ISLAMIC
FINANCIAL
PLANNING
Haliza Abu Bakar
Royal Bank of Canada
CONTENTS
• Islamic Financial Planning
includes:
 Savings
 Zakat Planning
 Debts – Financing & Credit
Cards
 Investment
 Takaful
 Estate Planning
ISLAMIC FINANCIAL
PLANNING
• Discipline of wealth
management:




Protect
Preserve
Accumulate
Distribute
• Main differences with
conventional financial
planning?
SAVINGS
• Main difference between
saving in Islamic banking &
conventional banking?
ABSENCE OF
INTEREST!
• Profit instead of interest!
• So how does it work?
SAVINGS
• Concept of Guaranteed
Custody or Profit Sharing
• Profit rate is not fixed;
depends on the returns of the
investment
• Profit rate for the Islamic
bank ranges from 1.45% - 4%
in 2004
INTEREST VS PROFIT
INTEREST
PROFIT
Rate based on the amount Rate based on the amount
of money involved
of profit obtained
Payment is fixed
Distribution depends
totally on the profitability
Amount does not increase
Distribution of profit
even if profit obtained increases in accordance to
manifold
the amount of profit
obtained
SAVINGS : ISLAMIC
PERSPECTIVE
• Islam does not favour excessive
spending
• Nor does it favour hoarding of
money
• Therefore we need to find the
right balance : Spend, Donate,
Save
WHY SHOULD I SAVE
•
•
•
•
•
•
•
•
Basic Needs
Pilgrimage
Umrah
Korban
Peace of Mind
Financial Independence
Aid for Others
Charities
ZAKAT
ZAKAT
ZAKAT FITRAH
ZAKAT ON WEALTH
ZAKAT FITRAH
• Can be paid in the form of staple
food; rice, or in the form of money
• For 1425H/2004, the rates were:
2.268 kg
$2.84 (according to the
value of fragrant rice)
$1.93 (according to the
value of Thai rice)
(Source: www.muib.gov.bn,
Brunei Islamic Religious Council)
ZAKAT ON WEALTH
• Depends on the amount of
wealth that you have and how
long you had it for
• Your wealth has to reached it’s
nisab (the minimum amount
upon which Zakat is payable)
and reached it’s haul (one
lunar year)
ZAKAT ON WEALTH
• The minimum amount payable
for 1426H/2005 is $2023.00,
upon which 2.5% of Zakat is
taxable
• Islamic calendar (354 Days)=
2.5%
• Normal calendar (365 Days) =
2.577%
• Changes according to price of
21K gold in the market
HOW TO CALCULATE
DATE
DEBIT
01.01.04
05.02.04
31.12.04
BALANCE
$5,000
$5,000
$1,000
04.04.04
15.11.04
CREDIT
$4,000
$5,000
$4,000
$9,000
$5,000
$200
$5,200
• Say in 2004, minimum limit = $2023
• Take minimum amount in account =
$4000. Why?
• Hence zakat = 2.577% x $4000 =
$103.08
• Need not be from the account itself
THE MEANING BEHIND
ZAKAT
• Affects three areas:
 Morale
 Economy
 Social Surroundings
• Protection for the
Hereafter
• Wealth do not belong to us
• “The More You Give, The
More You Receive”
ZAKAT IN THE QURAN
• 30 places in the Quran stressing the
importance of Zakat
• “… And Allah said: “I am with you if
you perform Prayer and give Zakat
and believe in My Messengers:
honour and assist them, and lend a
good loan to Allah, verily, I will
expiate your sins and admit you to
Gardens under which rivers flow (in
Paradise). But if any of you after
this, disbelieved, he has indeed
gone astray from the Straight
Path.”” (Al-Maidah: 12)
IN THE RED
• From an Islamic perspective,
being in debt is not encouraged
• Greatest sin is to die in a
state of debt & no asset to
pay it off
• Conventional loans – interest
bearing and can increase the
burden of the person!
• However, Islam encourages us to
help one another…
FINANCING
• … hence under Islamic
Banking = Financing!
• Profit rate again replaces
interest rate
• So why is the profit rate
under Islamic financing
usually higher than the
interest rate for a
conventional loan?
FINANCING
• Under Islamic financing, the
customer is not usually penalized
for late payment
• Under the “Reducing Balance”
concept, if you settle your loan
before the maturity of the period,
you do not have to pay the profit
due to the bank for the remaining
years
• Financing restructure depends on
the financial capability of the
client
CREDIT CARDS
• Different models used; one is
Guarantee & Agency Concept –
Card issuer (bank) is
nominated to guarantee the
cardholder’s payment to the
acquirer in any transaction
undertaken
• Monthly repayment usually
deducted automatically from
your account
CREDIT CARDS
• No interest; but the
Islamic banks are allowed
to charge the appropriate
fees e.g. administration
fees & annual fees
• Some transactions are not
allowed e.g. purchasing of
alcohol, gambling purposes
etc
INVESTING
• Why invest? Can get higher
return than savings BUT
higher risk!
• Limited Islamic investment
vehicles compared to
conventional; nevertheless
GROWING!
INVESTING
• Investing is encouraged in
Islam
• Why? Asked to make an
effort to provide a
comfortable and good life
for ourselves and those
depending on us
• BUT there are guidelines
that need to be follow
SUKUKS
•
•
•
•
Islamic Bonds
Interest-free
Asset-backed securities
Different concepts
underlying the bonds
contract, which are in line
with Shariah law
EQUITIES
• Must undergo a screening
process to comply with
Shariah guidelines; usually
done by the Shariah
Supervisory Board
• Example, the primary
activities of the companies
must not deal with
gambling, alcohol, pork etc
UNIT TRUSTS
• Must also undergo the
same screening process
• Diversification = Reduce
Risk
• Your portfolio will be
managed on your behalf by
professionals of investment
expertise
TAKAFUL
• Concept? Based on a
financial transaction of
mutual cooperation
• Therefore structured using
the concept of Profitsharing
• Aimed not only as a
protection device, but also
a savings scheme
ESTATE PLANNING
• Distribution in Islam clear &
definitive
• Before distribution to heirs,
ALL debts must be paid
• Only 1/3 of estate can be given
out through a will
• Final balance will be
distributed according to
Faraidh, Islamic law of estate
distribution
CONCLUSION
• Possible to do
Financial Planning
with the available
Islamic products
• Benefits not only in
this world, but also
the Hereafter
“ A Muslim should prepare
himself for the next world
as if he is going to die
tomorrow, but at the same
time work hard to improve
all his worldly comforts as if
he is going to live forever ”