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ISLAMIC ISLAMIC FINANCIAL FINANCIAL PLANNING PLANNING
Haliza Abu BakarHaliza Abu BakarRoyal Bank of CanadaRoyal Bank of Canada
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CONTENTS• Islamic Financial Planning
includes: Savings Zakat Planning Debts – Financing & Credit
Cards Investment Takaful Estate Planning
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ISLAMIC FINANCIAL PLANNING
• Discipline of wealth management: Protect Preserve Accumulate Distribute
• Main differences with conventional financial planning?
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SAVINGS
• Main difference between saving in Islamic banking & conventional banking? ABSENCE OF INTEREST!
• Profit instead of interest!• So how does it work?
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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
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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
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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
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WHY SHOULD I SAVE
• Basic Needs• Pilgrimage• Umrah• Korban• Peace of Mind• Financial Independence• Aid for Others• Charities
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ZAKAT
ZAKAT
ZAKAT FITRAH ZAKAT ON WEALTH
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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)
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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)
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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
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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
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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”
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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)
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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…
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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?
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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
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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
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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
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INVESTING• Why invest? Can get
higher return than savings BUT higher risk!
• Limited Islamic investment vehicles compared to conventional; nevertheless
GROWING!GROWING!
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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
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SUKUKS• Islamic Bonds• Interest-free• Asset-backed securities• Different concepts
underlying the bonds contract, which are in line with Shariah law
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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
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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
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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
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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
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CONCLUSION
• Possible to do Financial Planning with the available Islamic products
• Benefits not only in this world, but also the Hereafter
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“ “ 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 ””