TK 1003: Wealth Planning and
Management
Pre-examination Seminar
By Dr Shaikh Hamzah
1
What’s On Our Menu
9:00 - 10:30 a.m. -- All About CIFP
Part I Assessment Methods
10:30 - 10:45 a.m. -- Break
10:45 - 12:00 noon -- Review of TK
1001(Session I)
12:00 -- 1:00 p.m. -- Break
1:00 -- 3:30 p.m. -- Review of TK
1001 (Session II)
Learning Outcomes
At the end of the PES, candidates
should be able to:
comprehend the assessment methods
for the CIFP Part I program
have a clear idea of the final examination
format and procedures, NOT the
questions 
understand the Do’s & Don’ts in the final
exams
3
Learning Outcomes
At the end of the PES, candidates
should be able to:
have a better idea on how to maximize
your scores/marks for each question in
the exams
avoid common pitfalls and/or mistakes in
the final exam
Reviews of the Module
Q&A
Assessment Methods
The Assessment of the CIFP Part I
Comprises of the followings:
One Project Paper
- 20% (Due on 17th
July 2009)
Final Examination
2009)
- 80% (Aug 4th,
Format of the Final Exam
Duration: 3 Hours (excluding 15 minutes reading
time)
The Final Examination Consists of the
Followings:
Twenty MCQs
: 20 points
Five short essay questions
: 20 points
Choose three out five long questions: 60
points
Assessment Methods
Distribution of Grades:
80 to 100 : A
60 to 79 : B
< 60
:F
Do’s and Don’ts
Do’s
Read and follow the instructions carefully
(write legibly, read all of the questions,
begin your answers for each question on a
fresh page, etc.)
Observe your time management
Lead a healthy lifesyle few days before the
exam
Do’s and Don’ts
Don’ts
Leave any questions unanswered -- this
you will surely get ...
Leave the examination hall before the
time is up, i.e. never give-up
Make any Pleas or Confessions
Maximizing Your Marks
Analyze the framing of the question
and response appropriately
e.g.: Critically analyze, critical
assessment, discuss, soliciting for
opinions, understand, compare and
contrast, analysis of statements,
current issues, etc.
Answer what you are asked for, NOT
what you know
Plan your answer
Maximizing Your Marks
Each question comes with the
distribution of marks
Read and go through all questions
and jot down your first thoughts on
each question
Answer questions that will give you
the most marks first
Write in full & complete sentences
Write legibly
Topic 1
Wealth Creation
Topic 2
Nature and
Scope WP
Topic 3
Asset Allocatiom
Topic 12
Issues
Topic 11
Waqf
Topic 10
Zakat
Topic 4
TK 1003:
Wealth
Planning &
Management
Investment in Real
Estate
Topic 5
Investment in
Securities
Topic 9
Taxation
Topic 7
Topic 8
Retirement
Planning
Estate & Will
Planning
Topic 6
Insurance and
Takaful
Common Pitfalls/Mistakes
To write what you know, NOT what is
being asked
To leave questions unanswered
To write about the sad stories of your life
To write uneven answers according to
marks distribution
To sit for the exam with insufficient
stationaries required
To study until the last minutes, thus
coming in late
Topic One:
Wealth Creation And Mobilisation
From Conventional And Islamic
Perspectives
14
Review Questions & Answers
• Differentiate the concepts of wealth between the Islamic and
conventional perspectives. Are there any points of similarities?
How do you reconcile the two concepts in reality?
– In Islam
•
•
•
•
All wealth belongs to Allah.
Man is a trustee and needs to use it in accordance with Islamic teachings
Wealth is in abundance
Everyone has been allocated what is due to him. It is up to him to work on it.
– From conventional perspective
•
•
•
•
Wealth is generated by individual and hence he is the rightful owner
Wealth is scarce
It is man who generates wealth and not apportioned to him.
He has complete freedom to use it
– Efforts are needed to generate wealth under both perspectives
– To reconcile: Man’s effort can only be successful with the permission
of Allah
15
Review Questions & Answers
• Describe the nature of goods that Islam distinguishes
for public consumption. Why do you think Islam
distinguishes them from those that could rightfully be
privately owned?
– Two kinds of assets for public consumption:
• First is public utilities such as large streams, bridges, land for
common use and river banks.
• Second, natural resources: water, herbage fire and salt
– However, jurists are of the opinion that those goods with
the same attributes should be included as well
16
Review Questions & Answers
• The rationale is that those goods whose
production are too costly and burdensome to
individuals yet are very much needed by the
public at large should belong to public.
Otherwise the good can be privately owned
17
Review Questions & Answers
• Explain why wealth is considered as a two-edged
sword? How could one protect oneself from going
beyond the bounds permitted by the Shariah and
why?
– It is useful when one uses it in accordance with Shariah. It
helps man to perform his obligations and he should get the
blessings of Allah
– On the other hand he will suffer in the hereafter especially
when asked to account how he has attained and spent it.
– If he has used them for things forbidden it will be worst for
him
– Some examples?
18
Review Questions & Answers
• Is wealth planning permissible in Islam? How much
different will it be done from the conventional
approach?
– Define wealth planning
– What are the components of wealth planning in Islam and in
conventional practice
– Why is it permissible in Islam? Wealth planning is permissible
in Islam in order to ensure that man is able to live comfortably in
his old age. Islam does not want Muslims to suffer in this world
– It will be very different because
• a Muslim needs to cleanse (pay zakat, voluntary sadaqah and spending on
others) his property.
• He must not indulge in unIslamic activities while generating, accumulating,
preserving, protecting and spending his wealth.
19
Review Questions & Answers
• The three prohibitive elements that would
make a commercial transaction non-shariah
compliant are riba (usury), maisir (gambling)
and gharar (uncertainty; ambiguity). Why are
they considered prohibitive to Shariah?
– They obstruct justice and equity
– The players are not in the same playing fields
– Information is incomplete (gharar)
20
Review Questions & Answers
• “They ask you what they should spend (in charity).
Say: Whatever you spend that is good, is for parents
and relatives and orphans and those in want and for
wayfarers. And whatever ye do that is good, -(Allah)
knows it well” [Quran: Chapter 2 (Al-Baqarah):
Verse 215]
Spending one’s wealth on others is strongly
encouraged by Islam as is mentioned in the above
verse of the Holy Quran. Briefly explain the
importance of spending in the context of wealth
purification in Islamic wealth planning.
21
Review Questions & Answers
• Purification is of two kinds, the physical and the
spiritual
• Wealth purification is manifested by sharing with
others what we have and better still what we love
most (physical, purifying from non-Shariah compliant
income that may be earned unknowingly or within
tolerable limits)
• It is in the spirit of searching for the blessings of
Allah that we give away what we have (spiritual)
22
Review Questions & Answers
• The main distinction between the conventional
and Islamic wealth planning is the Shariah
requirement of wealth purification. Briefly
explain each of the different Islamic wealth
purification processes.
–
–
–
–
Spending (infaq)
Voluntary charity (sadaqah)
Compulsory wealth tax (Zakat)
Endowment (Waqf)
23
Topic Two:
Nature and scope of wealth
planning
24
Review Questions & Answers
• Describe the differences and similarities between
wealth planning and financial planning
– Similarities:
• Both aim at enhancing the value of wealth or resources
• Both use similar methods to enhance or preserve value
• Both have specific objectives when formulating plans
– Differences:
• FP is for specific projects or periods. WP is for the end of the period
• FP is for relatively shorter term but WP is for long term
• FP is meant to have enough for all periods but WP is for future
25
Review Questions & Answers
• Explain the differences and similarities
between the objectives of conventional and
Islamic wealth planning
– Similarities:
• Both contain functions of generation, accumulation,
protection or preservation, enhancement and distribution
• Both aim to have a good life during retirement
– Differences:
• Islamic: need to do cleansing (zakat, etc)
• Islamic: cannot contravene Shariah
26
Review Questions & Answers
• Describe the significance of the different
stages in wealth planning process
–
–
–
–
–
Inventory taking
Analysis & Evaluation
Plan Designing
Implementation
Monitoring and Reviewing
27
Review Questions & Answers
• Explain the trade-off concept and its relevance
in the preparation of a comprehensive wealth
management plan.
– Trade-off between risk and return
•
•
•
•
•
•
•
May not get the rate of return expected
Client may have different risk appetite
Risk-free concept means return is very low
Consistency of performance
Asset allocation can improve or worsen return
Trade-off between service and return
Trade-off between this world and the next
28
Review Questions & Answers
• How different is the conventional trade-off
concept from the Islamic concept?
– Trade-off between this world and the next
– A Muslim believes in fate and destiny (qadha’ and
qadar)
– There is effort (ikhtiar) and leaving it to Allah
(Tawakkul)
29
Review Questions & Answers
• Explain the similarities and differences
between the conventional and Islamic “Tradeoff Concept” in relation to wealth planning.
– Similar answer to the previous question
30
Review Questions & Answers
• “To Allah belongs all that is in the heavens and on
earth: To Him do all questions go back (for
decision)” [Quran: Chapter 3 (Ali ‘Imran): Verse
109]
Based on the above verse from the Holy Quran:
– can you explain the concept of wealth ownership in Islam;
– what implications do you think the second part of the verse
has on the generation and utilization of wealth in Islam?
– what should the objectives of wealth planning in Islam be
and relate its importance especially in the modern world.
31
Review Questions & Answers
– To Allah belongs all creations and hence all
resources and wealth and man is just the trustee
who has the right to use in accordance with His
Will
– We are accountable for all our actions
– To generate and accumulate wealth in order to be
closer to Him in whatever way. E.g. spend in His
way, sharing with others, etc.
32
Topic Three:
Wealth (asset) allocation process
33
Review Questions & Answers
• One of the most important aspects of successful
wealth planning is the process of wealth allocation.
Describe the main components of wealth allocation
process and explain the significance of each to the
success of wealth planning.
–
–
–
–
Establishment of objectives
Identifying potential opportunities
Determining risks and constraints
Potential investment channels
34
Review Questions & Answers
• One of the important processes in wealth
planning is the wealth allocation. In order to
ensure that the wealth allocation process is
carried out properly, one needs to formulate
the investment policy statement. List four
important elements that should be included in
the investment policy statement for wealth
allocation process and briefly explain what
each entails.
35
Review Questions & Answers
– Brief client description
– Purpose of establishing policies and guidelines regarding
objectives, goals, restrictions and responsibilities
– Identification of duties
– Statement of investment goals, objectives and constraints
– Schedule of review of investment performance, Shariah
compliance, etc.
– Asset allocation considerations
– Rebalancing guidelines for portfolio adjustments based on
feedback
36
Review Questions & Answers
• If you are appointed to be a consultant for a high net worth
Muslim individual to draft and execute a plan for his wealth,
what would be the four important steps that you would take to
ensure that his financial goals are fulfilled?
–
–
–
–
–
–
–
–
–
Planning
Identifying investor’s objectives and constraints
Creating investment policy statement
Forming capital market expectations
Creating strategic asset allocation
Execution
Feedback
Performance evaluation
Monitoring and rebalancing
37
Review Questions & Answers
Suppose your client has USD200,000 and he wants to get a
return of 10% per annum from the investments that you
propose.
(a) What would his total asset be at the end of three years?
{Hint: Use the formula A = P(1 + r)n where A = total asset
at the end of n years, P = Principal amount invested, r =
annual rate of return and n = number of years invested)
(b) If you allocate 50% of the investment in fixed income
instruments which give a return of 5% per annum and the
rest in equities with an expected rate return of 11% per
annum, would such allocation meet with the expected rate
of return of your client in three years’ time?
38
Review Questions & Answers
(a) P
= total amount invested = $200,000
r
= rate of return per annum = 10%
n
= number of years of investment = 3
A
= total asset at end of n = 3 years
Using formula
A = P(1 + r)n
We have
A = 200,000 (1 + 0.10)3
A = $266,200
39
Review Questions & Answers
(b) If 50% of principal amount is invested in
fixed income instruments that give 5%
return and 50% in equities that give 11%
return, then
= 100,000(1+.05)3 + 100,000(1+0.11)3
= $115,762.50 + $136,763.10
= $252,525.60
(c) This investment does not meet with the objective
of the investor.
A
40
Topic 4:
Investment In Real Estates
41
Review Questions & Answers
• Real estate is one investment that seems to
appreciate in value more than depreciate.
Explain.
– Real estate refers to land and anything affixed to it
– It has special features:
• Durable/ Perpetual
• Over time the property will be surrounded by
development
• More facilities become available
• Scarcity and immobility
42
Review Questions & Answers
• What are the common factors that determine the
value of real estate? Give reasons why.
–
–
–
–
–
–
–
–
High demand
Short supply
Development surrounding it
Shape and size
Accessibility
No encumbrances
Scenic view
Location
43
Review Questions & Answers
• Why does locality of a real estate play such an
important role in determining the value of a
real estate?
– It is immovable and hence depends on where it is
located, near the town, country side,
– Accessibility
– Access to facilities (market, shops, school,
hospital)
– Landscape
44
Review Questions & Answers
• Describe and explain the various methods of valuation of real
estate
– Comparison method
• Compare like for like and adjust the differences
– Investment method
• Comparing the returns to investment on the property
– Cost method
• Normally applied to public properties such as schools, hospitals, etc. Comparison is
made between the cost of building and the replacement cost giving allowance to
depreciation
– Profit Method
• It is based on the kind of profit that could be earned from the property
– The Residual method
• It is used to evaluate the development sites and properties suitable for
redevelopment. It compares value of proceeds (after development) with
development cost
45
Review Questions & Answers
• Explain the economics of real estate cycles
– Increase in demand due to population growth,
industrial development, public works and
government services
– Time is required to supply and construct properties
which gives rise to rents and land value
– Peak – high volume of real estate transfers. By that
time, S>D. Rentals fail to readjust. This causes the
break of building boom
46
Review Questions & Answers
• Mr. Ali bought a house for investment. He paid a
total of RM200,000 for it which includes the legal
and agency fees and all other miscellaneous expenses.
He took a 90% financing based on Bay’ Bithaman
Ajil (BBA) for 20 years at 4.0% per annum. He
managed to get a tenant who pays a rental of
RM1,500.00 per month.
(a) How much will Mr. Ali pay for the house in 20
years?
(b) What is the rate of return on his investment?
(c) Is this a good investment? Why?
47
Review Questions & Answers
(a) 90% financing at 4% per annum for 20 years
will yield a total financing cost of (90/100) x
200,000 x (4/100) x 20 = $144,000
Therefore the total amount paid by Ali in 20
years is $200,000 + $144,000 = $344,000
(b) The rate of return on his investment is $1,500 x
12 ÷ $200,000 x 100% = 9% p.a.
(c) Since the rental is $1,500 per month and the
monthly instalment is $344,000 ÷ 240 = $1433
per month, it is not a bad investment at all.
48
Topic 5:
Investment In
Securities
49
Review Questions & Answers
• Briefly explain the following terminologies as
used in the securities market:
–
–
–
–
Authorised Capital
Market Value of Firm
Bonus Issue
Earnings per Share or EPS
50
Review Questions & Answers
• Compare and contrast the debt and equity
instruments
– Debt and equity instruments are differentiated by
claim and time.
– Debt or borrowing is fixed in time and fixed in
claim. i.e. they are terminal and have fixed
maturity period. They must be paid in full or
within the stipulated time. Once it is paid, creditors
have no links with them
51
Review Questions & Answers
– Claim on debt is fixed (principal + interest).
– Equity provides ownership, is residual in claim and
perpetual in time. Equity owners own the firm net of the
firm’s obligations. The net residual portion belongs to
equity holders. All values created beyond the firm’s
obligations belong to the equity holders.
– Equity being ownership is not terminal and does not have
fixed maturity. Hence equity instruments are perpetuities.
– Most common equity instruments is the common stock.
52
Review Questions & Answers
• What makes securities so attractive that shareholders
are willing to part with their ownership when they go
public?
– The capital gain is normally very high when the company
goes public (IPO price is much higher)
– It provides instant cash
– It is too long to wait for dividends to recover the capital
gains
– Shareholders can easily repurchase the securities if they
want to
– “It is better to have cash now than to keep papers” which
may bring in losses too
53
Review Questions & Answers
• Identify risk elements inherent in the investment in
securities
– Business risk – refers to uncertainty of income flows
caused by firm’s business performance
– Financial risk – refers to uncertainty originating from the
way the financing is done (equity- debt combinations; etc)
– Liquidity risk – refers to un certainty introduced by the
secondary market for investment
– Currency risk – exchange rate risks due to the fluctuations
in exchange rates
54
Review Questions & Answers
– Country Risk – also called political risk arising out
of sudden change in policies or government
– Bond risks and rating – can be categorised as
follows:
•
•
•
•
Default risk
Interest rate risk
Liquidity risk
Inflation risk
55
Review Questions & Answers
• Explain the stock screening process adopted by the
Shariah Advisory Council of the Securities
Commission
– Step 1: Identify the universe based on core business. SC
has also listed activities that are non-Shariah compliant
– Step 2: Takes into account the level of contribution of
interest income from conventional fixed deposits or other
interest bearing financial instruments. Dividends from
investment in Shariah non-compliant securities are also
considered.
56
Review Questions & Answers
– For companies with activities comprising both
permissible and non-permissible elements the SAC
considers two additional criteria:
• Public perception of the company must be good
• The core activities of the company are important and
considered maslahah (“benefit” in general) to the
Muslim ummah and the non-permissible element is very
small and involves matters such as umum balwah
(common plight and difficult to avoid) ‘uruf (custom)
and the rights of the non-Muslim community which are
accepted by Islam.
57
Review Questions & Answers
– To determine the tolerable level of mixed
contributions from permissible and nonpermissible activities towards turnover and profit
before tax of a company the SAC has established
the following benchmarks
• a. The 5% benchmark – is used for activities that are
clearly prohibited such as riba; gambling; liquor and
pork
• b. The 10% benchmark – is used for activities
considered as umum balwah. E.g. interest from fixed
deposit
58
Review Questions & Answers
– c. The 20% benchmark – is used to assess the level of
contribution of mixed rental payment from shariah noncompliant activities such as rental payments from premises
used in gambling; sale of liquor etc.
– d. The 25% benchmark – is used to assess the level of
contribution from activities that are generally permissible
and have an element of maslahah to the public but there are
other elements that may affect the Shariah status of these
activities such as hotel and resort operations; share trading;
stockbroking and others because these activities may
involve non-permissible activities
59
Review Questions & Answers
– When there is a change of status from Shariahcompliant to Shariah non-compliant
• Sell the securities immediately if it is profitable to do so
and take the profits
• Wait until the price of security equals cost if at the time
of change of status the market price is less than
purchase price.
• While waiting if there is dividend received the company
may take it.
• If the company delays selling any profit made must be
cleansed.
60
Review Questions & Answers
• Explain how an ijarah sukuk is structured
– Refer to notes
61
Review Questions & Answers
• What are the main differences in the nature of
real estate and securities?
Real estate: physical properties; not liquid; no
structured market; information not readily
available; not easily transferable; requires third
party or real estate agents; immobile; huge in
size; value depends on state of development in
the surroundings; location; view; size and
shape; long term; appreciating in value
62
Review Questions & Answers
• Securities: two types of securities- equity and
debt; structured markets; complete information
available; prices fluctuate wildly; price is
known; lots of players; easy transfer; easy
entry and exit; small investment; volatile; risky
but high returns; short term;
63
Review Questions & Answers
• What are the differences between investing in
real estate and investing in stock market?
– Refer to previous answer
64
Review Questions & Answers
• Investing in debt instruments is different from
investing in equity instruments. What are the
main differences in the nature of debt and
equity instruments?
– Refer to previous answer
65
Review Questions & Answers
•
Explain the difference between equity and
debt instruments
•
Refer to previous answer
66
Review Questions & Answers
• What are the features of sukuk that are globally
acceptable?
– Should be asset backed
– Should not be based on debt
67
Review Questions & Answers
• Do you think harmonization of global Shariah
opinions would enhance further development
of Islamic finance industry?
– Open question
68
Review Questions & Answers
• When the core business of a company is Shariah
compliant, it may still have income from non-Shariah
compliant sources. For such companies, the Shariah
Advisory Council of the Securities Commission,
Malaysia has issued four benchmarks that set the
maximum level of non-Shariah income that could be
tolerated for such companies to be considered as
Shariah-compliant stock. Briefly explain each of the
four benchmarks.
– Refer to previous answer
69
Review Questions & Answers
What are the main features of investments in
– Real estate; and
– Securities?
Discuss their differences
Real estate: physical properties; not liquid; no structured
market; information not readily available; not easily
transferable; requires third party or real estate agents;
immobile; huge in size; value depends on state of
development in the surroundings; location; view; size
and shape; long term; appreciating in value
70
Review Questions & Answers
• Securities: two types of securities- equity and
debt; structured markets; complete information
available; prices fluctuate wildly; price is
known; lots of players; easy transfer; easy
entry and exit; small investment; volatile; risky
but high returns; short term;
71
Topic 6:
Insurance
And Takaful Schemes
72
Review Questions & Answers
• Describe the roles of insurance and takaful in wealth
planning
– Insurance and takaful are very important for wealth
preservation and distribution as they create an instant estate
with a small premium
– It helps in case of sudden death; temporary or permanent
disability in providing
•
•
•
•
Income replacement needs
Funeral expense needs
Debt repayment needs
Education needs
73
Review Questions & Answers
• Explain the differences between the underlying
principles of insurance and takaful contracts
– Insurance contract between the company and the
client is one of indemnity
– Takaful contract is one among the participants who
are willing to donate part of their contributions to
compensate losses incurred by any participant.
This donation is called tabarru’. The company is
only the manager or operator.
74
Review Questions & Answers
• Briefly compare the differences in the takaful models
– Mudharabah model where the company is the operator
(mudharrib) and the group of participants is the provider of
capital (rabbul mal). The company shares the underwriting
surplus and the investment profits with the participants
– Wakalah model – company takes an upfront fee for
managing the takaful business (underwriting and
investment plus the operations). The company may share
the profits from investment if it only takes fee for
underwriting and operations.
– Wakalah-waqf model – similar to wakalah model but the
donation portion is used to create waqf fund which is used
to pay off losses incurred by participants.
75
Review Questions & Answers
• Explain the main differences in the life
insurance contracts
– Term life –
•
•
•
•
For a specific period.
It is least expensive.
Can terminate and renewed at a higher premium
Could be until age 65 or 75 or 100 with no renewal
guarantees
• To remain insured the insurer issues renewable term
insurance which will be converted to permanent
coverage
76
Review Questions & Answers
– Whole life – is for insured’s whole life time
•
•
•
•
•
Very long period such as 88 or 90 or 100 years
Is a form of permanent insurance
It has element of savings called cash value
Straight life – premium payable as long as insured lives
Limited-pay life policy – premium payable for specific
period say 20 years or until 65
• After that no payment needed but insured is covered
until death
77
Review Questions & Answers
• Endowment is another form of permanent
insurance similar to whole life.
– The only difference is that the contracts provide
death benefits for a specified period of time.
– It has cash value and insured is paid face amount at
the end of the period if insured is still alive.
78
Review Questions & Answers
• Investment-life insurance contracts is different
from any other life insurance contracts
– The premium is divided into two accounts –
investment account and risk account
– Investment account belongs to insured
– Risk account belongs to company who will
conduct operations and pay off compensations.
– At death the insured party will get the investment
account plus the face value of the risk account
– The same as investment link insurance
79
Review Questions & Answers
• List the main differences between the
conventional insurance operations and those of
takaful (Islamic insurance).
– Insurance is a contract of indemnifying the policy
holders from the risks related to the policy.
Takaful is the mutual sharing of risks and
compensating those that face any hazards
– Insurance involves ambiguity (al-gharar),
gambling (al-maisir) and interest bearing
investments (riba). Takaful avoids all three
80
Review Questions & Answers
• Explain the concept of tabarru’ as is used in
takaful.
– Tabarru’ comes from the Arabic root word “albirr” which means “righteousness”. Tabarru’ is a
sincere or voluntary donation by takaful
participants from part of the contribution for a
policy. The participants have no right to the
amount donated and will not receive any benefit
out of it because he has “given up his right on it”
This is the part that is managed by the takaful
operator to pay out claims.
81
Review Questions & Answers
•
What are the means available today that can
help us protect our wealth?
–
–
Insurance and takaful
There are available takaful products that are
meant to compensate losses on property due to
fire, theft, and where a piece of property is being
purchased under some financing arrangement,
the purchaser can have a policy that would pay
out the total financing in case of death or
incapacitation of the purchaser
82
Review Questions & Answers
• There are three main models of takaful in operation
today. Describe the basic Quranic principle that
underlies all the different takaful models.
– The basic Quranic principle of “Ta’awun” or helping one
another in righteousness and piety is the underlying
principle that is being employed in formulating takaful
models. [Surah Al-Maidah (5): verse 3)] which means,
“Help ye one another in righteousness and piety, but help
ye not one another in sin and rancour”
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Review Questions & Answers
• Explain in some detail the operations of one of
the models.
– Refer to the previous answer
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Topic 7:
Estate Planning
85
Review Questions & Answers
 What is the purpose of estate planning and why is it
important to have a plan?
 Estate here means all the movable and immovable
properties of an individual
 Estate planning therefore concerns the various steps to be
taken in order to accumulate, conserve, enhance and
distribute the estate of the individual. In Islam, it also
includes cleansing or purifying the estate which involves
voluntary and compulsory distribution and after death,
the implementation of the law of inheritance.
 It is very important to have a plan so that the wishes of
the individual can be fulfilled and his dependents are well
taken care of.
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Review Questions & Answers
What are the most important components of a Will?
Briefly explain the purpose of each component.
 A will is a declaration of the intentions of a testator (owner
of an estate) with respect to his property which he desires
to be distributed upon his death.
It should include
The list of his properties ( to know what he has as property)
The list of beneficiaries and the proportions of the property he
allocated (to whom should be given)
The administrator or executor of the will (to execute his will)
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Review Questions & Answers
When does a Will take effect and can one
change his Will? If so, how many times?
A will takes effect only after the death of the
testator
One can change his will any number of times until
his death
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Review Questions & Answers
• What is the “Power of Attorney”? When does
it become necessary? Who can get it?
– It is an instrument created by the person granting
the power of attorney (Donor) in favour of a
person or persons named by the Donor in the
power of attorney instrument (Donee)
– It becomes necessary when the Donor may not be
available to execute his plan or transaction
– The person named by the Donor in the instrument
of the Power of Attorney
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Review Questions & Answers
• Differentiate between a contentious and noncontentious Probate.
– Non-contentious Probate is when the deceased has
left a Will and named an executor, or if all the
beneficiaries have consented to a particular
executor, even if his name is not mentioned in the
Will
– Contentious Probate is when the executor is not
named in the Will or when the beneficiaries do not
give consent to the executor.
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Review Questions & Answers
• Differentiate between a Trust and Will
– Will is a declaration of the intentions of an estate
owner on how his estate is to be executed when he
dies.
– Trust is the right given to a person or persons to
manage or handle an interest (could be a property
or anything of value) on behalf of another person
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Review Questions & Answers
• What are the roles of a Representative in the
administration of an estate?
– He has to fulfil all the intentions of the testator
according to the Will
– Essentially, he has to ensure that the estate is well
managed, transacted and distributed to the rightful
beneficiaries
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Review Questions & Answers
• Explain the differences between the Contested
and the Non-Contested Beneficiaries
– Non-contested beneficiaries are those whose
names have been listed and their proportions of
estate have been allocated
– Contested beneficiaries are those whose names are
not listed, these may come from spouses,
unmarried daughters, infant sons and/or mentally
or physically disabled minors who are incapable of
looking after themselves
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Review Questions & Answers
 Islamic Law of inheritance seems to give favour to
males than females. What seems to be the rationale?
 Islamic law of inheritance is based upon the
responsibilities of the males over the females. This is
clear from the Quranic injunctions
 The husband for instance are to provide everything for
the wife even if the wife has her own income and the
wife does not have to share her income if she does not
want to. The husband can only use her income if she
consents
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Review Questions & Answers
Can somewhat give away his property
according to his own personal preference?
He can do so while he is still alive and not on his
death bed
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Review Questions & Answers
A man dies leaving a wife and a son. What are
the proportions of the estate that the wife and
the son should get?
The wife should get 1/8, and the rest goes to the
son
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Review Questions & Answers
A lady leaves her husband, her father and two
daughters. What proportions of her property
will each get?
 husband gets ¼ or (3/12) two daughters get 2/3 or
(4/12 each) and father will get the residue which is
1/12. This is the case where the father will not get
his fixed share of 1/6.
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Review Questions & Answers
•
List the main features of the Islamic law of
inheritance (faraid).
–
Distributed based on responsibilities, need and
nearness or closeness to the deceased
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Review Questions & Answers
• Explain why it forms the basis of estate
distribution in Islam.
– Because it is comprehensive, covers all the heirs
and is essentially Quranic
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Review Questions & Answers
• A man dies and leaves behind two wives, a son, two
daughters and a brother from the same parent. If his
total estate is worth USD100,000 how much will each
of the beneficiaries get?
– The two wives will share 1/8 or 1/16 each or 2/32 each
– The two daughters and the son will share 7/8 in the
proportion that the son will get two portions and the
daughters one each. So, 7/8 to be divided by 4 which is
7/32 each. So the son gets 14/32 ($43,750), the daughters
7/32 ($21875) each and the wives 2/32 ($6250) each
– The brother does not get anything as he has been blocked
by the son
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Review Questions & Answers
•
The Islamic law of inheritance is derived
mainly from the Qur’an. List down the main
principles of the law
–
See the previous answer
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Review Questions & Answers
•
A woman dies and leaves behind a daughter, a
brother from the same parents, two granddaughters
and a grandson who are the children of her late son.
If his total estate is worth USD100,000 how much
will each of the beneficiaries get?
–
–
–
–
Daughter will get ½ = $50,000
Grandson and 2 granddaughters will share the other half
with the grandson getting 2 portions and granddaughters
get one portion each. The brother gets nothing.
So the grandson gets ¼ = $25,000
The granddaughters get 1/8 each or $12,500
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Topic Eight:
Retirement planning
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Review Questions & Answers
• What do you understand by retirement
planning?
– Retirement planning is a comprehensive process of
reviewing and analysing our assets, liabilities,
saving and investment strategies to ensure there is
sufficient income for all our needs when we retire.
– In other words, based on the wealth that we have
we would like to make a comprehensive plan to
ensure we have enough during our retirement.
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Review Questions & Answers
• Why is retirement planning becoming more important
now?
– In the past, the average income level of individuals were
not high enough to warrant a comprehensive plan.
– Secondly, the average life expectancy has significantly
increased due to advancement of medicine and
improvement in quality of life.
– Thirdly, there is also an increase in the cost of living
especially medical, which requires proper plan for healthy
life.
– Fourthly, there is significant increase in the average income
level of society that warrants a comprehensive plan to meet
all the needs of modern living.
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Review Questions & Answers
• There are many factors that lead to the need
for retirement planning. List four of them.
– Refer to previous answer
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Review Questions & Answers
• Explain the six stages of retirement planning process.
– The six stages of retirement planning process are:
• Setting retirement plan goals (setting retirement goals and the
desired life style – they must be specific, realistic and measurable)
• Obtain necessary information to determine retirement needs
(information pertaining to financial statement, required retirement
income, resources available, interest and inflation rate, investment
opportunities – will help achieve the goals set above) These
information will be necessary to calculate the future income needs
using the Replacement income method or the Expense method
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Review Questions & Answers
• Analyse information and calculate saving needed to
meet the objectives (we need the cash flow statement
showing client’s current annual sources of income and
uses of cash, annual budget listing of present and future
income, review of all available assets that will be
utilized to meet retirement needs)
• Plan the distribution of the income (must take into
consideration the risk appetite, the inflation rates, etc)
• Implementation of the plan
• Reviewing the plan (to revisit and rebalance the
strategies)
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Topic Nine:
Tax Planning and Management
109
Review Questions & Answers
• What are the criteria used to evaluate a tax system?
– Certainty – All tax liabilities should be certain and not
arbitrary
– Fair – All transactions should be treated fairly for tax
purposes
– Efficiency – The tax system should be able to generate the
amount of revenue required by the Government
– Low compliance cost – Tax laws should be simple so that
compliance costs can be kept to a minimum
– Flexibility – Aspects of the tax system can be varied
quickly to have an immediate impact and to achieve other
economic objectives
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Review Questions & Answers
• Define the following terms
–
–
–
–
–
Chargeable income
Scope of taxation
Tax rebates
Tax exemptions
Chargeable income = income that is taxable which is gross
income less all relief allowed
– Scope of taxation = the definition of income that is taxable.
It depends on whether the person is a resident of the
country or not and that his income is earned from activities
conducted in the country or remitted from outside. If a
person is a resident then all income he drives from the
country or remitted from abroad will be taxable.
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Review Questions & Answers
– Tax rebate = deduction from the tax charged. E.g.
tax rebate is granted to individuals whose
chargeable income is less that $3,500. The rebate
is fixed at say $350.00
– Tax exemption = income that is not taxable, such
as pension, interest payment on certain loans
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Review Questions & Answers
• Explain the following terms
–
–
–
–
–
–
Deductible expenses
Tax avoidance
Tax evasion
Double deductions
Capital allowance
Deductible expenses = expenses that can be
deducted from chargeable income, such as expense
on computer, books, medical bills for parents, etc.
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Review Questions & Answers
– Tax avoidance – legal way of reducing tax by using
lacunae or means of escape or loopholes in tax laws
– Tax evasion – illegal way of evading the payment of tax
– Double deductions – double deductions are special
deductions given to some expenses. It means that if you
spend $20,000 then you get a tax deduction of $40,000
– Capital allowance – capital expenditure on machinery,
buildings for certain businesses can be deducted from the
income before computing the chargeable income
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Review Questions & Answers
• Explain the advantages of tax planning
– Tax planning is a way of organising businesses in order to
reduce the payment of tax in a legal way. E.g. one may
create subsidiaries in a way that allows for more tax
deductions and hence reduce payment of tax.
– There are many ways that can be done to reduce tax in a
business environment. E.g. the government may want to
encourage certain industry and hence gives tax holidays
provided certain conditions are fulfilled. Then one should
take advantage of such advantages by fulfilling the
necessary conditions from the beginning so that when it
comes to tax computation, you are able to comply with the
requirements to reduce the tax.
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Topic :10
Zakat (zakah)
116
Review Questions & Answers
• Describe the conditions of Zakat payment
– Must be a Muslims
– Giver is freeman and not a slave
– The wealth has reached the nisaab. Nisaab is the amount upon which
the zakat is due and obligatory
– A minimum duration of 1year (hawl) has passed since ownership of the
wealth concerned
– Ownership of the wealth is known
– The wealth is fully owned (milkut taamm)
– When a person dies, his zakat due must be paid from the inheritance
before distribution. When a person dies four payments need to be
made:
•
•
•
•
Debts which include zakat due.
Wasiyyah – a will
Burial expenses
inheritance
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Review Questions & Answers
• Describe the eight (8) categories of people who can
receive Zakat:
–
–
–
–
–
Needy Muslims (faqeer/fakir)
Poor Muslims(miskin)
A’amil
Mu-allafatu quloobohum (new converts to Islam)
Fir-riqaab- slaves who are Muslims who are mukaatab
slaves. They are slaves who have been allowed by their
masters to work towards freeing themselves and paying
their masters the amount due in instalments
– Al-ghaarimeen- Muslims who are in debt
– Fisabilillah – strive in the cause of Allah
– Ibnus-sabil – travellers (musafir) who are travelling for a
pious or permissible purpose, or to return to their own
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country
Review Questions & Answers
• Describe those who cannot received the Zakat
– Non Muslims
– Rich people ; they still can get zakat if the falls under
ghaarim, or the amil of the fisabililah category
– The dependents of those who give zakat provided they are
poor and no longer considered his dependants
– The families of the Prophet (pbuh)
– Slaves cannot receive zakat because they already receiving
maintenance from their masters.
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Review Questions & Answers
• What are the TWO types of Zakat?
– Zakatul-Maal ( zakat on wealth) namely gold, silver,
currencies, stock in trade or business merchandise,
livestock (al-an’aam), cereal and fruits like dates and the
dried grapes.
– Zakatul-fitr - zakat on the person paid during the month of
Ramadhan. Zakatul-fitr is approximately 2.3kg of the
staple food of the country or its value.
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Review Questions & Answers
• What are the conditions of Zakatul-fitr?
–
–
–
–
–
Giver is a Muslim
Is a mukallaf
Is a free man and not a slave
Able to pay the zakatul-fitr
He is living during or before the sunset on the eve of eidul-fitr on the
alst day of Ramadhan. If a child is born after the sunset on the eve of
eidul-fitr, zakat is not obligatory on him since the eve is the start of 1st
shawal.
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Review Questions & Answers
• What are the characteristics of Waqf?
– Irrevocability – consensus among Muslim jurist that the founder cannot
revoke the dedication if the property has already been declared a waqf
– Perpetuality – majority of Muslim jurist believe waqf must be perpetual
once it is created and this will ensure that no confiscation of waqf
property by government or by individuals.
– Inalienability- feature originates as the property of waqf is transferred
to Allah(swt) although the usufruct derived from it can benefit man.
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Topic :11
Waqf
123
Review Questions & Answers
• What are the 3 types of waqf
– Waqf Khayri (public waqf) – is an endowment made by the founder to
support the general good and welfare of poor and the needy in society.
– Al-waqf al-Dhurri, Alwaqf al-ahli and waqf ala-wlad – are same and
refer to family waqf. The founder endows his property to his children,
grandchildren, relatives or other persons whom he specifies. If the
beneficiaries not longer alive, then waqf property will be given for
public welfare purposes. Encourage by the Prophet (pbuh)
– Al-waqf al-mushtarak (combined public and family waqf) – created by
the founder to support both the public and his family.
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Review Questions & Answers
• Describe the conditions for validity of waqf
– Founder must be ‘aqil (sound mind), baligh (adult) and hurr
( a free man/women) and capable to transfer the ownership
to the ownership of Allah.
– Dedicated property can either be movable or immovable
– Appoint a muttawalli (trustee) either himself or someone
else
– Beneficiaries can be specified by the founder in his waqfiah
(waqf deed), it can be either his family members, society
– Creation can be either oral i.e verbal or written
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Review Questions & Answers
• Describe the endowment Assets (al Mawquf)
– Immovable and movable property – land field, farms,
buildings., mosque are immovable. Movable are cattle and
implements of animal husbandry, books, money, crops,
weapons, and share of company.
– Waqf sahih (sound waqf) and waqf ghair sahih (unsound
waqf)- waqf sahih is the waqf upon mulk land i.e. Privately
owned freehold property over which the owner held
complete rights of alienation. Waqf ghair sahih are state
owned land and whose property belongs to the empire’s
public treasury
– Direct and indirect waqfs – direct waqf is a waqf created to
serve the people free of charge like mosque, schools. The
creation of indirect waqf is needed in order to provide
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running expenses e.g. Renting properties.
Review Questions & Answers
What are the restrictions to waqf
– irrevocability – founder cannot revoke the dedication if the
property has already been declared as waqf
– Perpetuity – waqf created must be perpetuity this will
ensure no confiscation of the property by the government
or individual
– Inalienability of the Waqf- once the property of waqf is
transferred to Allah (swt) no one can ever become owner of
it. The usufruct derived from it can benefit man as
intended.
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Review Questions & Answers
•
What are the TEN (10) stipulations for the
creations of Waqf
–
–
–
–
–
Ziyadah (increase) and Nuqsan (decrease) –the founder can increase the
share of one beneficiary or decrease the share of another. E.g. Equal share
for mosque and hospital. Hospital requires more fund, the founder can
change the revenue to increase for hospital and reduce for mosque.
Idkal (addition) and Ikhraj (removal) – add new beneficiaries and remove
another- flexibility for public waqf.
I’ta a (granting) and Hirman(dispossession) – allows founder to grant all or a
portion of his waqf revebue to whomever he chooses for a specific period
and dispossess. Revenue for scholarship can be channelled to heart patient in
hospital.
Taghir(replacement) and Tabdil (conversion) – founder can replace use of
the waqf revenue to purchase of hospital equipment instead of rental
maintenance while tabdil allows the founders the right to change the waqf
property. Eg.convert unproductive land to housing to gain revenue.
Istibdal (substitution) and Ibdal (exchange). Ibdal actual selling of non- 128
profitable waqf property while Istibdal is the purchase of another property.
Review Questions & Answers
• Describe the modes for Immovable waqf
– Hikr (long lease right)- was developed to prevent the waqf property from being
sold in case it came to any harm. The right is given to the trustee to lease the
waqf property on a long lease at a nominal periodic rent. The right is sold for a
lump sum, which is equal to the value of the waqf property in advance and with
a nominal periodic rent paid tot he trustee
– Al-ijaratian (the lease with dual payment) – resulted from destruction of some
fo waqf properties by fire in Constantinople (1020AH) dual method of finance
and reconstruct these damage waqf properties, This is also a long lease contract
with a large lump sum to be paid in advance which is approximately equal to
the value of the waqf property for reconstruction and with a nominal periodic
rent.
– Al-istibdal (substitution)- emerge from the fact that the waqf property cannot
be sold. Muslim jurist agrees to exchange the waqf property with another
property or for money in order to renovate the old ones. If the waqf property
can no longer generate revenue. It provides liquidity and the disadvantage is
that it lost half of the waqf property or its good location.
– Al-murshad mode_ in which advance lump sum is paid by the lessee to be
credited by the waqf department towards the agreed upon periodical rent
applicable after reconstruction. Advantage land is developed, disadvantage is129
that the lessee will claim his ownership of this land after a long time
Review Questions & Answers
• Describe the modes for movable waqf
– Jewellery can be created as waqf and no zakat for waqf
property.
– Measurable and weightable waqf proeprty could be sold
and its proceeds can be invested in mudarabah ie changing
its status from crops to cash waqf.(wheat seed grain given
to poor for cultivation and taken back and given to others,
in the way perpetuality of the waqf is maintained.
– Cash waqf (liquid form) can utilised Mudarabah
partnership. Imam Zufar who approved the validity of
darahi (money) to dedicated as waqf says that the money
deposited as a waqf can be invested in mudarabah and the
return to be used for a pious purpose.
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Topic 12:
Issues Related to Wealth Planning and
Management
131
Review Questions & Answers
• Describe the users and providers of wealth planning
services
– Users of wealth planning services are high net worth
individuals who want to ensure that they will be able to
enhance their wealth; corporations which are keen to
enhance the assets they have, either for the benefit of
shareholders or for the employees retirement plans
– Providers of wealth planning are professionals who know
about wealth planning procedures and strategies. These
could be individuals or special firms with such expertise.
Examples of such professionals are bank managers,
insurance / takaful agents, unit trust agents, trustee agents
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Review Questions & Answers
• What in your opinion is the most important
function of governing bodies in the wealth
management industry?
– To ensure that the wealth planning professionals
are truly qualifies and certified
– To protect the interest of clients
– To ensure there is proper training programmes and
qualifications for wealth planning professionals
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Review Questions & Answers
• Is there really a need for regulatory control
when you find that the banking and other
financial sector has gone into deregulation
instead?
– Although wealth planning is something quite
recent, there should be efforts towards normalising
the activities in the industry. This is very important
because clients may loose out if the professionals
are not genuine
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Review Questions & Answers
•
Why do you think ethics and the code of
conduct is considered essential in the wealth
planning and management industry?
–
To achieve a high level of integrity, objectivity,
competence, fairness, confidentiality,
professionalism and diligence
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Review Questions & Answers
• Do you agree with Burke Christensen’s
suggestion on “Professionalism” and why?
– Burke Christensen suggested, “A professional is a
person engaged in a field that requires (1)
specialised knowledge not generally understood by
the public, (2) a threshold entrance requirement,
(3) a sense of altruism, and (4) a code of ethics”
Discuss
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Thank you
and all the best to all of you
137