ISLAMIC ISLAMIC FINANCIAL FINANCIAL PLANNING PLANNING

Haliza Abu BakarHaliza Abu BakarRoyal Bank of CanadaRoyal 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 of money

involved

Rate based on the amount of profit

obtainedPayment is fixed Distribution depends

totally on the profitability

Amount does not increase even if profit

obtained manifold

Distribution of profit increases in accordance to 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$2023.00, upon which 2.5%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

• 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

DATE DEBIT CREDIT BALANCE

01.01.04 $5,000 $5,000

05.02.04 $1,000 $4,000

04.04.04 $5,000 $9,000

15.11.04 $4,000 $5,000

31.12.04 $200 $5,200

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!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 Profit-sharing

• 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 A Muslim should prepare himself for the next worldhimself for the next world

as if he is going to die as if he is going to die tomorrowtomorrow, but at the , but at the

same time work hard to same time work hard to improve all his worldly improve all his worldly

comfortscomforts as if he is going as if he is going to live foreverto live forever ””