Chapter 1 Introduction to IFP

ISLAMIC
FINANCIAL PLANNING
Mahyuddin Khalid 1
Introduction to Islamic Financial
Planning

Chapter Outline
Content
Financial Planning
Maqasid al-Shariah: Classification Of Human Needs
What influences a person’s financial plan?
Islamic Financial Planning
Pillars of Islamic Financial Planning
Objectives of Islamic Financial Planning
Financial Life Cycle
Financial Planning Process
Concept of Wealth in Islam
Concept of Debt in Islam
2

What’s so important about Financial
Planning?
Financial planning is
a process of
setting goals (short,
medium or long
term)
developing a plan
putting the plan into
action,
and
achieving
goals
3

Planning?
It’s creating a
roadmap for
handling
everything you do
with your money
Spending
Savings
Using credit
Investing
4

Planning?
From the items that
you buy and save
for, some are needs
and some are
wants:
Needs
•the very basic things we must have
to survive.
Wants
•the things that make life more
interesting and fun (but you could
live without them if you had to).
From your list,
which are NEEDS
and which are
WANTS?
5

Maqasid al-Shariah: Classification Of Human
Needs
Maqasid al-Shariah can be
categorized into descending
order of importance
Beginning with the essential
(masâlih /daruriyyat), followed
by the complementary needs
(hajiyyat), and then the
embellishment (tahsiniyyat). Masâlih/ Daruriyyat
• Essentials that are considered as
vital for the founding of wellbeing
in this world and the Hereafter
Hajiyyat
• Complementary needs of the
community for the achievement
of its interest and the proper
functioning of its affairs
Tahsiniyyat
• Embellishment is of the nature of
desirability in order to attain
refinement and perfection in the
customs and conduct of people at
all levels of achievement.
6

Classification Of Human Needs: Masālih
/Daruriyyat
• The essentials (masālih /daruriyyat) are particulars that are required
and considered as vital for the founding of wellbeing in this world
and the Hereafter.
• If society in some way neglects them, the outcome will be anarchy
together with disorder of the functionality of the society which will
result in total collapse
• The essential masālih/ daruriyyat are further divided into five:
• Preservation of faith/religion (Din)
• Preservation of the life
• Preservation of lineage /descendents / procreation (lineage)
• Preservation of property (Mal)
• Preservation of intellect/reason (‘Aql)
• The Shariah seeks to protect and promote these values and validates
measures for their preservation and advancement.
7

Classification Of Human Needs:
Hajiyyat
• The needs (hajiyyat) serve as complementary to the essentials.
• It consists of what is needed by the community for the
achievement of its interest and the proper functioning of its
affairs.
• If it is neglected, the social order will not actually collapse but
will not function well.
• Likewise, it is not on the level of what is indispensable
(daruriyyat).
• As soon as the scope within the essentials has been fulfilled, the
corporations may strive for the second level, the
complementary (hajiyyat) which is deemed beneficial to remove
difficulties, even though it may not pose a threat to the very
survival of normal order
• For example: (A needs maslahah can be elevated to the rank of
the essential maslahah when it concerns the public at large).
8

Classification Of Human Needs:
Tahsiniyyat
• The embellishments (tahsiniyyat) relate to matters which
bestow enhancement in the society and a guide to improved
life.
• This class is of the nature of desirability as they seek to attain
refinement and perfection in the customs and conduct of
people at all levels of achievement.
 Involving in charity or giving donations to the poor and needy;
providing scholarships to the less fortunate students and
providing sufficient, correct and clear information or
advertisement regarding products offered to customers are
some of the examples of Corporate Social Responsibility (CSR)
commitment with respect to achieving the embellishments for
society
9

the effort by
an individual/corporation
in managing their financial affairs
in accordance with the shariah
to meet their life goals
10

Sources in Developing IFP
• Conventional Financial Planning Model
Framework
• Al-Quran
• Sunnah /Hadith
• Ijma’
• Qiyas
Primary sources
• Ijtihad
• Uruf
Secondary sources
11

Why Financial Planning? – Islamic View
Islam as a comprehensive religion – emphasizes worldly life
and hereafter.
Concept of Allah’s bounty – very important in Islam as a
good Muslim is required to have a proper balance between
the fulfillment of his spiritual and worldly obligations.
Muslims are encouraged to plan their life and put effort to
achieve the goal setting before proceeding to “tawakal”.
A Muslim still has to commit to financial planning because
either he would leaves debt or children to the trusted one.
12

Concept of Islamic Financial Planning
The additional activities/areas not found in conventional
 Obligation of zakat
 Takaful planning and
 Assets distribution according to shariah
The prime concern for Muslim investors in investment
planning (wealth accumulation) is to ensure that all
investment activities are shariah- compliant, and
The financing (in conventional is called borrowing) aspect
must be in line with the shariah principles, one of which
and the most important is, no element of riba (interest-
free).
13

Islamic Financial Planning in Al-Quran and Hadith
• " The time! Verily, Man is in loss, except those who believe (in Islam) and do the righteous good deed
and recommend one another to the truth and recommend one another to patience”. (Surah Al Asr: 103,
1-3)
• Importance of time and thus implies that we need to set our goals in life
• "And render to the kindred their due rights, as (also) to those in want, and to the wayfarer. But
squander not (your wealth) in the manner of spendrift. Verily spendrift are brothers of the evil ones and
the evil one is to his Lord ungrateful" (Surah Al Isra : 26)
• Importance of where and how to spend our wealth
• "Whoever works righteousness, man or woman, and has faith, verily, to him will We give a new life, and
life that is good and pure, and We will bestow on such their reward according to the best of their
actions ” (Surah Al Nahl: 96)
• We learned how to work, how to live and the benefits that we will get
Al-Quran
14

Islamic Financial Planning in Al-Quran and Hadith
• According to Al Bukhari and Muslim our Prophet Muhammad S.A.W (pbuh)
mentioned .. " Remember five things before comes five things, healthy
before sick, young before old, rich before poor, spacious before tight, life
before death”
• The Prophet stated “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” (narrated by Al-
Dailani)
Hadith
15

Financial Planning – Islamic View
In Islam, Muslims are discouraged to be in debt.
Greatest sin is to die in a state of debt and no asset to pay
it off.
Therefore in Islam, financial planning can be used as a tool
in managing one’s wealth.
In this perspective, financial planning is therefore a must
and is not only for the high-income earner and rich but
applies to all
16

What influences a person’s financial
plan?
Many factors that can be expected or unexpected:
Financial
Planning
1. Values, Goals,
& Personal
Choices
4. Life Cycle
Needs
3. Lifestyle
Conditions
2. Major Life
Events
17

plan?
The choices you make today
impact your future!
Choices and goals made in the
present may have a significant
impact on your future financial plan.
Life events that affect your financial
plan may be unexpected
Financial
Planning
1.Values, Goals,
& Personal
Choices
2.Major Life
Events
18

plan?
What are examples of lifestyle conditions
that may affect a person’s financial plan?
Marital status
Age
Income
Number of Dependents
Education
Employment Status
Health Status
Economic Outlook
Financial
Planning
3.Lifestyle
Conditions
19

plan?
Life cycle - a
series of stages
through which an
individual passes
during his or her
lifetime
Typical financial life
cycle pattern
applies to most
people and affects a
financial plan
Financial
Planning
4.Life
Cycle
Needs
20

Typical Financial Life Cycle
21
RM
0 20 30 40 50 60 70 80
Years of Age
Income stream
Retirement/
Estate
Tax
Benefits
Savings/
Investment
Liability/ Takaful
Asset Acquisition

22
RM
Approaching
Retirement
Years
Retirement YearsSingle * Marriage * Start and Raise Family
0 20 30 40 50 60 70 80
Years of Age
Stage 1: Basic Wealth
Protection
Stage 3: Wealth
Distribution
Stage 2: Wealth
Accumulation

Financial Life Cycle Stages
23
Stage 1
Stage 3
Stage 2
Stage 1: Basic Wealth Protection
Focus on building financial security
Stage 2: Wealth Accumulation
Head of household has reached peak
earning years, is accumulating wealth, and
approaching retirement
Stage 3: Wealth Distribution
The consumption of wealth, usually
during retirement
Which stage of the
financial life cycle
are you in?

What types of financial planning would occur
during each stage of the financial life cycle?
24
Stage 1
Stage 3
Stage 2
Stage 1: Basic Wealth Protection
(protecting your future)
• Develop emergency savings
• Develop positive credit
• Begin investing in retirement
• Purchase insurance
Stage 2: Wealth Accumulation
(giving it to yourself)
• Investing to build wealth
• Purchasing a home
Stage 3: Wealth Distribution
(giving it to your chosen ones)
• Estate planning

25
Stage 1
Stage 3
Stage 2
What factors or events in a
person’s life could cause
the typical financial life
cycle to change or vary?

Financial Life Cycle Events Activity
People in certain age groups tend to have
similar financial life cycle needs:
26
High school:
13-17
Young adult:
18-24
Adult with or
without children:
25-34
Working parent or
adult:
35-44
Midlife:
45-54
Pre-retirement:
55-64
Retired:
65 and
older
Determine what types of financial
planning may occur for each age
group

Pillars of Financial Planning
Wealth
Protection
Wealth
Accumulation
Wealth
Preservation
Wealth
Distribution
Wealth
Purification
27

Wealth Protection
Concept of protection in Islam – Concept of Takaful
 Takaful means joint guarantee, whereby a group of participants
agree to jointly guarantee among themselves against a defined
loss.
Based on the principle of Ta’awun (mutual assistance) and
Tabarru’ (donation, gift or contribution) where the risk is
shared collectively by the group voluntarily.
Takaful provides guarantee against loss or damage & with
Takaful, Muslims can plan ahead for any
unwanted/unfortunate events.
E.g. General Takaful & Family Takaful
28

Wealth Accumulation
Achieving a reasonable capital growth with the objective of
preserving accumulated wealth.
Involves asset allocation strategies, investment policy and
others.
Channels of investment must be Shariah compliant – free
from elements of gharar (uncertainty), riba (usury), maysir
(gambling) and free from any prohibited elements in
Islam.
E.g. Takaful investment link product, shares, unit trust, gold
and silver, property, mudarabah investment account etc.
29

Wealth Preservation
Protecting wealth against every conceivable financial risks
and treats through sound wealth management – quality
investment etc.
No one should suffer unnecessary losses due to the quality
of investment advice they receive or to a failure to protect
one’s assets.
Islamic view – wealth as a trial and man are responsible as
the trustee to the wealth that ALLAH has given to him. Man
are required to work hard if he wants to acquire wealth.
E.g. Takaful investment link product, shares, unit trust, gold
and silver, property, mudarabah investment account etc.
30

Wealth Distribution
Important discipline in IFP – proper wealth distribution
after death.
Death is inevitable, but many tend to ignore.
Danger of leaving a mess to family members –disputes etc.
E.g. Faraid, Wasiyyah and Hibah.
31

Faraid, Wasiyyah & HibahFaraid
•Distribution of estate after one’s
death according to the Quran.
•Guidelines of estate distribution can
be referred in verses 12 and 176
surah An-Nisa.
Wasiyyah
•Basically means giving a gift to
others in term of wealth, debt and
beneficence of one’s property after
his death.
•However, not for legal heirs &
allowable at maximum of 1/3 of total
assets.
Hibah
•Giving one’s wealth to others
without the expectation of any
replacement or exchange with the
transferring effect on the ownership
during lifetime or executed upon
death.
•Applicable either to family members
(legal heirs) or members who are not
entitled to inheritance.
•Hibah can be used during lifetime
for executed upon death.
32

Wealth Purification
Fundamental concept in IFP
Spending on those in need is a highly commendable form
of ibadah (submission to Allah). The Prophet Muhammad
pbuh declared:
 “A generous person is close to Allah, close to Paradise, close to
people, and far from Hell. However, a miserly person is far from
Allah, far from Paradise, far from people, but close to Hell. Allah
loves more an ignorant man who is generous than a worshipper
who is miserly. (Narrated by At Tarmizi)”
Sadaqa (almsgiving) and Infaq (spending in the service of
God) are voluntary whereas Zakat is obligatory.
33

Islamic Products & Services For IFP
Protection
Family Takaful;
Takaful Plans for
Medical needs
Motor Vehicle
Fire
Financing /
Mortgage plan
Accumulation &
Preservation
Takaful Plans
Family Takaful
Hajj & Umrah
Education
Investment-Linked
Others
Shares
Investment
Account
Gold & Silver
Property
Distribution
Regulatory
Agencies
Shariah Court
Amanah Raya
Berhad
Wealth
Management Firm
Purification
Agencies
State Religious
Council
Zakat Centre
Waqf Centre
34

Objectives of Islamic Financial Planning
Bring prosperity
and blessed life
Provide financial
stability
Achieve
financially
independence
Preparation for
the Hereafter
35

Objective 1 : Bring Prosperity And Blessed
Life
Concern about
halal & haram
of earnings
Understand the
concept of
tawakkal and
redha
Concern about
the barakah
concept
Spend on the
right priorities
36

Objective 2 : Provide Financial Stability
•Lower income
•Intermediate income
•High income
•e.g. al-Rahn,, Debt
management, Tax
planning
•Net worth = Asset -
Liability
•Earnings=Consumption
Identify current
financial
position
Understand
about financial
status
Adopt
appropriate life
style
Solution for
financial
problems
37

Objective 3 : To Be Financially
Independent
•e.g. direct selling,
online-business,
takaful or UT agents
•e.g. pension, EPF,
life annuity
•e.g. Properties,
Shares, Bonds, Unit
trusts, etc.
Having good
investment
(money creates
money)
Having takaful
protection
Having a
retirement
planning
scheme
Having
alternative
incomes
38

Objective 4 : Preparation For Hereafter Life
• e.g.Faraid,
Wasiat (will),
Hibah (gift)
Investing in
knowledge
Performing Hajj
(Pilgrimage)
Paying Zakah
and giving
Sadaqah
(charity) or Waqf
Preparing a
Estate planning
39

Significant of Islamic Financial Planning
40
In
general
Improve standard of
living
Minimize financial
disaster
Ability to invest
optimally
Accumulate sufficient
wealth over time

The Financial Planning Process
Six-step procedure for Financial Planning
 Determine your current financial situation.
 Develop your financial goals.
 Identify alternative courses of action.
 Evaluate your alternatives.
 Create and implement your financial action plan.
 Review and revise your plan.
41

• Determine current financial situation regarding income, savings, living
expenses, and debts
• Prepare a list of current asset and debt balances and amount spent for various
items
• Match financial goals to current income and potential earning power
Step 1: DETERMINE YOUR CURRENT FINANCIAL SITUATION
42

• Financial goals - specific objectives to be accomplished through financial
planning
• Identify feelings about money and the reasons for those feelings
• Determine the source of your feelings about money
• Determine the effects of economy on your goals and priorities
• Make sure that your goals are your own and are specific to your situation
• Financial Goals should be SMART goals
Step 2: DEVELOP YOUR FINANCIAL GOALS
43

SMART Financial Goals
• State exactly what is to be done with the money involvedSpecific
• Write the exact dollar amountMeasurable
• Determine how it can be reached, which is often determined by the individual’s budgetAttainable
• Do not set the goal for something unattainable or unrealisticRealistic
• Specifically state when the goal needs to be reachedTime Bound
44

• Possible courses of action can be:
• Continue the same course of action
• Expand the current situation
• Change the current situation
• Take a new course of action
• Creativity in decision making is vital to effective choices
• “Do nothing” can be a dangerous alternative
Step 3: IDENTIFY ALTERNATIVE COURSES OF ACTION
45

• Consider life situation, personal values and
economic factors in evaluating the alternatives
• The assessment of the alternatives are based on the
concept of Time Value of Money, choice and risk.
Step 4: EVALUATE YOUR ALTERNATIVES
46

Evaluate Your Alternatives
The concept of time value of money
•Time value of money is define as a Ringgit today is not
equal to a Ringgit tomorrow.
•Time value of money involves two concepts:
•Concept of compounding or also known as future value
•Concept of discounting or also known as present value
Consequences Of Choices
•Opportunity cost - What you give up
•when you make a choice
•The cost or trade-off of a decision cannot always be
measured in ringgit. Sometimes the cost is your time
Evaluating Risk
•Uncertainty is a part of every decision.
•Best way to analyze and minimize risk is to gather
information from financial planning sources.
47

• Develop an action plan that identifies ways to achieve financial goals
• Possible action plans can be increasing savings, reducing spending, or making provisions
for taxes
• To implement action plans you may need assistance from others
Step 5: CREATE AND IMPLEMENT YOUR FINANCIAL ACTION PLAN
48

• Financial planning decisions need to be assessed
regularly
• Complete review should be done at least once a year
• Regular reviews of decision-making process can help in
making priority adjustments to achieve financial goals
Step 6: REVIEW AND REVISE YOUR PLAN
49

Scope of Islamic Financial Planning
Cash flow and
liability management
Takaful planning
Investment
planning
Zakat & Tax planning
Retirement
planning
Estate planning
50

Concept of Wealth in Islam
Definition of wealth
Abundance of valuable material possessions
or resources
All property that has a money value or an
exchangeable value
An income beyond the daily and basic
requirements of a family' or ‘surplus income
Features of wealth
Accumulation of income over a period of
time
51

Islamic Perspective of Wealth
Al-Baqarah (2:212)
• “The life of this world is alluring to those who rejects faith, and they scoff at
those who believe. But the righteous will be above them on the day of
Resurrection; for Allah bestows His abundance without measure on whom
He will”.
Al-Baqarah (2:29)
• “It is He Who has created for you all things that are on earth”
52

Wealth is a form of trial by Allah
 Accumulation or acquisition of wealth is allowed in fact in some
circumstances becomes mandatory.
 It should not abused or misused.
 "And know that your properties and your children are but a
trial; and that it is Allah with whom lies your highest reward”
(Surah Al-Anfal (8:28))
 "This is by the Grace of my Lord to test me whether I am
grateful or ungrateful. And whoever is ungrateful, truly his
gratitude is for (the good of) his ownself, and whoever is
ungrateful, (he is ungrateful only for the loss of his own self).
Certainly My lord is Rich and Bountiful” (Surah An-Naml (27:40))
53

Wealth is a trust (amanah)
“Wealth and children are the adornment of the life of the
world. But the good righteous deeds that lasts, are better
with your Lord for rewards and better in respect of hope"
(Surah Al-Kahfi (18:46))
“And spend of that whereof He has made you trustees"
(Surah Al-Hadiid (57:7))
54

Wealth as Means to Achieve Al-falah
 Wealth as means to achieve al-falah - to be successful in
this world and in the Hereafter.
“ O ye who believe! Shall I show you a commerce that will
save you from the painful doom? Ye should believe in Allah
and his messenger, and should strive for the cause of Allah
with your wealth and your lives. That is better for you, if ye
did but know. He will forgive you your sins and bring you
into Gardens underneath which rivers flow, and pleasant
dwellings in Gardens of Eden. That is the supreme triumph”
(Surah Al-Shaff (61:10-12))
55

Conditions to Acquire Wealth
Accumulated in an honest manner
Managed in a responsible manner benefiting not only its owner and family but also the community as a whole
Managed in a responsible manner.
Does not distract Muslims from their strong faith in Allah
56

Concept of Debt in Islam
 Debt is essential in life - able to enhance income, provide
leverage.
 Debt - from an institutions or from an individual.
 Islam encourage helping each other (debt); Prophet said “the
upper hand is better than the lower hand”.
 Islam commanded to give and take debt that is free from
interest or based on qard hasan.
 Debt must be put in writing - a liability in this world and
hereafter.
 Debt must be paid back - debtor soul is hanging in the
hereafter and not accepted by Allah.
57

Conditions of Debt in Islam
Debt must be free from interest or based on qard hasan.
Debt must be in written form.
Debt must be paid back by the borrower.
Fulfilling the requirements of a debt transaction.
58

Validity of Debt
A debt transaction is valid or complete when the following
requirements are met:
 Utterance of the aqad (spoken offer and acceptance between the
two parties) - an agreement.
 The writer of the debt who is fair and just - trusted by both
parties and to follow the instruction of both parties.
 Witness to the debt transaction - minimum of two parties to the
debt transaction - borrower and lender, profiles of each are
mentioned clearly in the agreement and not force the writer to
amend any material information in the agreement such as the
amount.
 Stated amount or wealth borrowed - details of transaction such
as amount borrowed must be clearly stated in the agreement.
59

Mahyuddin Khalid 60
End of Chapter
Introduction to Islamic Financial
Planning

Chapter 1 Introduction to IFP

More Related Content

What's hot (20)

Viewers also liked (10)

Similar to Chapter 1 Introduction to IFP (20)

More from Mahyuddin Khalid (20)

Recently uploaded (20)

Chapter 1 Introduction to IFP