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 of money involved Rate based on the amount of profit obtained Payment 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 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 Say in 2004, minimum limit = $2023 DATE DEBIT CREDIT BALANCE 01.01.04 $5,000 05.02.04 $1,000 $4,000 04.04.04 $9,000 15.11.04 31.12.04 $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 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 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 ”