Islamic Financial Planning Paradigm

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

INTRODUCTION

Islamic financial planning is a guideline for the people especially for Muslims’ society on how they can manage and use their wealth in a correct way, which is inline with the Syari’ah principles. The most important thing that is stressed in the Islamic financial planning is the elimination of “Riba” or interest element in all forms of transaction. This is to ensure the exploitation among people can be eliminate and thus to establish a just society.

There are several mode of financing in Islam such as through investment, Insurance (Takaful) and others. Investment can be in the form of unit trusts, shares, bond and other securities. As we can observed, recently people use Insurance as one of the ways to reduce the risk of loss due to misfortunes. This concept is not against the Syari’ah principles since it are inline with the principles of compensation and shared responsibility among the society. The concept of Insurance is already exist during the Prophet time which has been practiced by the Muhajirin of Mecca and the Ansar of Madinah following the hijra of the Prophet over 1400 years ago.

As we can see nowadays, many of the financial institutions offer Islamic windows to their customer. It shows that the degree of awareness and the demand of such services among the public have been increased. That is why, recently we can find an Islamic financial services also been offered by the conventional banks.

Such financial institutions have set up their own division called Syari’ah Board. The function of this division is to monitor the operation of the organization and to ensure that they did not operate against the Syari’ah principles. This board also have to make a thorough research and analysis before any actual investment been undertaken by the organization. In other words, any activities that are going to execute must first confirm or approve by the Syari’ah board.

In this paper, our main discussion is on the Investment and Insurance (Takaful) in an Islamic perspective. It includes the central idea, Syari’ah rulings and the practical scenario for each type of financial instruments.

CENTRAL IDEA

Basically, in Islamic Financial System, there are certain guidelines and rules that the organizations have to follow. As far as this paper is concern, we only discuss on two types of financing mode which are Islamic Investment and also Insurance (Takaful).

Islamic investment can be in the form of unit trusts, securities such as shares and Islamic bonds and so on. As mentioned before, there are several principles that the organizations have to comply with. In the Islamic Investment, the transactions or activities must be dealt with the ethical sectors only. Ethical sectors means that when the organization make an investment, they have to invest their wealth in a permissible activities. This is because the profit that they are going to earn should not come from the unlawful activities such as gambling, production of liquor, pornography and etc.

As we know, liquor is a prohibited item in Islam. Muslims are not allowed to drink it. Therefore, if someone make a profit out of that production or trading of the liquor, then the return that they get is a haram return

Besides that, the profit from the investment also should not come from the interest or Riba. Such activities are unlawful and it is prohibited in Islam. For instance, in Islam, we cannot pay extra from the amount that we owe and we also not allowed to buy something lower than the actual price.

Another principles in the Islamic Investment are the rewards should be earned from the invested capital. Meaning that the profit only can be generated from the amount of capital that a person put into their investment. In Islam, we are not allowed to make an investment that provides pre-determined returns such as bonds, bank deposits and etc. Syari’ah contradicts bonds because the return is not come from the invested capital but the return is calculated on compounded based.

For Islamic bonds, the return should come from the invested capital. For example, if someone buy a bond for RM 1,000 with the coupon rate of 10% per annum. Therefore, in the first year, bondholder will get RM 100 as a return. Then in the second year, he also gets a return of RM 100. Unlike conventional bond, in the first year he will get RM 100 but in the second year, he will get RM 110. This is because in the second year the return is calculated based on the principle plus the return, which is RM 1,100. This type of bond is against the Syari’ah principles since the return is not come from the invested capital but also include the amount of return from the investment.

An equity security or also known as shares, which is another type of securities, is acceptable by the contemporary scholars. This is because the profits are tied to the returns of the underlying company and hence are risk related. It means that the shareholders will only get the returns if the company that they invested is making a profit. And if the company not performing well and make a loss from their business, then the shareholders also responsible for that risk. That is what it means by the risk related. In other words, wealth should be earned from a partnership between investor and the user of the capital in which the returns and it risks is shared.

Another principles that have to be complied with are the money that investors are going to finance his investment should not come from the borrowed money on interest. Therefore that money should not be invested or traded at margin. For example, someone make a loan from a bank for RM 10,000 with the interest rate of 5% per annum. Then he used that money to buy shares from one of the established company. Such transaction is prohibited in Islam since he used the money that comes from the borrowed on interest.

Furthermore, it seems like we take advantage on such amount of money. Meaning that we make use the borrowed money to purchase shares and hoping that we can get a high return on the money that we have invested.

However, the same logic as mentioned above is permissible if let say unit trust company use the fund which comes from the trustee to finance the investment. Unlike in the conventional funds such as hedge funds, arbitrage funds and others, the funds are all comes from the borrowed money in order to finance their investment. Therefore this kind of investment is prohibited in Islam.

Besides investment, takaful or Islamic insurance can be considered as the good way to plan your saving. Today takaful operators such as Takaful Malaysia, Takaful Nasional and others offer assorted kind of services or products. Islamic insurance transaction is a policy of mutual co-operation, solidarity and brotherhood against unpredicted risk. In Islam, this Islamic insurance is obligate to get both co-operation and mutual agreement between the participant and the takaful operator. By this condition, the Islamic insurance will give benefit for the participant and the selected operator. Hence, there should be a legitimate relationship between the parties, where the beneficiaries are not barred from claiming the benefits over the policy. This relationship is referred to as insurable interest.

Therefore, the takaful practices, family takaful or Islamic life insurance can only be determined based on the principles of ‘wasiyah’ (bequest) and ‘Mithrah’ (inheritance) for their product of life insurance of family takaful. It is to ensure that the love’s one would be save in the future even though the assured is still alive upon the maturity of the policy period.

Moreover, the takaful is implementing the concept of Al-Mudharabah. The money will be invested on a profit and loss sharing. This profit and loss sharing are not contrary with the syari’ah either in their operations or in the nature of their business. It is because of everything follows the Islamic and Malaysian rules and regulation. The takaful operator will be treated as al-mudharib that in-charge of the investment and the profit will be distributed according to the mutual agreement made earlier.

The profit gain for the transaction under al-Mudharabah activity will be divided into the participant account and the operator account according to the agreed ratio. Beside in case any losses occur during the investment operation, the takaful company shall be borne alone.

There are many types of takaful offer in Malaysia. Some of them are like follows: -

The above products are open for both Muslims and non-Muslims except for Takaful Wiladah. However, for non-Muslim, the takaful operator will investigate the income sources in the first place. If it is found that he commit activities related to prohibited activities like gambling, selling pork or wine, their application will be rejected. Otherwise they will be granted the permission to participate in the scheme. It investigation is important in order to purify the investments and get the bless form Allah.

Other than that, the Takaful Act 1984 does not provides any provision concerning the recipient of the benefits. So for this situation, the Insurance Act 1996 is applied. Section 167 2 of the act provides that in a life insurance policy held by a Muslim and nominates someone in the policy, the nominee shall be a mere trustee, agent, manager or executor. The person is the one who receives the benefits from the policy. The person’s job is to distribute among legal heirs in line with the principles of Fara’id. 2

PRACTICAL SCENARIO OF ISLAMIC FINANCIAL PLANNING

Nowadays, people are gradually accepting many types of Islamic financing planning. Many conventional banks are implementing and provide Islamic windows regardless of races and religions. Lately as we can observe not only Muslim seek for Islamic services but also non-Muslim are using the Islamic practices of any kind of transaction. Islamic financial institutions or conventional financial institution that provide Islamic financing receiving participation from individual and also corporate bodies including multinational corporations. Here we believe that the practice of Islamic financial planning’s popularity is increasing reflect to its practicality and its application is acceptable in our daily lives.

As mentioned in detail in the central idea section, Islamic financial planning can be divided into several elements. There are Islamic investment, Islamic insurance of Takaful and others. Beneath each type of these Islamic financial planning lays assorted kind of choices.

Recently, we can see that people who have surplus money, like to make use of that money to invest in any business. For example, Encik Kamarul has cash for RM 100,000. Then he would like to invest the money so that it will give him a return from his investment in future years. So, it is recommended that he invest the money in businesses that operate in ethical sectors. In this case, Encik Kamarul can use his money to buy shares from a company that deals with the Islamic operation.