1. ISLAMIC FINANCIAL PLANNING Haliza Abu Bakar Royal Bank of Canada

2. CONTENTS Islamic Financial Planning includes: Savings Zakat Planning
Debts – Financing & Credit Cards
Investment
Takaful
Estate Planning

3. ISLAMIC FINANCIAL PLANNING
Discipline of wealth management:
Protect
Preserve
Accumulate
Distribute
Main differences with conventional financial planning?

4. SAVINGS
Main difference between saving in Islamic banking & conventional banking? ABSENCE OF INTEREST!
Profit instead of interest!
So how does it work?

5. 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

6. 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

7. 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

8. WHY SHOULD I SAVE Basic Needs Pilgrimage Umrah Korban Peace of Mind
Financial Independence
Aid for Others
Charities

9. ZAKAT

10. 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: Brunei Islamic Religious Council)

11. 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)

12. ZAKAT ON WEALTH
The minimum amount payable for 1426H/2005 is $ , 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

13. HOW TO CALCULATE Say in 2004, minimum limit = $2023
DATE
DEBIT
CREDIT
BALANCE
$5,000
$1,000
$4,000
$9,000
$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

14. 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”

15. 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)

16. 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…

17. 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?

18. 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

19. 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

20. 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

21. INVESTING
Why invest? Can get higher return than savings BUT higher risk!
Limited Islamic investment vehicles compared to conventional; nevertheless GROWING!

22. 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

23. SUKUKS Islamic Bonds Interest-free Asset-backed securities
Different concepts underlying the bonds contract, which are in line with Shariah law

24. 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

25. 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

26. 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

27. 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

28. CONCLUSION
Possible to do Financial Planning with the available Islamic products
Benefits not only in this world, but also the Hereafter

29. “ 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 ”