entitled legal heirs as the
bequest does not affect their inheritance entitlement at all.
2) The quantum of the bequest must not exceed 1/3 of the whole estate.
This principle is stated in the ḥadīth reported that Saad bin Abī Waqās narrated that the
Prophet “…came to visit me in the year of the farewell pilgrimage when I was afflicted with a
severe illness. I said to him: ‘O Prophet, you see how ill I am. I have property and no heir
except my daughter. Shall I then give away two-thirds of my property as alms?’ He replied,
‘No.’ I said, ‘A half then?’ He still said, ‘No.’ I then asked, ‘A third?’ He replied, ’A third.’ And
a third is much. It is better that you leave your heirs rich than you should leave them
destitute, begging from their neighbours”.1
This ḥadīth shows that a bequest exceeding the limit of 1/3 is not valid. The reason for this is that
upon the death of the deceased, his estate passes immediately to the legal heirs and hence, the
exceeding amount would be tantamount to an encroachment of their rights. Therefore, their
consent is needed. If the legal heirs approve, the bequest becomes effective. If they do not, it is
still valid but only up to the portion of 1/3 of the total estate. Similarly, the legal heirs here are the
entitled legal heirs, whereas consent from non-entitled legal heirs is not necessary as they have
no right at all to the estate.
3.2 Hibah
Hibah or gift is an act of giving away one’s property with the immediate effect of transfer of
ownership without any return. Hibah is made during the lifetime of the donor and when the donor
dies, the property does not constitute part of his estate. The transfer of ownership takes place
immediately after the completion of the contract (ʿaqd). In other words, it is a transfer of property
without an exchange. It is constituted with the presence of a definite proposal of the owner of the
property (the donor) and the acceptance from the beneficiary (the donee).
Making a hibah is encouraged in Islam. Allah says it in general terms: “It is not al-Birr (piety,
righteousness, and every act of obedience to Allah) that you turn your faces towards east and
(or) west (in prayers); but alBirr is (the quality of) the one who believes in Allah, the Last Day, the
Angels, the Book, the Prophets and gives his wealth, in spite of love for it, to the kinsfolk, to the
orphans, and to al-masakin (the poor), and to the wayfarer, and to those who ask, and sets
slaves free, performs as-Salah and gives the zakāt, and who fulfills his covenant when he makes
it, and who is patient in extreme poverty and ailment (disease) and at the time of fighting (during
battles). Such are the people of the truth and they are al-Muttaqin (the pious)” (al-Baqarah (2):
177).
This is supported by a ḥadīth in which he was reported to have said, “Exchange gifts among you
and thus strengthen mutual love with each other.” He had also said, “Give presents to one
another, because a present removes grudges.” He had further stressed, “If any one seeks to
take back a gift he is like a dog who returns to its vomit. An evil example does not apply to us”.
Therefore, from the above Qur’ānic verses and ḥadīths, it is clear that the purpose of making a
hibah is to seek the pleasure of Allah and obtain reward for that. Apart from this, another benefit
is that hibah strengthens the relationship among mankind. Hence, the donor is not allowed to
ask for the return of the object as doing so would cause dispute between the parties.
From the above, making a hibah is not compulsory. It is, however, recommended for reasons
which certainly would benefit mankind, especially in terms of their relationships.
In making a hibah, there are three conditions that must be satisfied: first, the two contracting parties; second, the pronouncement of offer and acceptance by the contracting parties; and third, the subject matter. In general, since hibah is an ʿaqd, the conditions imposed on other
types of ʿaqd, such as ʿaqd of sale, are therefore applicable to the ʿaqd of hibah, such as the requirements of capacity of the parties and so on.
Another important point pertaining to hibah is the taking possession of the subject matter of hibah. According to the Shāfiʿīs, taking possession is a condition that makes the ʿaqd binding.
This means that without taking possession, the hibah is not binding and, hence, could be invalidated. This is based on the practice of the Righteous Caliph Abū Bakr.
It is reported from Aisyah, which states that Caliph Abū Bakr made a gift in favour of her of 20 wasaq (a weight) of dates. The dates had not been plucked from the trees by the time Abū Bakr was approaching death. Abū Bakr said to her, “If you had taken possession of the dates they would have been yours. Now you shall distribute them in accordance with the law of inheritance among all the heirs”.
It is also narrated that Caliph ʿUmar said: “What is the matter with some men who make gifts to their sons and then hold on to them. When one of his sons dies he says that my wealth in my hands, I did not give to anyone. When he is in dying situation he would say I had given this to my son. He who makes a gift and then does not permit it to the heirs, then such a gift is void”.
3.3 Waqf
Waqf literally means ‘detention’. Technically, it means the dedication of property (any charitable or religious object), or giving it away in charity either in expressed terms or by implication, or to secure any benefit for human beings. It is the detention of a specific thing from the ownership of the appropriator, and devoting or appropriating its profits for charity for the poor or for other good objectives. When a person places his property under waqf, it means that his ownership to the
property has been relinquished and the property is held in the ownership of Allah the Almighty.
Section 2 of the Enactment of Wakaf of Selangor 1999 defines waqf as the dedication of any property from which its usufruct or benefit may be used for any charitable purposes whether as waqf ʿām or waqf khāṣ according to Hukum Syarak, but does not include a trust which is defined under the Trustee Act 1949.
The waqf instrument is important and it plays a significant role in Muslim societies. It is used to support the aged, the poor, the orphans, warehouses, and bakeries; and charitable, educational and religious foundations. To manage a waqf property, a pious person or bayt al-māl is
appointed and they are called mutawallī. The designation of the waqf property cannot be changed once it is created. It is therefore, not to be sold or disposed to anybody.
There is no explicit injunction in the Qur’ān pertaining to waqf. However, the Qur’ān contains a great number of verses indicating the practice of making charitable and benevolent gifts as well as the redistribution of wealth.
Allah the Almighty says: “O you who believe! Spend of the good things which you have (legally) earned, and of that which We have produced from the earth for you” (al-Baqarah (2): 267).
Allah the Almighty says: “By no means shall you attain al-birr (piety, righteousness- here it means, Allah’s reward i.e. paradise), unless you spend (in Allah’s cause) of that which you love;
and whatever of good you spend, Allah knows it well” (Ól-ʿImrān (3): 92).
Waqf is also stipulated in the traditions of the Prophet (s.a.w.). The Prophet (s.a.w.) said: “When the sons of Adam die, their deeds come to an end, except charity with enduring benefits, their knowledge which benefits others and their virtuous sons, they pray for them (bless them)”.
There are reports which indicate that the verses had inspired the Companions to make waqf.
One of the examples is the endowment by Abū Ṭalḥah of his Bayruha garden on the occasion of the revelation of surah Ól-ʿImrān (3): 92.
According to Jābir, “All the Companions who were known as rich would take the opportunity of contributing their belongings to such institutions”.
There are two types of waqf:
i. Waqf al-Ahlī (Family Waqf)
Waqf Khāṣ is a specific waqf and is commonly created for the purpose of maintaining security and welfare of close relatives of the wāqif. By creating this waqf, the wāqif can make sure that his family members, their generations or close relatives will be entitled to the benefits of the waqf property. When these people die, the waqf property becomes general waqf and it reverts to the welfare of the poor and needy.
2. Waqf al-Khayrī (Welfare Waqf)
Waqf Óm or general waqf is created to cater for the needs of the public such as the needy, the poor, the orphans and the handicapped. It is for the benefit of the public in general, such as building mosques, schools, hospitals, graveyards and other places of public welfare.
3.4 Wiṣāyah
Wiṣāyah literally means trusteeship. It is a means of creating a specific form of trust under Islamic law such as the appointment of a person to administer the deceased’s estate, including the manner in which the estate is to be distributed. The hukum of making wiṣāyah depends on the conditions of the owner of the property. It can be sunnat or recommended and can be wajib or compulsory.
It is recommended for settling debts, for example, for returning borrowed objects, or for carrying out a bequest and to secure/maintain the welfare of minors.
It becomes compulsory upon a father to appoint a trustworthy Muslim in order to administer the property of his minor sons and daughters if he believes that by not doing so, their property would be usurped by irresponsible individuals. Safeguarding a minor’s property for the purpose of preventing it from being squandered or lost is compulsory in Islam. Therefore, the maxim of “the thing without which an obligation could not be carried out completely, it becomes compulsory as well”.
3.5 Wadīʿah (Trust)
It is also a type of trust that Allah SWT has commanded to be restored. According to the Shafi’ is and Mālikīs, wadīʿah is a concept of the appointment of a person for the purpose of taking care and administering the assets of the settler. The physical asset of the trust property is owned by the trustee but its usufruct is for the beneficiary.
Allah the Almighty says: “Indeed, Allah commanded you to carry out the trusts placed upon you to its owner” (al-Nisā’ (4): 58); “O you who believe, do not betray Allah and the Prophet and you betray trusts put on you” (al-Anfāl (8): 27).
In general, if a property is given to a minor and is then put under a trust, the property is owned by the beneficiary and is administered by a trustee. When the settler dies, the trust property is not his estate. The ownership of the property and its usufruct has actually been transferred to the beneficiary during the lifetime of the settler, even though the property is still registered under the former’s name.
If the beneficiary is given the ownership of the usufruct without the property itself and if he dies before the settler, the property will not become part of the beneficiary’s estate. The reason is that
he is given an incomplete ownership and therefore, when he dies, the property will revert to the owner.
3.6 Harta Sepencarian
Under Section 2 of the Islamic Family Law (Federal Territory) Act 1984, harta sepencarian is defined as property jointly-acquired by the husband and wife during the subsistence of their marriage in accordance with the conditions stipulated by hukum Syara’. In other words, it is the
wealth acquired by the joint efforts of the husband and wife during their marriage.
In relation to inheritance, prior to the distribution of estate according to farā’id, the living spouse can claim his/her right for harta sepencarian, as it constitutes part of the debts of the deceased.
Therefore, the living spouse might have two entitlements, namely, entitlement to harta sepencarian and the entitlement under farā’id.
3.7 Nomination
It is a process by which an individual gives direction to the person holding the relevant funds on his behalf, to pay the funds to a named person upon his death. Like bequests, it takes effect upon the death of the nominator. The National Fatwā Council issued a fatwā on 9 October 1973
stating that a nominee, who is appointed by way of nomination, holds such a position as no more than a trustee.
The fatwā states: “Nominees of the funds in the Employees Provident Fund, Post Office Savings, Insurance and Co-operative Societies are in the position of persons who carry out the will of the deceased or the testator. They can receive the money of the deceased from the sources stated to be divided among the persons entitled to them under the Islamic law of inheritance”.
3.8 Farā’id
Farā’id is one of the instruments stated in the Qur’ān for estate distribution. Due to the comprehensiveness of the subject, a separate sub-section is devoted to this.
9.3 FARĀ’ID LAW
The term farā’id denotes the quantum of shares allotted to the legal heirs as determined by the Shariah. The knowledge of farā’id is pertaining to principles regarding the determination of the entitled legal heirs, their quantum of shares, the impediments and the causes of inheritance, the
exclusions from inheritance and the classification of the legal heirs. The Qur’ān prescribes in detail the entitlement and the quantum of shares of each legal heir as in Surah al-Nisā’ (4): 11, 12 and 176 which are known as verses on inheritance.
Allah syas: “Allah (thus) directs you as regards your Children’s (Inheritance): to the male, a portion equal to that of two females: if only daughters, two or more, their share is two-thirds of he inheritance; if only one, her share is a half. For parents, a sixth share of the inheritance to each, if the deceased left children; if no children, and the parents are the (only) heirs, the mother has a third; if the deceased left brothers (or sisters) the mother has a sixth. (The distribution in all cases (‘s) after the payment of legacies and debts. Ye know not whether your parents or your children are nearest to you in benefit. These are settled portions ordained by Allah; and Allah is All knowing, All-wise” (al-Nisā’ (4): 11).
“In what your wives leave, your share is a half, if they leave no child; but if they leave a child, ye get a fourth; after payment of legacies and debts. In what ye leave, their share is a fourth, if ye leave no child; but if ye leave a child, they get an eighth; after payment of legacies and debts. If the man or woman whose inheritance is in question, has left neither ascendants nor descendants, but has left a brother or a sister, each one of the two gets a sixth; but if more than two, they share in a third; after payment of legacies and debts; so that no loss is caused (to any one). Thus is it ordained by Allah; and Allah is All-knowing, Most Forbearing” (al-Nisā’ (4): 12).
“They ask thee for a legal decision. Say: Allah directs (thus) about those who leave no descendants or ascendants as heirs. If it is a man that dies, leaving a sister but no child, she shall have half the inheritance: If (such a deceased was) a woman, who left no child, Her brother takes her inheritance: If there are two sisters, they shall have two-thirds of the inheritance (between them): if there are brothers and sisters, (they share), the male having twice the share of the female. Thus doth Allah make clear to you (His law), lest ye err. And Allah hath knowledge
of all things” (al-Nisā’ (4): 176).
The farā’id system is not a new legislation in its totality. In other words, the Shariah does not legislate a new system of inheritance but simply modifies the Arab customary system of succession by introducing a new group of legal heirs, namely, the Qur’ānic heirs as stated in the
above verses. The Shariah maintains the entitlement of residuary heirs, who were also entitled during the Jāhiliyyah period, but their rights are subject to the prior rights of the Qur’ānic heirs.
The Shariah does not totally abrogate the system of succession practiced by the Arabs Jahiliyyah people, but instead, recognizes many of its principles through the divine injunctions.
The farā’id distribution stated in the 3 verses in surah al-Nisā’ can be summarized as in Table 9.1 on the next page.

Table 9.1: Farā’id System of Estate Distribution

(1) Re Mutchilim [1960] M.L.J. 25.
(2) The daughters in such case being residuaries with the son.
(3) The son’s daughters being residuary with the son’s son.
(4) An example of the doctrine of aul or increase.
(5) The mother gets 1/3 of ¾ (that is after deducting the wife’s share). This follows a decision of the Caliph Umar.
(6) The brothers and the sisters are residuaries.
(7) An example of awl

(8) The son’s son and son’s daughter are residuaries.
(9) Example of aul or increase.
(10) Examples of aul or increase.
(11) In these cases the daughter and son’s daughter get their Qur’ānic shares while the sister takes as residuary.
(12) The mother gets 1/3 of ½ (that is after deducting the husband’s share).
(13) The brothers and sisters are residuaries.
(14) This is the case of himariyya or musharaka. The full brother and the uterine sisters share the 1/3 share. See Fitzgerald Muhammadan Law p.135 and Nawawi Supra, p.250.
(15) This is the case of Al-akdariya – see Tyabji Muhammadan Law (3rd Edn.) p.874 and Fitzgerald Muhammadan Law p.128 and Nawawi p.253 Supra, (p.22 supra)
(16) This is the case of al-Mālikīa – see Fitzgerald p.128.

(17) There is a doubt whether the son’s daughters (who are excluded as Qur’ānic heirs) are nevertheless entitled to take as residuaries together with the agnatic ascendant or collateral. See Fitzgerald Muhammadan Law, p.124.
(18) In all these cases, as there are two daughters, the son’s daughter cannot inherit as Qur’ānic heir. She therefore takes as an agnatic heir and shares the residu with the lower son’s son.
(19) The son’s daughter is a residuary with an equal son’s son.
(20) As there is a “nearer” daughter, the share of the son’s son’s daughter is 1/6 that is the remainder of the 2/3 share of daughters.

Note: This information is obtained from: http://www.arb.com.my. Amanah Raya Berhad provides wiṣāyah services to Muslims in Malaysia.
4.1 Classification of Heirs
a) The Qur’ānic Heirs
They are the heirs whose portions and situations are specified in the Qur’ān. They consist of 12 people namely:

The shares that are allotted to them as prescribed in the Qur’ān, ḥadīth and ijmāʿ are: 1/2, 1/3, 1/4, 1/6 and 1/8

b) ʿAṣabah
They are agnatic heirs whose relationship with the deceased is not from a female relative.
Their shares are not detailed but the Qur’ān and ḥadīth states that they are entitled to the remaining estate after the Qur’ānic heirs. This means that if the Qur’ānic heirs have taken all the estate, they therefore, will receive nothing. This is based on the principle stated in a ḥadīth: “Give the fixed shares of inheritance to those who are entitled to receive it, whatever remains should be given to the closest male relative of the deceased.” ʿaṣabah are divided into 3 groups as shown below:

The rules of priority are rules to identify the closest male relative or the most deserving ʿaṣabah. Applying these rules means that remote ʿaṣabah will be excluded from inheritance and therefore, only one ʿaṣabah will be entitled to the inheritance.

c) Outer family: Bayt al-Māl
Outer family is the relatives of the deceased but they are neither Qur’ānic heirs nor ʿaṣabah.
According to the Shāfiʿīs, they are not entitled at all to the deceased’s estate because priority goes to the bayt al-māl. If the Qur’ānic heirs do not exhaust the estate, and no ʿaṣabah is present, the remaining will go to bayt al-māl, not the outer family.
According to farā’id, there are rights that must be settled prior to the distribution of estate. The rights are:
a) Burial expenses
b) Settlement of debts
c) Execution of bequest
d) Distribution of estate under farā’id

9.4 ISLAMIC WILL AND ESTATE ADMINISTRATION
The following information on Islamic will and its effect on estate administration was sought from
one of the experts in estate planning, Zar Perunding Pusaka. To understand the concept of an Islamic will, one must understand a few other Islamic concepts.
5.1 Waṣiyyah, Wiṣāyah and Its Effect on Estate Administration
(a) Waṣiyyah
The Muslims in Malaysia call this document a ‘Wasiat’. It refers to the testamentary bequest limited to one-third (1/3) of the Testator’s estate that can only be given to non-heirs as defined in the Holy Qur’ān. This means that the general bequest can be made to adopted children and
adopted parents and is usually meant for charitable purposes including to mosques, religious organizations and orphanages. It has to be reminded that under Islamic law, heirs and family members do not exactly mean the same people.
(b) Wiṣāyah / Isa’
This concept is hardly known in Malaysia. However, it is widely practiced in the Middle East, especially in Egypt whose Islamic inheritance procedures are quite well-established. The wiṣāyah is a trust document which appoints a Wasi (Trustee), almost akin to the Executor appointed under the English Will. The responsibility of the waṣīy (Executor) is to assemble the assets of the deceased, pay off debts, implement the wishes of the Testator in respect of the waṣiyyah, the harta sepencarian or matrimonial asset (property acquired and accumulated during marriage), the unexecuted hibah (Islamic lifetime gift) if applicable, and finally, to
distribute the residue of the estate to the wāris (heirs) according to the farā’id (the Islamic Law of Inheritance). It is the over-riding principle that all the above matters must not be in contravention or contradiction to the basic principles of the Islamic Law. This Islamic concept must be
compared and contrasted against the English Law concepts of testate and intestate properties:-
(i) Testate
This term means that the property left behind by the deceased is provided for in a Will and an Executor has been appointed by the deceased before his death to implement his wishes relating to the distribution of the property to the chosen beneficiaries who may or may not be his family
members, which in the English Law, are also called heirs. All properties, movable and immovable must be stated in the Will, otherwise, they will become intestate properties. Upon the individual’s death, the Executor will apply for the Grant of Letters of Probate by proving the Will
or authenticating the Will, that is, getting the Will endorsed by the High Court by showing that the Will had complied with all the formalities and procedures under the Wills Act and the Probate and Administration Act.
(ii) Intestate
This term refers to the properties of the deceased person who has not left a Will, that is, he has not appointed an Executor prior to his death nor has he planned his estate i.e., he has not provided who is supposed to get what upon his death. Members of his family will, by consensus, appoint an Administrator who will apply for the Grant of Letters of Administration.
To grasp a clear understanding of the Islamic Will, one must have a clear understanding of the concept of waṣiyyah and wiṣāyah in the Islamic law and the English law concept of the testate and intestate properties. This is imperative as the Islamic Inheritance Procedures in Malaysia
are still governed by the Civil Law (read English Law) and regulated by the Probate and Administration Act 1959 and the Small Estates Distribution Act 1959. In addition, non-Muslim estates are regulated by the Distribution Act 1959 and the Wills Act 1959.
5.2 The Administration of Estates: A Common Problem
So, why write a Will, or an Islamic Will for that matter? For nonMuslims, writing a Will would be to expedite the process of settlement of the estate; the assets of the estate are unfrozen or unlocked faster compared to if they were intestate properties without a Will. It is common knowledge that extracting a Grant of Letters of Administration would take a longer time, sometimes double the time of that to extract a Grant of Probate if there is a Will involved. In addition, one can determine the distribution to one’s loved ones instead of allowing the same to be decided by the Distribution Act 1959.
For Muslims, the essence of writing a Will only relates to the appointment of the Wasi (Executor).
Since the Islamic Will does not come under the purview of the Wills Act, there are presently no such provisions in the Civil Law which provides for the procedures for the Islamic Will saved and except that, the Islamic Will can be construed as the testamentary document within the context of the Probate and Administration Act 1959. This allows it to be submitted as the document to obtain the Grant of Probate thereby, allowing Muslims the same advantages as Non-Muslims.
The distribution of the estate properties is already determined by the farā’id (the Islamic law of inheritance) i.e. who gets how much, etc. However, the same can be waived if all the heirs consent to a differing distribution formula.
“If I may make an analogy to put the Will-writing problem in a proper perspective, I would like to compare writing a Will, be it for Muslims and non-Muslims alike, to buying a ‘Touch & Go’ card.
By buying a ‘Touch & Go’ card, our journey on the highway through the tollgate would be smooth sailing as opposed to those having to pay cash. Similarly, on the highway of life, the tollgate also marks the ‘end of the road’. The only difference is, the tollgate is for your assets you leave behind while you go through another ‘gate’. Your assets would then be ‘expeditiously processed’ at the tollgate as an Executor had been appointed to do the ‘processing’.”
“Meanwhile, as you have passed on, your loved ones are anxiously waiting on the ‘other side’ of the tollgate for the ‘arrival’ of the assets. Compare this with a situation where the ‘Touch & Go’card is not used, it becomes like an airport baggage carousel where there are bags without
tags and where no one is ‘administering them’. Obviously, your loved ones will have a longer wait and will have to endure prolonged ‘anxiety’ due to your lack of foresight.”
The same expert also has this to say on the misconception of will writing among Malaysians:
“It is the writer’s contention that there has been a serious misconception on the understanding of the Islamic Will concept which has led Muslims in Malaysia, at least, to be confused that writing a Will is not important and relevant. What is critical to understand is that writing a Will, whether be it for Muslims or non Muslims, does not mean that you are planning to die; you are merely ensuring your assets are not stuck longer than is necessary and that your final wishes and last instructions are followed.
This means appointing a trustworthy Executor prior to death who will expedite the process of settlement of the Estate i.e unlocking the frozen assets and settling your debts and following your last instructions as long as it complies with the Wills Act for non-Muslims and the Islamic
Law of Inheritance for Muslims.
This misconception arose because Muslims felt that the waṣiyyah was actually the Islamic Will (as defined by the English Law) and since the bequest was limited to non-heirs (which are normally not family members with the exception of adopted children), they saw no purpose in writing a Will because they felt that it is their family members which needed to be protected and not anyone else. This gave an unfair description of the divine Qur’ānic laws.
The waṣiyyah is actually meant for charitable and philanthropic purposes. It is meant for nonheirs because the Qur’ān had already provided for heirs and to protect the heirs, the Qur’ān limits the charitable bequests to one-third of the Estate because the heirs should not be left wanting and in financial difficulties. This is to be contrasted and compared to non-Muslims’ Wills where one can make a bequest to anyone even non-family members and for whatever value of the estate for as long as it complies with the Wills Act and does not go against public policy.
It is further the writer’s contention that the wiṣāyah document is the real Islamic Will Document and not the waṣiyyah document. The writer goes further to call the Wiṣāyah document the Islamic Will Document and to make the differentiation complete, the Waṣiyyah document should be called the Islamic Bequest Document. The essence of the wiṣāyah (Islamic Will) is the
appointment of the Wasi (Executor) and is based on the trust concept, which is carrying out the last wishes and instructions of the Testator for as long as they are not in contravention of the Islamic Laws. On the other hand, the essence of the waṣiyyah document is the gifting, which is
the testamentary bequest for charitable purposes limited to one-third of the estate to non-heirs.
In conclusion, it is the writer’s opinion that this misconception in the understanding of the true nature of the Islamic Will, has resulted in the large majority of adult Muslims in Malaysia, totalling almost 10.0 million people in not writing Wills.
For the record, according to a newspaper report from the Small Estates Department of the Ministry of Lands and Mines (as it was then known), in 2002, more than RM3.0 billion worth of assets are stuck pending settlement of estate due to family squabbles or non-distribution, which could have been settled had the deceased planned his inheritance. Just imagine the loss to the country in terms of unproductive assets. It must be remembered that writing a Will does not mean that you are planning to die; you are planning for your loved ones to live well after you are gone. To do so, one should appoint a trusted person to administer one’s estate; this applies to everyone, Muslims or otherwise.”

Self-Assessment
Circle the letter of the correct choice for each of the following.
1. Which of following is NOT an instrument for Islamic Estate Planning?
A. Faraid law
B. Hibah
C. Mudharabah
D. Waqf
2. Which of the following statements is NOT an importance of Islamic Estate Management?
A. Preventing any disputes among the legal heirs, beneficiaries and creditors.
B. To manage the assets placed under waqf.
C. Saving the time and cost of applying for the distribution of estate.
D. Ensuring the needs and interests of an adopted son/daughter, minor and poor relatives are protected.
3. Which of the following statements is TRUE about waqf?
A. An irreversible act of giving away one’s property with the immediate effect of transfer of ownership.
B. Bequesting wealth to recipients other than the entitled legal heirs.
C. Allotting shares of the deceased’s wealth to the legal heirs as determined by the Shariah.
D. The appointment of a person for the purpose of taking care and administering the assets of the settler.
4. Which document is the equivalent to a Will according to the English Law?
A. Wasiyyah
B. Faraid Distribution
C. Wasi
D. Wisoyah
5. A Muslim without a wisoyah document will have to obtain the Letter of
__________ that is time-consuming to obtain and troublesome to the heirs of the deceased.
A. Probate
B. Testate
C. Intestate
D. Administration
6. All of the following are rights that need to be settled before faraid estate distribution EXCEPT:
A. Settlement of debts
B. Liquidation of assets
C. Burial expenses
D. Execution of bequest
7. Which of the following would reflect the correct asset distribution according to faraid law, for a woman who had left her husband and three sons?
A. 1/6 to the husband, the balance to the sons equally
B. ¼ to the husband, the balance to the sons equally
C. ½ to the husband, the balance to the sons equally
D. 1/5 to the husband, the balance to the sons equally
8. Outer family’s right to the wealth of the deceased is:
A. The same as the right of asabah.
B. The residual after asabah have received their rights.
C. The residual after Quranic heirs and if no asabah is present.
D. Not entitled at all to the deceased’s estate because priority goes to the Bait-ul-mal.
9. The roles of a Wasi (trustee) are the following, EXCEPT:
A. To assemble the assets of the deceased
B. To pay off debts
C. To distribute Harta Sepencarian
D. To liquidate all assets for the purpose of distribution
10. The following are TRUE about Islamic estate distribution EXCEPT:
A. Wasiyyah is a document to distribute estate for charitable purposes.
B. Nominees of the funds in the Employees Provident Fund and Tabung Haji are the recipients of the estate of the deceased.
C. A wife has to elect to receive the estate of the deceased by way of faraid or harta sepencarian.
D. Wadiah is the concept of appointing a person for the purpose of taking care and administering the assets of the settler.
Answer: 1-c, 2-b, 3-b, 4-d, 5-d, 6-c, 7-b, 8-d, 9-d,10-c.

MODUILE 1 / CHAPTER 10

ISLAMIC RETIREMENT PLAN
Chapter/Topic Outline:
10.0 Introduction
10.1 Retirement Hazards
10.2 Theory on Retirement Planning
10.3 Types of Retirement Funding
10.3.1 Defined Benefit
10.3.2 Defined Contribution
10.3.3 Other Funding to Consider
10.4 The Needs for Retirement Planning
10.5 The Process of Islamic Retirement Planning
10.6 Obstacles to Retirement Savings
10.7 Retirement Issues for Employees
10.8 Employees Provident Fund in Malaysia
10.9 Conclusion
Study/Learning Objectives:
Upon completion of this chapter you should have basic knowledge of:
(a) Retirement Hazards
(b) Basic Theory of Retirement
(c) Types of Retirement Funding
(d) The Needs for Retirement Planning
(e) Process of Islamic Retirement Planning
(f) Obstacles of Retirement
(g) Employees Provident Fund in Malaysia

10.0 INTRODUCTION
Retirement planning is an arrangement to provide people with an income during retirement, that is, when they are no longer earning a steady income from employment. Retirement plans may be set up by employers, insurance companies, the government or other institutions such as
employer associations or trade unions. The major issues faced by a worker are: How to prepare for and live in retirement?
In Islam, it is the responsibility of the children to look after their parents, especially when the latter become too old and incapable of sustaining themselves. It is an act of disloyalty towards Allah the Almighty if one neglects one’s responsibility of taking care of one’s parents. This act is regarded as an attitude of those who are proud and boastful. This is clearly stated in the Qur’ān, “Worship Allah SWT and join none with Him (in worship); and do good to parents, kinsfolk,
orphans, the poor, the neighbour who is near of kin, the neighbour who is a stranger, the companion by your side, the wayfarer (you meet), and those (slaves) whom your right hands possess. Verily, Allah SWT does not like such that are proud and boastful” (al-Nisā’ (4): 36).
Even though it is a religious responsibility of the children, it is very much encouraged that parents voluntarily release their children from such a burden. This is perhaps based on the reason that their children are also responsible for their own families. Hence, one should consider the Islamic retirement planning tools and processes as one’s preparation to be independent financially when one is old or retires from one’s job.
The need to plan one’s retirement becomes more obvious as the years pass. Even though in Islam children are responsible for caring for their parents, there is no Islamic injunction which precludes one from planning for one’s benefit in retirement. Retirement planning becomes more
significant as the financial impact and demands of modern society take their toll on the grown children’s lives. When the cost of living goes up, the ability of the working population to care for those other than their immediate families will become increasingly difficult.
10.1 RETIREMENT HAZARDS
Retirement can be the beginning of a new life but there are pitfalls.
According to Robert Valentine (2007), retirement planning is a tricky process that requires careful planning and patience. Even if one has a retirement plan and a clear set of financial and lifestyle visions and goals, it is important that one be aware of several common missteps that
many, even those with a plan, fall victim to.
2.1 Underestimating the Costs of Healthcare
One of the most overlooked and most common mistakes made in retirement planning is a lack of preparation for the financial impact of one’s health. As long term healthcare costs continue to rise dramatically, it becomes the most expensive costs and employers are shifting more weight
of the costs onto their employees. In America, many companies are beginning to drop retired workers from their health plans and the end result is millions of Americans have no form of coverage at all. So, buying long-term healthcare insurance early can help lower healthcare costs immensely without a devastating effect on one’s financial plan.
With aging, individuals are likely to become ill and need to pay for medical bills. Fortunately, our eastern cultural values puts emphasis on caring for its elderly community; but one would never know the changes to those values in the future.
2.2 Misjudging How Long One or One’s Spouse will Live
The world is an ever-changing place. As life expectancy increases along with medical technology, one or one’s spouse may live longer, perhaps even past the age of 80. A common assumption is that one should have enough retirement assets to last until the end of one’s lifespan; so it is vital that one is really ‘prepared’ to live longer.
2.3 Presuming a Longer Working Life
As life expectancy increases, one wants to continue working longer but that can be one of the biggest retirement mistakes one makes. Generally, the average age of retirement is 62 but for the public sector in Malaysia, as newly announced by the Prime Minister, it is 58 years old. Even
if one wants to work as long as one can, one is still compelled to retire earlier. It is vital that one plans and saves for such a scenario. Retirement could be the beginning of many great years.
Working with a financial professional and having the proper plan in place is a key part of retirement. One should also keep an eye on healthcare costs and stay informed on issues that will effect one’s retirement. One should always be focused on one’s plan and be aware of some common pitfalls. That way, one can be prepared to make the best years of one’s life as good as they can possibly be.
2.4 Demographic Change and Consequences to Retirement
The standard economic model of wealth accumulation posits that consumption decisions are made in a life-cycle framework, where consumption-smoothing requires one to save during the working years to support consumption after retirement. Specifically, this framework models the consumer as maximizing his discounted lifetime expected utility such that consumption flows
and wealth stocks at each point depend on his permanent income, i.e., anticipated lifetime resources, as well as preference parameters. To do so, the consumer must understand present discounted values, the difference between nominal and real amounts, and be able to project expected future labor income, pensions and social security benefits, retirement age, and survival probabilities, among many other factors. These requirements are inherently complex and demanding.
THEORY ON RETIREMENT PLANNING
3.1 Overlapping Generation Model
Overlapping Generation Model (OGM) is a model used in microbased macroeconomics which implies the structure that at any one time individuals of different generations are alive and may be trading with one another. The model studies the aggregate implications of life-cycle
savings by individuals and how the capital stock is generated by individuals who save during working lives to finance consumption during retirement.
3.2 Two Period Lives
The general idea of OGM is, in the real world individuals at different stages of their life-cycles interact in markets, the young dealing with older people and later with mostly younger people.
This feature is best captured under assumptions that individuals live for two periods, so that at any point in time, the economy is composed of two generations, the young and the old.
Additional assumptions to make this theory work are: work only in first period and earning real wage of wt, consume part of first period income and save the rest to finance retirement consumptions.

This scenario can be explained by equation as below:

To make the explanation simple, life is divided into two periods, t and t+1. An individual is born, works and consumes part of his income at time t and gain utility, u(c1t). He also saves part of his income to finance consumptions at t+1 and get returns from the savings; the utility is described as u(c2t+1). Both periods give utility to the individual. As stated, in period two (t+1) the individual does not work anymore, so his source of income is based on savings and its returns from period.
For this topic’s discussions, this savings can be considered as any retirement plan either pension schemes or employee’s provident fund (EPF) which fulfill the assumption of saving during working span for retirement consumption. The theory shows that, one needs a proper retirement scheme to maintain one’s continued utilisation from consumption into retirement.
From the theoretical framework of OGM, one can always relate to the real world through:
a) Work when young and will definitely retire at a certain age
b) Continue to consume in both periods (young and old age)
c) In order to maintain the consumption during retirement, one needs to work and choose the appropriate retirement scheme in the young period.
3.3 Life Cycle Hypothesis
The concept of life-cycle savings and wealth accumulation was introduced by Modigliani and Brumberg (1954). It suggests that the propensity to consume and the propensity to save are different at various stages of individuals’ lives. In the Modigliani and Brumberg’s model, the
exclusive motive for saving and wealth accumulation is to provide sufficient resources for retirement (Wolff, 1979). Figure 10.1 illustrates the Modigliani and Brumberg model and Tobin’s model (1967) which, in contrast, suggests that an individual’s net worth begins at zero level,
then starts to decrease to a negative level due to many commitments during young age. After that net worth increases along with age and reduces at a certain point of time, usually during retirement age.
In comparison to Modigliani and Brumberg, Tobin suggests the possibility of householders incurring debt in their early working life due to study loan repayments, house purchase and other durables. The later model reflects more of reality, since it considers the possibility of
debt occurrence among households in their early employment period.
Figure 10.1: Modigliani and Brumberg’s (1954) and Tobin’s (1967), Models of Life Cycle Hypothesis (Source: Wolff, Edward N. (1994)

Figure 10.1 demonstrates that householders’ net worth increases as their age increases and reduces steadily after retirement. This is due to the fact that householders consume their stock of wealth after retirement in order to maintain the lifestyle adopted during their working period.
The total level of net worth is considered in the model and includes wealth held in the form of real and financial assets after consideration of all financial obligations has been made.
Spending plan of individuals usually follow a typical framework that corresponds to the age of life cycle of the individuals. For most people, significant events that happen in their lives can be plotted on a timeline and generally reflect the progress of their maturation; namely acceptance into college/university, family formation and raising children, purchasing or building a home, funding children’s education, healthcare expenses, setting aside money for retirement, assistance to retired parents, savings for Ḥajj and/or umrah and funeral expenses (Fisher 2003).

As indicated in the previous diagram on the life-cycle, financial needs peak during the middle age, when individuals are aged between 40 and 55. To provide for retirement, individuals have to start saving early in their lives because of the large amount of money needed for it. In order to cope with the fact that spending level changes from one phase to another, individuals have to plan the income earned and the wealth accumulated properly. Other than adjusting to the
economic activities that changes according to life cycle, individuals should also try to maintain a certain level of lifestyle so that the quality of life will not deteriorate significantly during the period
of retirement when income from employment ceases to exist.
10.3 TYPES OF RETIREMENT FUNDING
4.1 Defined Benefit
Defined benefit is one which provides a final benefit based on a formula which comprises the number of years of services and the final salary. It is also known as a noncontributory retirement plan which means one does not have to pay anything into it. For this type of retirement scheme, the participant is not required to make investment decisions and it is always referred to in Malaysia as a ‘pension scheme’. The participants are promised a specific monthly benefit at retirement that is calculated according to the participant’s salary and service.
4.2 Defined Contribution
Under defined contribution, the employer alone, or employees and employer together to contribute directly to an individual account. The benefits are based on the amount contributed into the plan and are also affected by income, expenses, gains and losses. In other words, the contribution throughout the individual’s working period will be invested as capital and is paid to the old. There are restrictions as to when and how one can withdraw these funds without penalties. A defined contribution plan requires quite a bit of management by both the employer and the employee but is less costly to the employer in the long run. By the given definitions of defined contribution, the best example in Malaysia is the Employees Provident Fund (EPF).
4.3 Other Fundings to Consider
As stated in the OGM, during retirement we only do consumption. The savings activity must be done in period 1 or when young. Higher savings can increase utility during retirement. Apart from defined benefits and defined contributions as mentioned above, individuals must think of
other alternatives to consider for a higher utility during retirement period. This can be done through proper financial retirement planning like insurance and trusts.
10.4 THE NEEDS FOR RETIREMENT PLANNING
The retirement risk is the counterpart to the risk of premature death. Both are real but only one can happen in one’s lifetime. After retirement, death can no longer be classified as ‘premature’. The person has lived his full economic life. If the individual dies prematurely, he will have no necessity for funds that are being reserved for retirement. On the other hand, if the individual lives until retirement, say age 55 or 56, provisions made for premature death will not be used, but there is a need for funds to sustain the living years after he has retired. With the
possibility of either outcome materializing, the individual has little choice but to make provisions for both – if he does not wish to leave his financial future to the fickleness of fate.
An individual, who retires today, can expect to live for another 15 to 20 years. With increased awareness of health concepts and improvement to the health care system, people are generally living longer than those of the past generations. The life expectancy of a Malaysian male is about 72, while women are estimated to live slightly longer. With increased longevity arises the problem of retirement income. To generate income, it is either man at work or money at work.
When a retired person ‘really’ retires, he is ‘dead’ in the economic sense – but yet is alive in person, requiring all the necessities that everyone else needs. So, the question arises as to where he is going to get the income to sustain the balance of his living years.
5.1 Why Islamic Retirement Planning is Needed?
Islam is a way of life. It is revealed by Allah the Almighty to mankind as a divine guidance. It is to regulate mankind with the ultimate aim to secure the benefit and welfare of mankind and to prohibit evils which could jeopardize their interest. In order to achieve the ultimate goal, the Islamic ruling in muʿāmalāt is that everything is permissible unless there is injunction in the Qur’ān or Sunnah or any other sources of Islamic law which prohibits it. Some reasons as to why man is not allowed to be involved in certain dealings is because of the presence of the elements of injustice, unfairness, ribā, gharar and gambling.
The issue of payment of zakāt is also significant when one talks about retirement planning. The EPF money, the gratuity and any type of financial benefits that would be received by a person when he retires are subject to the payment of zakāt. Zakāt is a religious obligation that every Muslim, regardless of age, has to pay once the conditions of such an obligation are satisfied. In Islamic retirement planning, Muslims who have not performed pilgrimage are also advised to prepare for it as this is also a religious obligation. Every Muslim, when capable, is obliged to perform ḥajj once in his lifetime.
Apart from that, Islam takes full cognizance on the way Muslims spend their wealth. It is prohibited that wealth bestowed by Allah the Almighty be spent wastefully. Allah the Almighty regards those who spend their wealth wastefully as the brothers of evils. Allah the Almighty states in the Qur’ān, “And those who spend their money wastefully are the brothers of evils” (alIsrā’ (17): 26).
Islam encourages Muslims to spend their wealth in the way of Allah the Almighty, such as sustaining their families, and their dependants. They are also encouraged to give donations, waqf, etc., as their preparation for their hereafter.
10.5 THE PROCESS OF ISLAMIC RETIREMENT PLANNING
The situation of a retired worker in his retirement is really different from his previous situation during which he had a specific job which yielded a specific income. Hence, it is important for him to prepare for his retirement by planning. In other words, to plan one’s retirement is similar to planning against the risk of premature death. There is a process to performing the task. He must consider the issue of Shariah compliancy. He should avoid elements that are prohibited in Islam such as ribā, gambling, gharar, etc. He should also prepare for the religious obligations that he has to perform such as performing the ḥajj and the payment of zakāt, as well as the recommended donations, such as helping the poor and the needy.
In general, the Islamic retirement planning process consists of three broad steps. These steps are outlined below:
 The first step is to assess the future income needs of a person. How much will he need in order to retire the way he wants? If it is just to survive, the needs will be less. If he wants a more ambitious retirement plan, then the funds to be created will be greater. This requires forecasting the income needs that will exist after the person has retired in congruence to the type of retirement he desires. Tacked to this step is having to identify the sources that will be available to meet these needs.
 The second step involves the question of how to accumulate the funds defined in the first step. This requires the designing of a plan that will meet the needs of the client and to implement the plan successfully thereafter. The amount needed is the difference between the resources that will be needed for the retirement and the resources, e.g. EPF. He must take into account the issues of Shariah compliance; otherwise, his plan will certainly involve elements such as ribā which are against Islamic principles.
 The final step is to ascertain the manner in which the accumulation will be consumed.
How should the retiree be paid? Is lump sum better or is it the annuity payment method? For the method to be determined, the period of projected benefit payments and the provision that should be made for the dependants must be known.
As in financial planning, retirement planning follows a planning process that is conceptually close to the six-step personal planning process adopted by the Malaysian Financial Planning Council.
The discussion of the retirement issues, strategies and techniques to follow are structured mostly around these six retirement planning processes.
Step 1: Establishing the Client-Practitioner Relationship
The financial practitioner and the client will mutually define the scope of the engagement before work begins. He is to establish a trusting relationship with the client in the area of his professional services and with him as a person. This may require some initial disclosures of his background and his practice and to provide testimonials of past performances. These will be answered by asking questions like “What does the financial practitioner do and what were his track records?” and “Does he possess adequate Islamic knowledge especially in terms of Shariah compliance issues?”
In addition, he should explain to the client their mutual responsibilities, and disclose his area of competence, in particular, his expertise in performing the retirement planning job as well as his knowledge about Islamic principles especially pertaining to Shariah compliance. Usually, this is already done when the financial practitioner begins the financial planning activity on the signing of a letter of engagement. If necessary, the financial practitioner should also declare the planning areas in which he has no expertise. He must be honest and trustworthy towards his client. The Prophet (s.a.w.) said to the effect: “Whoever cheated us, he is not among us.” As such, the financial practitioner should let the client know that other professional help is needed to solve some of the problems. This is to prevent the client from developing wrong expectations of the practitioner’s skills. The Prophet (s.a.w.) had also said to the effect: “There is no Iman for those who are not trustworthy and no religion for those who have no promise”.
Step 2: Gathering Data and Setting Retirement Goals and Objectives.
The information obtained on the client provides the basis of analysis to understand the client’s situation. The financial practitioner must first have a clear understanding of the client’s financial well-being and his future needs, aspirations, goals and objectives at retirement. Since the client will usually possess limited resources, it is valuable to know which should be the priorities, and once known, they should be arranged in order of their importance. In addition, it is important to find out what the client’s current financial health is and the available financial resources that can be used to support his retirement plan.
Step 3: Analysing Data to Determine Client’s Situation and His Retirement Needs
Once the data gathering process is completed, it is time to analyze that data to help determine the client’s current financial situation, his retirement needs and his adequacy of resources in meeting those needs. The financial practitioner should take a holistic approach when analyzing the client’s retirement situation, so that an effective retirement funding plan with strategies that optimize the client’s needs and wishes on his retirement will result from the design stage.
Step 4: Determining and Filling the Client’s Retirement Needs
Once the overall financial health position of the client is determined, the financial practitioner can proceed with finding out the retirement needs of the client. The retirement gap is the deficiency amount that has to be determined and filled in order for the client to have adequate funds to meet his retirement needs.
– What does the client want at retirement? The first would be to identify the type of lifestyle the client would want when he finally retires. No matter what lifestyle is chosen, the basic requirements are to have a roof over the head, sufficient income to live out the retirement years and have money to pay for unexpected expenses. These four needs are the base in all retirement plans.
(a) What are the client’s financial retirement resources? The second is to determine the client’s current financial standing in relation to his retirement goal. The retirementresources status discussed earlier should reveal to the financial practitioner the client’s situation at retirement. The status should be stated clearly in the plan.
(b) What is the income needed to sufficiently fund the lifestyle chosen? The third area is to determine the sort of income needed to sustain the client’s chosen lifestyle. The quality of the lifestyle will depend on the income available when the client retires. To achieve this objective, the financial practitioner must, as accurately as possible, compute the amount
of income required to meet the objective. The amount is then capitalized using TVM techniques (refer to Step 3 of the retirement planning process).
(c) What is the additional lump sum amount needed (fund deficiency) to fill the client’s retirement needs? The fourth area is to find the lump sum retirement gap. The projected lump sum needed at retirement less the projected retirement resources will give the lump sum retirement gap.
(d) What must the client do from now on in order to meet his retirement funding shortfall? And finally, the fifth or last area of consideration, a retirement funding blueprint must be developed to ensure the retirement goal can be achieved. The blueprint will outline the investment options and strategies that have to be adopted for the client to meet his retirement goals.
The financial practitioner should be reminded that the laws and regulations, plan qualification, as well as the principles of Shariah can help determine the design of the retirement plan. Tax laws and the payment of zakāt in particular, are two important determinants. Other factors being equal, those investment vehicles in the plan that are chosen based on available tax incentives and exemptions will produce a greater yield than those that are not given the said incentives and exemptions. For instance, takāful or Shariah compliant insurance products qualify for a certain amount of tax deduction according to the Income Tax Act 1967.
Step 5: Implementing the Islamic Retirement Plan
The implementation of the Islamic retirement plan starts once the consent from the client is obtained. The consent is necessary based on the Qur’ānic verse, “O you who believe devour not your property among yourselves by unlawful means except that is trading by your mutual
consent” (al-Nisā’ (4): 29).
Based on this verse, it is a general principle of constituting a contract, like the agreement of appointing the Islamic financial practitioner, that there must be mutual consent between the contracting parties.
The key element of this step that the financial practitioner must follow is to ensure he selects the appropriate products and services that are in line with the client’s goals, needs and priorities and do not contradict the principles of Shariah. The implementation responsibilities must be clearly defined and they should be consistent with the scope of engagement agreed on earlier. Usually, the financial plan starts with an opening or introductory letter to the client.
Step 6: Monitoring Performance and Reviewing the Retirement Plan
Depending on the scope of work agreed upon between the Islamic financial practitioner and the client, the financial practitioner may have to monitor changes in the environment, the laws and regulations, and other factors that may impact the performance of the client’s investments.
Usually, this is done with the help of other professionals if the financial practitioner himself is not sufficiently competent in handling the function.
The monitoring function may involve rebalancing the assets in the portfolio. If for instance, the value of the client’s share portfolio surges, from say, the allocated 25% to 50% due to growth, this indicates that the portfolio should be rebalanced to the chosen allocation of 25%. Of course, if the client’s circumstances have changed and the client is comfortable with the increase in risk, then no adjustment is needed.
Review of Investments For the following reasons, it is imperative that the Islamic financial practitioner reviews the investment performance of the client’s retirement portfolio periodically:
 Checking that all the investments are Shariah-compliant.
 Checking the performances of the investments in the portfolio and reporting them to the client.
 Checking the current relevancy of the investment in meeting the retirement goals.
 Revisiting the earlier projections to ensure they reflect the current situation.
 The manifestation of new investment instruments that may be better than the current ones for meeting the objectives of the client.

Six retirement planning processes.

Scheduling the Review Sessions
There are no hard and fast rules regarding the time between reviews and events that trigger a review from the time of the plan implementation, but the following three types of reviews are commonly practiced.
 Initial Review: The first review usually takes place one month after the strategies outlined in the plan are implemented. This review is to ascertain that the performance of the investment and other non-investment activities are in accordance with expectations and are in alignment
with the goals and objectives that have been set. If the results show that these activities are not performing as planned or are out of alignment, they should trigger actions to carry out adjustments, either to the goals and objectives or to the activities or both.
 Yearly Review: The first annual review is carried out twelve months after the plan is implemented, and thereafter, annually. Again, the review is to ensure that the performance of the investment and other non-investment activities are in accordance with expectations and are in alignment with the goals and objectives that have been set.
 Impromptu Review: These are reviews that are triggered by unexpected events or where the client requests for one because he has a change of plan with regard to issues concerning his retirement or estate. For instance, a financial crisis that affects investment returns severely should immediately trigger an impromptu review of the plan.
10.6 OBSTACLES TO RETIREMENT SAVINGS
7.1 Tendency to Overspend
Many working adults tend to spend the full after-tax income on supporting their current standard of living. This has resulted with nothing left for saving towards retirement. It is for this reason that all clients should be taught at a young age to follow a budget that assists them to live within their means and also provide for their retirement savings. Islam encourages Muslims to spend their wealth wisely. The Qur’ān equates those who spend wastefully as the brothers of evil. The Qur’ān states: “Verily, spendthrifts are brothers of the evil ones and the evil one is to his
Lord ungrateful.” Yūsuf ʿAlī in his commentary to this verse states “spendthrifts are not merely fools. They are of the same family as the evil ones. And the chief of the evil ones –Satan himself- fell by his ingratitude to Allah SWT. So those who misuse or squander Allah’s gifts are also ungrateful to Allah SWT” (al-Isrā’ (17): 26).
The practitioner should emphasize that a spending ratio of not more than 90/10 is generally desired. Under the 90/10 ratio, 90% of the clients’ after-tax income is used to maintain the current standard of living and the 10% is directed to other long term financial objectives such as the clients’ children’s education and their own retirement.
Furthermore, practitioner should recommend that when income increases, the
percentage spent on current standard of living should decline.
7.2 Unexpected Expenses and Unexpected Reduction in Income
Unexpected expenses is like cost of major repair to the house and expenses due to inadequate takāful or Islamic insurance and unexpected reduction in income either through pay reduction or unemployment which do occur from time to time. The client should set up an emergency fund consisting of 3 to 6 months of his or her income. In addition, the practitioner should conduct a thorough review of their clients’ takāful needs to ensure they are covered adequately.
7.3 Other Competing Long-Term Financial Objectives
Islam encourages Muslims to help the poor and the needy. Apart from compulsory zakāt, Muslims are told to voluntarily donate their wealth to assist the spreading of Islam. Down payment for a residential home and education for children may consume whatever long-term savings one has. Usually these objectives are more immediate than the retirement savings. Although these objectives are important, planners have to remind the client to set up a dedicated fund for retirement purpose.
7.4 Divorce
Divorce often leaves one or both parties with little or no accumulation of private retirement income. The problem is compounded by additional expenses incurred when one has to live on his or her own.
10.7 RETIREMENT ISSUES FOR EMPLOYEES
An employee can be rewarded for his services in many ways. The cash-based remuneration like salaries, wages, commission and bonuses paid to employees are probably the most significant portions of the income package paid as reward for their contribution to the business. As long as
these payments are realistic, reasonable and within the confines allowed by the tax code, they rank for full deduction as ordinary and business operational expenses. There are also cases where the owner-employee and their relatives receive reward far in excess of the type and degree of services rendered to the business. In such situations, the DGIR has the power to disregard such payments as tax deductible or to bring them in conformity with commercial practice.
8.1 Tax Issue: Compensation that is not Tax Deductible
Generally, all payments made in respect to services rendered by the employees and which are in accordance with the service agreement are allowed as tax deductible expenses to the business. However, there are some types of payments, made to or on behalf of the employees, which are not allowable or can become contentious issues with the IRB. Hence,
in planning the compensation structure for the business owner, the planner must be familiar with the type of payments that may give rise to problems.
The following are some of such payments:
 Non-contractual rewards like gratuities or voluntary rewards for services rendered may be disallowed unless the IRB is satisfied that it is the enterprise’s general policy to make such payments and the amount of such payments are reasonable by commercial standards. The situation is the same where ex-gratia payments are made to beneficiaries of a deceased
employee.
 Payments given to a terminated employee to prevent him from exercising a similar employment elsewhere are in the nature of goodwill and are not tax allowable deductions.
The amount received by the employee is likewise not taxable in his hands.
 Leave passages to employees are not allowable for tax deduction by the employer.
 Reimbursement of entertainment expenses and the payment of entertainment allowances which are related to sales are deductible by the employer. Other entertainment expenses will be given a 50% deduction. Both will take effect from the Assessment Year 2004.
 Islamic insurance premiums or other contributions made for the benefit of an employee to an unapproved provident fund or scheme by the employer do not qualify for tax deduction.
 When business is wound up, payments paid to employees to facilitate the winding up process are not deductible expenses as they are not considered as being incurred in the production of income for the enterprise.
 Payments made by a successor business in a re-organization to an employee for services rendered to the previous business are not tax deductible to the successor business. These could be payments arising from a take-over, such as pension payments, gratuities and bonuses.
8.2 Considerations for Picking a Benefit Scheme
There are various factors to consider when choosing an employee benefit scheme. Some of the more important ones are stated below:
 Contributory or non-contributory: Contributory plans require the employee to contribute a portion of the total contribution to the fund, while non-contributory plans are fully financed by the employer.
 Tax deductibility of contributions: Not all schemes enjoy tax deduction, and this affects the yield to the fund and final outlays by the contributors.
 Tax liability with respect to earnings of the scheme’s fund: Only approved schemes enjoy tax exemption of the income earned by the fund.
 Pension or lump sum and tax implications: Pension payments in a regular stream of payments, usually on a monthly basis while lump sum is a onetime full payment of the benefit amount.
 Vehicle to use for the accumulation: This refers to the method chosen to accumulate the fund. An example would be using family takāful (life) or an Islamic unit trust scheme.
 Employee’s tax liability on receipt of the benefit payments: The type of funds and the timing of payment affect the tax liability on the amount received by the beneficiary.
8.3 Approved Plans
The main advantages accorded to the approved plans are the various tax benefits on the contributions made to the fund and on the withdrawn amount. These benefits are discussed below.
8.4 Tax Benefit of Approved Plans
One of the reasons for setting up an approved plan is in the area of accumulation. The tax benefits for approved plans can be substantial for the contributors and the recipient of the plan.
These benefits may be summed up as follows:
 Contributions made by the employer are tax allowable, subject to the limit set by the tax code, which is adjusted from time to time.
 Contributions made by the employee are deductible from his taxable income, again subject to certain limitation set by law.
 Withdrawals from the funds by the employee are not considered taxable income in their hands.
 Under the same circumstances, the accumulation of the fund is faster compared to unapproved schemes because the income of the plan or fund is tax-free.
EMPLOYEES PROVIDENT FUND IN MALAYSIA
The Employees Provident Fund (EPF) is Malaysia’s national provident fund which aims to provide financial security for its members’ retirement purposes. The EPF is one of the world’s oldest provident funds. Established in 1951, we help the Malaysian workforce to save for their retirement in accordance to the Employees Provident Fund Act 1991. The EPF strives to grow their members’ retirement savings while continuously developing a wide range of products and services to support their journey towards a comfortable retirement. Today, the EPF continues to refine their vision to not only stay relevant but to create a better retirement for all our members. This strengthens their commitment in safeguarding the members’ savings and increasing their dedication in providing excellent services. It helping members achieve a better future and extended their mandate to include aiding national infrastructural development while safeguarding and growing members’ retirement savings. As an employer, they are obligated to fulfil specific responsibilities, including to register their organisation and employees with the EPF, ensure orderly contributions and record keeping as well as comply with the existing policies and requirements. Individuals who are employed, self-employed or business owners can opt to contribute based on their own requirements. In shorts, it is a compulsory program, managed by a social security organization that provides retirement benefits to private sector employees and non-pensionable public service employees. The EPF is governed under the Employee Providence Fund Act. Currently, employees contribute 11% of their monthly income, while the employer contributes 12% of the income.
Individual EPF is divided into two accounts, namely Account I and Account II.
Account I specifically caters for retirement (70 percent of total fund), whereas Account II is meant for housing, education and healthcare (30% of total fund). Although ideally, EPF’s objective is to provide for retirement, the fund also provides early withdrawal schemes for its members before they reach retirement age. Among the withdrawal schemes are:
Retirement Withdrawal Schemes
a) Age 50 years Withdrawal Schemes
b) Age 55 years Withdrawal Schemes
Pre-Retirement Withdrawal Schemes
a) Withdrawal Scheme for the purchase/building of a house
b) Withdrawal Scheme for reducing/redeeming a housing loan
c) Members/Members’ Children Education Withdrawal Schemes
d) Health Withdrawal Schemes
Other Withdrawal Schemes
a) Incapacitation Withdrawal Schemes
b) Leaving the country Withdrawal Schemes
c) Death Withdrawal Schemes
d) Pensionable employees Withdrawal Schemes
e) Optional retirement Withdrawal Schemes
Other than the above withdrawal schemes, the EPF also provides an investment scheme for members who wish to invest part of their savings in unit trusts.
Looking at the options for early withdrawal stated above, one has a reason to be worried. The flexibility to take out retirement money may seriously affect the ability of a person to be able to provide for his retirement needs. The trend for letting the EPF participants manage their own fund by investing in unit trusts poses a challenge too. People with minimal investment knowledge may let themselves down by managing their retirement funds inefficiently.
During retirement, income from employment ceases. A challenge for retirees is to plan for sufficient cash inflow for the inactive employment period. Incomes that retirees may receive postretirement are from business sources and rental income, among others. Government servants will enjoy half of their last-drawn salary as their monthly income. For private employees, the challenge is greater in terms of managing their lump sum retirement money so that the fund will provide continuous flow of income after retirement.
Cash outflow of retirees is also different from that of active working individuals. Although it is argued that retirees have little financial obligations, the amount of cash needed is probably major. Take medical expenses and long-term care, for example. Medical expenses can be very expensive especially for retirees who are unfortunately diagnosed with serious health problems as this tends to occur when individuals get older. Financial planning for retirement is vital in an environment that does not provide free medical care, such as Singapore. In Malaysia, its people can still enjoy the luxury of paying a minimal amount of money for medical treatment. However, in the cases of individuals who need major operations and who suffer from serious diseases, significant amounts of money are needed. That is the reason the government is providing relief on personal income tax to the amount of RM3,000 per year (beginning Assessment Year 2007).
This releases the taxpayers’ money for them to obtain their own medical coverage.
Other outflow of cash includes the usual monthly expenses such as transportation, communication, water and electricity. In addition to living expenses, some individuals carry their credit card debts to be paid during retirement. This is generally not a smart move in financial planning for retirement.
Other cash outflow that has to be planned is education expenses of the children. Many individuals are postponing their marriage to provide room for career development. Take an individual who has his first child at 33, the eldest child would be 23 years old when the individual retires at 56. He could have more children who would still be in school when he retires. With lesser government aid on the cost of tertiary education, cash outflow for this purpose can be significant.
Table 10.2 illustrates the cost of selected 3-year courses in Malaysia.
Table 10.2: Estimated Total Tuition Fees for Bachelor Degree
Programmes Offered by Malaysian Private Colleges & Universities (By areas of study and paths of graduating) in Malaysian currency.

Source: Challenger Concept (M) Sdn. Bhd. Research unit
*(http://www.symbiosisonline.com/dec01_edu.htm)*

Individuals, currently, also live longer due to medical advancement. There is a high possibility that a person outlives his retirement fund due to the long portion of his life being spent in the retirement phase rather than in the accumulation phase. The average life expectancy of Malaysian women is 76 while it is 72 for the men.1 A millionaire will be spending all his money after 20 years of his retirement if he withdraws RM76,422 in a year in an environment that provides return of 5% without taking into consideration the inflation in the economy. RM76,422 or RM6,368.50 monthly, is not a large amount of money by today’s standard of living.
Another reason why EPF funds will not be enough is the force of inflation in the economy.
Inflation will eat up the value of money over time. To mitigate the effects of inflation is to engage in inflation-adjusted investments, for example, in Merdeka savings bond which specifically constructed for retirees.
The challenge in managing the EPF is to manage the fund in such a way as to produce a steady stream of income. It takes immense discipline to manage a lump sum of money. The idea of taking the annuity scheme is probably good as it ensures that retirees have a fixed amount of
income each month to provide for living expenses. Other vehicles that provide a stream of income are profit from deposits, dividend from shares and unit trusts, and rental from property. The safer versions of investments are preference shares, guaranteed unit trust funds, real estate investment trusts (REITs) and Malaysian Savings Bonds. To decide on the types of investment stated, tax considerations will have to be examined.

Self-Assessment
Choice Circle the letter of the correct choice for each of the following.
1. Which of the following statements is FALSE?
A. Individuals will smooth out income during their lifetime to cater for retirement.
B. Modigliani’s opinion on Life Cycle Hypothesis is that income of individuals is negative, rises and peaks in the 40s and reduces significantly during retirement.
C. Savings can be divided into precautionary, discretionary and non-discretionary, and retirement.
D. Annuity payments are a source of retirement income.
2. Which of the following statements is inflation-adjusted investments/savings?
A. Investment in Sukuk
B. Invesment in blue-chip company shares
C. Savings in Tabung Haji
D. Merdeka Savings Bonds
3. Which of the following statements on EPF Withdrawals for medical costs is FALSE?
A. Actual cost incurred paid by the employers.
B. Lower of savings in Account 2 and actual cost incurred not paid by the employers.
C. The balance of bills not payable by the employers limited to the balance in Account 2.
D. For joint application, the actual cost is limited to the balance for both employees.
4. “The final benefit is based on a formula which comprises the number of years of services and the final salary”. Which retirement scheme does this statement correctly define?
A. Defined Contribution
B. Defined Benefit
C. State Benefit
D. Employer-sponsored Retirement Fund
5. Financial planners’ concern for retirees who “live too long” is on their __________ survival.
A. social B. spiritual C. physical D. economic
6. In assessing retirement income needs, the method that considers 70% of the last drawn salary as income needs is the __________.
A. expense method.
B. replacement ratio method.
C. fixed percentage method.
D. reduction method.
7. In planning retirement apportionment, the method that employs accumulated capital sufficiently to generate enough income is _________.
A. capital retention.
B. capital liquidation.
C. capital balance.
D. capital protected.
8. Malaysian tax considers insurance premiums or contributions by the employers to unapproved provident funds for employees as _________.
A. qualified for tax deduction.
B. not qualified for tax deduction.
C. qualified for up to two months of the employee’s salary.
D. qualified for double deduction.
9. According to Section 3(4) of the Income Tax Act, deduction on the contributions made by employers to an approved fund is up to _________ of the remuneration of the participating employee.
A. 19% B. 10% C. 12% D. 17%
10. The first step in the retirement planning process is ___________.
A. to determine how to accumulate retirement funds.
B. to ascertain how the accumulated funds are to be distributed.
C. to assess future income needs.
D. to invest in high growth shares for maximum returns.
Answer: 1-b, 2-d, 3-a, 4-b, 5-d, 6-b, 7-a, 8-b, 9-a,10-c.

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