Islamic Financial Planner – Module One (Revision)

Financial Planning Industry in Malaysia

- Major areas of Financial planning i.e. Conventional; insurance, various
investment, tax planning, estate & retirement planning. Islamic; takaful,
various Shariah-based investment, zakat treatment & tax planning, Islamic
estate i.e. Hibah, Amanah (Trust), Wasiat, Waqf planning
- Capacity of Financial Planner - When he analyses the financial positions of
another person and provides a plan to meet that person’s financial need and
objectives
- The IFP certification is the first comprehensive training and certification
program in the world to produce Islamic Financial Planners. An IFP is a
financial planner capable of meeting the financial needs of the clients in
conformity to Shariah.

Licensing Regime – Securities Commission (SC) & Bank Negara

Malaysia (BNM)
- To ensure orderly development of the financial and capital markets besides
ensuring the licensed bodies and persons comply with the regulations.
- The Securities Commission has defined a Financial Planner as a person who
“analyses the financial circumstances of another person and providing a plan
to meet that other person’s financial need and objectives
- Financial planning is a regulated activity, requiring a license from the SC (as
per Schedule 2 of the Capital Markets and Services Act 2007). To be a
representative of a financial planning company, the person must hold either a
CFP, ChFC, RFP or IFP qualification.
- A qualified person for financial planning can apply to be a Capital Markets
Services License (CMSL) holder but he must have minimum 8 years of
relevant experience and net worth of RM50, 000. As an individual CMSL
holder, he cannot have any licensed representatives to act on his behalf.
- The licensing and regulation of financial advisers in respect of insurance
products is by Bank Negara Malaysia. The license is called Financial
Adviser’s License (FA) under The Insurance Act 1996.

Basics of Islamic Financial Planning

- Standards issued by FPAM governing the practice of financial planners are
Code of Ethics and Professional Responsibility. Also Financial Planning
Practice Standards.
- Islamic financial planning is financial planning that is in conformity to Shariah.
Shariah literally means “path to the water source” and analogy can be made
where just as water is a necessary element of life, so is Shariah essential to
the well-being of a Muslim. Shariah is commands of Allah which encompass all
aspects of human life.
- Primary sources – the Quran and the Sunnah (sayings and doings of
Prophet Muhammad pbuh )
- Secondary sources – Ijmak (consensus), Qiyas (analogy) and Maslahah
mursalah (public interest)
- Other sources – Urf (custom; knowledge of a given society), Istishab (relates
to the sense that the past accompanies the present without any interruption
or change, Istihsan (personal opinion in order to avoid any rigidity and
unfairness that might result from the literal enforcement of existing law) and

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 Istislah (considerations which prevent a harm (mafsadah) and secure a benefit
(maslahah), and and serve the objectives (maqasid) of the Shari’ah)
- Primary objective of Shariah is the realisation of benefit to the people,
concerning their affairs both in this world and the hereafter. Essentially,
Shariah aims at securing a benefit for the people or protecting them against
corruption and evil
- The Essentials (Al-Daruriyyat) - matters on which the religion and worldly
affairs of the people depend on them, their neglect will lead to total disruption
and disorder and it could lead to evil ending. Measures aimed at safeguarding
them must be taken, whether by individual or by government authorities.
- The Complementary (Al-Hajiyyat) - Necessary things which realisation is
intended by the Shari’ah for the purpose of removing hardship from human
life eg. Allowance on combining or shortening the obligatory prayers under
under certain circumstances
- The Embellishments (Al-Tahsiniyyat) - Refers to aspects of Islamic law
that bring comfort and ease in human life. Relinquishing them is not
detrimental or disruptive to human life however it might lead to some
discomfort
- Al-Falah is being successful in this world and the hereafter and Hayatan
Toyibah is living a good life in this world
- Financial planning is Ibadah (Worship) - “He said: You shall sow for seven
years continuously, then what you reap leave it in its ear except a little of
which you eat. Then there shall come after that seven years of hardship which
shall eat away all that you have beforehand laid up in store for them, except a
little of what you shall have preserved. Then there will come after that a year
in which people shall have rain and in which they shall press grapes)”. (Surah
Yusuf 12 : 47-49)
- Wealth is an Amanah (Trust) from Allah that must be administered
properly - “Wealth and children are the adornment of the life of this world.
But the good righteous deeds that last, are better with your Lord for rewards
and better in respect of hope” (Surah Al Kahf 18:46)
- Wealth is a major means to achieve Al-Falah - “O you who believe! Shall
I show you commerce (tijarah) that will save you from a painful doom? That
you believe in Allah and His messenger, and strive for the cause of Allah with
your wealth and your lives. This is better for you, if you only knew. 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 As-Saff 61: 10-12).

The 6-step Process

- Establishing and defining the client-planner relationship
- Gathering of client data, goals and objectives
- Analyzing and evaluating financial status
- Developing and presenting financial planning recommendations
- Implementing the financial plan
- Monitoring the financial plan

Differences between Conventional & Islamic Financial Planning

- Time horizon - A Muslim’s time horizon does not end upon death. He will
continue to live in the Hereafter. This is a major tenet of the Islamic faith. He
has needs in the Hereafter

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 - Method - In his pursuit of wealth creation and accumulation, a Muslim must
abide by Shariah at all times. Basically, he must avoid gambling (maisir),
usury (riba), doubtful or uncertain (gharar) investment transaction and any
dealings in things that Islam prohibits – beer, pork, etc. A Muslim is also
concerned with how his wealth is being utilised, applied or spent
- Objectives (To achieve al-Falah - Diligently drawing and executing a
Shariah compliant financial plan is striving in Allah’s cause with the wealth
with the rewards due from Him. In conventional financial planning, there is
neither Allah nor Al-Falah to consider

Islamic Financial Product & Services

- Shariah compliant financial products are the products which have been
verified by Shariah Advisers as compliant with Islamic trading principles in line
with the rules imposed by SC and BNM governing Islamic financial
instruments
- Shariah adviser is a person who and expertise in Usul al-Fiqh or Fiqh al-
Mu’amalat
- Objectives of the SAC are to harmonise the Shariah interpretations,
strengthen the regulatory and supervisory oversight of the industry and foster
a pool of competent Shariah advisers
- The role of supporting services is to complement Takaful and Investment
needs and make the financial planning process holistic
- State religious authority is for the overall administration of Islamic matters
while zakat collection agency is to oversee the collection of zakat monies

Role of Islamic Financial Planner

- The role of a financial planner is to provide impartial assistance in analysing
and organising personal financial affairs to achieve financial and lifestyle goals
of the client.
- For the Islamic financial planner, the role is the same except that when the
client is a Muslim, the goals are guided by Shariah and the methods applied
must be Shariah compliant.
- Conflict of interest is a situation in which a planner has competing
professional and personal interests that makes it difficult to provide client with
impartial advisory
- Laws are written rules enacted by the government to regulate the affairs of
society whereby punishment can be meted out to the offender
- Ethical parameters are unwritten moral conduct expected of a civil society
- Al-Quran actually covers the laws governing the Muslim as well, however the
implementation and enforcement is subject to the sovereign ruling the
constituency.

FPAM Code of Ethics & Practise Standards

Principle 1 – Integrity
Principle 2 – Objectivity
Principle 3 – Competence
Principle 4 – Fairness
Principle 5 – Confidentiality
Principle 6 – Professionalism
Principle 7 – Diligence

FAST Principles
Fathanah is being resourceful.

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 Amanah is being trustworthy.
Siddiq is being truthful.
Tabligh is the ability to impart knowledge.

Introduction to Risk Management and Takaful

- Risk management is a systematic effort identifying and evaluating risk to
determine and implement the appropriate activities to minimize the adverse
effects of unexpected loss at the least possible acceptable cost
- Risk - Possibility of loss or no loss, Chance- Possibility of loss or gain, Hazard
- Unavoidable Risk
- The methods are Risk Avoidance, Risk Retention, Risk Reduction, Risk
Transfer / Sharing
- Risk Classification: Speculative Risk vs. Pure Risk, Specific Risk vs.
Catastrophic Risk, Static Risk vs. Dynamic Risk, Subjective Risk vs. Objective
Risk
- Takaful means mutual guaranty or protection. According to BNM, it is “a
scheme based on brotherhood, solidarity and mutual assistance which
provides for mutual financial aid and assistance to the participants in case of
need whereby the participants mutually agree to contribute for that purpose.”
- Islam encourages risk management. There are many lessons in the Quran and
the Prophet’s seerah such as the examples in the stories of Prophets Noah,
Jacob and Joseph, and the Hijrah of Prophet Muhammad.
- Islam encourages the concept of mutual help and co-operation in providing
material security against unexpected perils or loss. Allah (s.w.t) never
prohibits any effort taken in overcoming unpredictable difficulties or tragedies
but encourages us to overcome problems or hardship in life.
- The concept of Takaful was first introduced in Malaysia in 1984 when the
TAKAFUL ACT came into effect.

Principles of Takaful and Insurance

- Key principle of Takaful system is based on mutual co-operation,
responsibility, assurance, protection and assistance between groups of
participants. It is a form of mutual risk sharing insurance.
- Specific principles of Takaful are Mutual Responsibility, Mutual help and
co-operation and Mutual protection
- Insurance is a form of risk management by transferring the risk of loss from
one entity to another in exchange for a premium.
- Key principles of Insurance are Indemnity, Utmost good faith, Insurable
interest, Subrogation, Contribution and Proximate Cause
- Basic differences between Takaful and Insurance are In terms of Contract,
Responsibility of Policy holders/Participants, Liabilities of Insurer/Operator and
Investment of Funds
- BNM define tabarru’ is the agreement by Takaful participants to relinquish as
donation a certain portion of the Takaful contribution that he agrees to pay,
thus enabling him to fulfill the obligation of mutual help and joint guarantee
should any of fellow participants suffer a define loss.
- Justification of Mutual co-operation in the Quran: ‘And help each other in
righteousness and piety, and help not one another in sin and transgression
(5:2).
- There are three (3) models and several variations on how Takaful can be
implemented.
1) Mudharabah Model
2) Wakalah Model

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 3) Combination of both
- Insurance uses buy sell contract (Muawadhah) to effect a risk transfer where
as Takaful uses Tabarru’ contract to effect a risk sharing. The Muawadhah
contract in Insurance are rendered non Shariah Compliant because it does not
conform to all the requirement of buy & sell contract in Islam and the
existence of Gharar, Maisir and Riba’
- It is mandatory for all Takaful Operator to have Shariah Advisory Council /
Committee

Takaful Products
- General Takaful provides coverage to participants against losses due to
misfortune usually inflicted upon properties or assets
- General Takaful contracts are short-term tabarru’ contracts with usually
varying contribution at renewal
- General Takaful Product: Motor Takaful, House owner / Householder Takaful,
Other Non-motor Takaful (Engineering Takaful, Marine Takaful, Theft Takaful,
Liability Takaful
- Motor Takaful are schemes to cover motor vehicles (private cars,
commercial vehicles & motorcycles) for :-1) Third party, 2) Third party , Fire &
Theft, 3) Comprehensive
- Family Takaful plans/products are long term tabarru’ contract for personal
protection with elements of saving / investment and a fixed maturity period.
- Family Takaful products are divided into basic plans and riders
- Family Takaful contributions can be made in installment but amount shall be
subject to be determine by the operator
- Under Mudharabah contract, the operator is the Mudharib who is
responsible for running the business. The operator gets its income from a
share of the profit.
- Under Wakalah contract, the operator is an Agent of the participants who is
responsible for running the business. The operator gets its income from
Wakalah fee.
- Under the Wakalah contract, the return from the Investment Account is not
shared between the participants and the Takaful operator. Instead the Takaful
operator charges a fee from the Investment Account.
- Takaful operators are required to invest or deposit the funds in Shariah
compliant instruments only.

Responsibilities of a Takaful Agent

- The Takaful agent, although an agent of the Takaful operator, has an
obligation to act in the best interest of the participant
- Section 25; defines that assumption of risk by Takaful operator where no risk
shall be covered until payment is received (Cash before cover i.e. the agent
must collect the Takaful contribution before issuing the Takaful cover.)
- Section 28; is the penalty under Takaful Act 1984 which defines that it is a
criminal offence to defraud a participant into entering a Takaful contract by
way of misleading, false, or deceptive presentation, or by any fraudulent
concealment of a material fact. Fine not exceeding RM 20,000 or to
imprisonment for a term not exceeding 1 year or both.
- Code of ethics for Takaful agent are Truthfulness and Trustworthiness

Shariah overview of Investment

- Islam encourages the Muslims to seek for wealth and Muslims must conform

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 to Shariah in wealth accumulation to optimize the use of Allah’s bounty for the
benefit of mankind
- Gist of Surah Yusuf verse 47-49; Working for life – earn your keep , smart
consumption – cannot be lavish and wasteful, investment for future – need to
plan when the future is uncertain
- The applications of these rules on a particular case will result in one of the
following categories of ruling: Obligatory (fard), Recommended (sunnah),
Permissible (halal), Not recommended (makruh), Prohibited (haram)
- Basically, Riba is of two types: Riba al-Nasiah - a stipulated excess over the
loan received by the creditor in relation to a specific period. Riba al-Fadl’ -
similar ribawi items are exchanged with each other with different counter
value or with surplus
- Primary role of the Shariah Adviser/Committee: To advise on all aspects of the
Islamic products including documentation, structuring, investment as well as
other administrative and operational matters and ensure compliance with
applicable Shariah principles and relevant resolutions and rulings made by the
SAC from time to time
- Why Islam prohibits Riba?
- Dependence on interest, prevents one from working to earn money
- Taking of interest discourages people from doing good to another
- The lender (normally the rich) will exploit the poor
- Why Islam prohibits Maisir?
- To avoid from unproductive activities
- To prevent from injustice and unfair income generating activities
- To prevent enmity and hatred among society
- Why Islam prohibits Gharar?
- To encourage clarity and transparency in transactions
- To promote fairness and justice
- To inculcate hardworking culture

Basics of Investment
- Return: the level of profit derived from an investment. Can be derived from
two sources, i.e. income and capital gains
- Risk : the variability of returns, the extend to which investment results may
differ or vary from expected return
- Risk Return Tradeoff: the principle that potential return rises with an
increase in risk. Low levels of uncertainty (low risk) are associated with low
potential returns, whereas high levels of uncertainty (high risk) are associated
with high potential returns
- Diversification means spreading the money into various types of
investments. Risk diversification refers to the process of combining many
securities that do not move together in a portfolio to reduce the overall risk
- Systematic risks are factors that affect all types of investments while
unsystematic risks are factors that relate to a specific class of securities
- Modern Portfolio Theory (MPT) said that by combining many not-perfectly
correlated securities in a portfolio, an investor can diversify all unsystematic
risks
- When all unsystematic risks have been diversified away, the remaining risks
are the systematic risks. A portfolio having only the systematic risks is called
an efficient portfolio
- A collective investment scheme is a way of investing money with other
people to participate in a wider range of investments than may be feasible for
an individual investor. Collective investments are promoted with a wide range

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 of investment aims either targeting specific geographic regions (e.g. Emerging
China) or specified themes (e.g. Commodity).
- Advantages of collective investment scheme are professional management, instant diversification,
access to a wider range of product, economies of scale, higher liquidity
- Asset Allocation is the process of distributing assets among different asset
classes, such as stocks, bonds and cash equivalent instruments. A well-
designed portfolio is capable of delivering superior returns without breaching
the risk tolerance level of the investor

Why Investment is Necessary?

- To provide capital and income at some future time, either to meet a future
obligation or need, or to transfer to the next generation
- To provide a hedge against inflation (to maintain the purchasing power of
their money).
- Investment is needed to accumulate wealth that will generate current income during retirement
period
- Inflation erodes the purchasing power of money

Shariah stock benchmark

- A company with mixed activities can be deemed as Shariah compliant when
the non-permissible activities are below tolerable levels, as follow:
o The 5% benchmark - level of mixed contributions from the activities
that are clearly prohibited such as riba (interest-based companies like
conventional banks), gambling, liquor and pork, cannot exceed 5%
o The 10% benchmark - level of mixed contributions from the activities
that involve the element of “umum balwa” which is a prohibited
element affecting most people and difficult to avoid, cannot exceed
10%
o The 20% benchmark – level of contribution of mixed rental payment
from Shariah non-compliant activities, such as rental payments from
premises used in gambling, sale of liquor, etc.
o The 25% benchmark - level of mixed contributions from the activities
that are generally permissible according to Syariah and have an
element of “maslahah” to the public, but there are other elements that
may affect the Syariah status of these activities, cannot exceed 25%

Islamic Investment Products

- Investment in shares is permissible in Islam, provided that the shares are in
shariah-compliant companies. It is a form of partnership (mudarabah). The
share certificate represents the equity of the company. Shareholders are the
capital provider (rabbul mal) and the company is the entrepreneur (mudarib)
- Unit trust is managed by a group of professional managers who will invest
the pooled money in a portfolio of securities such as shares, bonds and money
market instruments or other authorized securities to achieve the objectives of
the fund
- Islamic Unit Trusts are unit trusts fund which are managed in accordance with
shariah, the fund must have a Shariah Adviser appointed, the fund must be
invested in shariah-approved investment, the fund must use shariah-approved
contract (wakalah/mudarabah)
- Exchange Traded Funds (ETFs) are index-based funds that allow
investors to buy or sell exposures to an index through a single financial
instrument
- ETFs are shares of a portfolio and not an individual company. Thus, ETFs

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 represent shares of ownership in either open-end funds or unit investment
trusts that hold portfolios of stocks or bonds in custody and track the price
and yield performance of their underlying indices
- REIT is a collective investment vehicle (typically a trust fund) which pools
money from investors and uses the pooled capital to buy, manage and sell
real estate assets, such as residential or commercial buildings, retail or
industrial lots, or other real estate-related assets (e.g. shares in public-listed
property companies, listed or unlisted debt securities of property companies
etc.)
- Returns are generated from the rental income plus any capital appreciation
that comes from holding the real estate assets over the period. Unit holders
will receive their returns be in the form of dividends or distribution and capital
gains for the holding period
- Derivatives are financial instruments used to manage one's exposure to
today's volatile markets. A derivative product's value depends upon and is
derived from an underlying instrument, such as commodity prices, interest
rates, indices, and share prices
- Sukuk are bonds based on Islamic principles. Sukuk are monetary
denominated participation certificates of equal unit value issued to investors,
to represent their proportionate share in the ownership of the underlying
assets and a pro rata share in the income generated by those assets
(commonly referred to as “receivables”)
- Structured Product is a new investment alternative, giving investors access
to wider range of markets and payout structures
- An investment-linked Takaful is a family takaful plan that combines
investment and takaful cover. Your contribution will provide takaful cover,
which includes death and disability benefits, and part of the contributions will
be invested in a variety of Shariah-approved investment funds
- Property; an investment which is involving ownership and the return
includes rental income and capital gains from price appreciation. Property has
traditionally been regarded as a hedge against inflation. In a diversified
portfolio, property works to balance the portfolio as it has the potential to
reduce the risks/volatility without significantly reducing returns
- Gold and other precious metals are assets that are both tangible and liquid
(i.e. easily traded), unlike real estate which is tangible but not liquid, or
company shares and bonds which are liquid but not tangible. Investment in
gold can be done directly through bullion ownership or via gold-accounts
- A commodity is a tangible asset that is relatively homogeneous in nature.
Investors can gain direct exposure to commodities in spot market (cash sale)
or in markets for a deferred delivery. In deferred delivery contract, price is
established in advance of delivery

Role of Shariah Committee

- The Shariah Advisory Council (SAC) of the Securities Commission was
established by the SC in 1996 under section 18 of the Securities Commission
Act 1993 (SCA)
- Its scope of jurisdiction is to advise the Commission on all matters related to
the comprehensive development of the Islamic capital market, and function as
a reference centre for issues related to the Islamic capital market
- The Shariah Advisory Council (SAC) of Bank Negara Malaysia was
established on 1 May 1997 as the authority for the ascertainment of Islamic
law for the purposes of Islamic banking business, takaful business, Islamic
financial business, Islamic development financial business, or any other

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 business which is based on shariah principles and is supervised and regulated
by Bank Negara Malaysia
- SAC has used two approaches:
1) To study the validity of conventional instruments available in the market
from the shariah perspective. The study focuses on the structure,
mechanism and use of the instruments to ascertain whether they are
against shariah principles.
2) By formulating and developing new financial instruments based on shariah
principles.
- The primary role of the Shariah Adviser/Committee is to advise on all aspects
of the Islamic products including documentation, structuring, investment as
well as other administrative and operational matters and ensure compliance
with applicable shariah principles and relevant resolutions and rulings made
by the SAC from time to time

Shariah Concepts relating to Investment

- Time Value of Money: Money does not grow on its own by time. However,
Muslims must appreciate time and optimize the use of time. Muslims should
spend the money wisely and invest them in productive business
- Liquidity planning: A Muslim must have a saving of at least one year
income for liquidity and emergency purpose
- Risk Management: Islam always encourages Muslims to do risk
management.
- Risk Return Tradeoff: In Islam, to get a return, the requirement of counter
value or compensation (’iwad) is critical as it is one of the cornerstones in
Islamic principles of profit in the sale contract. This is revealed by the legal
maxim “al-ghonmu bil ghormi” (no reward without risk) and “al kharaj bil
daman” (in any benefit lies a liability)
- Diversification: Islam encourages diversification as a method to mitigate risk

Approaching an Investment
- Prospectus is a formal legal document, which is required by and filed with the
Securities and Exchange Commission, that provides details about an
investment offering for sale to the public
- Prospectus of a Unit Trust is to be read before investing in order to ascertain
that the fund’s primary features i.e. objectives, policies and risks match our
investment goals and expectations, to know if it is Shariah compliant or not.

Types of investment risks

- Business risk: A threat of an event /action that may affect company’s ability
to achieve its business objectives.
- Liquidity risk: A risk that arise from the difficulty of selling an asset i.e.
stocks vs. house
- Currency risk: A risk of an investment value that may be affected by the
changes of exchange rates.
- Country risk: A potential default of a foreign government bonds/ stocks due
to political/financial events of a given country.

Risk tolerance
- Risk tolerance is the degree of uncertainty that an investor can handle in
regards to a negative change in the value of their portfolio.

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 - Conservative: This investor isn’t willing to tolerate "noticeable downside market
fluctuations," and is willing to forego most all significant upside potential, relative to the
markets, to achieve this goal
- Moderately conservative: The typical investor in this category is either retired and
getting their paycheck from portfolio income, soon to be retired, or has been burned by
poor investment management and lost a lot of money in the past
- Moderate: The majority of investors are in this middle of the road category. These people
has the desire to invest long-term for retirement or college funding
- Moderately aggressive: This group of investors want to outperform a basket of similarly
weighted indices when the markets are up, and doesn’t mind too much being down a little
more than the markets when they are down
- Aggressive: These investors want to substantially outperform the markets and (should)
know they are exposed to much more risk than the markets

Timing of Investment and the Economic Cycle

- The Recession - Historically, the world has a recession every seven to nine
years. The start of the recession is often characterised by high interest rates,
growing unemployment, lack of consumer confidence and the failure of many
businesses
- The Share Market Cycle - As the share market continues to rise, investors’
confidence in the market begins to outpace gains made due to good company
performances. This is because of a number of factors, including increased
investor savings, a buoyant economy and an overly optimistic view of the
share market. A share market correction signals the start of the real estate
cycle
- The Real Estate Cycle - As the share market pitches restlessly, investors are
quick to channel their savings into the security of bricks and mortar. Of
course, a rapid increase in the demand for real estate results in a
corresponding increases in property values. This stabilisation in the value of
real estate prices marks the beginning of the fixed interest (or cash) cycle
- The Fixed Interest Cycle - The share market is doing little, and interest
rates are too high to make borrowing for a property an attractive investment.
Investors have little choice but to hold on to their current investments, or
make most of high interest rates and invest in debt (bonds, debentures and
fixed interest). High interest rates slow the economy and lead us towards
another recession

Basics of Zakat
- Zakat is to purify and cleanse the wealth and the soul of the zakat payer.
Wealth that is not zakat paid is unclean wealth
- Zakat is a yearly obligation of a Muslim to pay a portion of his wealth to 8
categories of people. Zakat is one of the five pillars of Islam. Also, Zakat
means to purify one's wealth to gain Allah's blessing to make it grow in
goodness
- Zakat is the major economic means to establish social justice leading to
multiplying economics effects and security for the society. Zakat causes
wealth to flow and re-distributes wealth to the unfortunates of society
- Zakat is simply a transfer of certain portion of wealth (mal) from the have to
the have not. It is a built-in / automatic annual instrument to transfer wealth
from the rich to the poor. However this objective is not specifically mentioned
in Al Quran.

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 - In order to achieve this distributive justice, Islam has the following
redistributive schemes:
Obligatory measures - zakat, faraid, Voluntary measures - sadaqah, waqaf and
Prohibitive measures - riba’, ihtikar (hoarding of goods to raise price)
- Zakat payable = Stock for sale + Debtors + Cash - Creditors. It is not
charged directly on profit.
- A payment from Muslim individual / group on specific wealth in specific
rates and specific terms and to be given to specific recipients. [Hint:
There are 4 specifics]. It simply means zakat is a pillar of Islam which
payment must comply to the rules and not made arbitrarily by Muslims.
- Nisab is the threshold for zakat payment / minimum zakatable amount. It
signify that Islam do not asked Muslim to pay zakat unless their wealth has
achieved certain minimum amount.
- All monetary wealth is zakated at the rate of 2.5% after the wealth has been
held in a complete hawl and reach the nisab (85g of gold).

Asnaf
- 1. Fakir - One who has neither material possessions nor means of livelihood
- 2. Miskin - One with insufficient means of livelihood to meet basic needs
- 3. Amil - One who is appointed to collect and administer zakat
- 4. Muallaf - One who newly converts to be a Muslim
- 5. Riqab - One who needs to be freed from bondage
- 6. Gharimin - One who is in debt to meet basic needs
- 7. Fisabillillah - One who strives in the cause of Allah
- 8. Ibn us-Sabil - One who is stranded in journey

Administration of Zakat in Malaysia

- All aspect in the administration of zakat in this country is governed by the
respective states. So it is not standardized. Therefore, there is a need to some
sort of coordination between different law and practices in the states.
- The exclusive authority of State government to administer zakat affair is
derived from Federal Constitution, Ninth Schedule, List II (State List).
List II clearly mentioned that the power to legislate laws regarding zakat
administration is lies in the hand of respective States Government.

Types of Zakat
- Zakat fitrah is chargeable on every Muslim (child, adult, free and slave) who
are live during Ramadhan and the first day of 'Eid. The rate is one saa'
(approx 2.7 kg of rice) per person. Therefore zakat fitrah is zakat per person.
- Zakat mal is chargeable annually on the "excess" of wealth; hence it is not
charge per person. Zakat mal is governed by specific term and rules. Not all
types of wealth that belongs to Muslim is zakatable.

Conditions that make zakat compulsory

- Muslim individual & group. If shared with non-Muslim, only Muslim portion will
be imposed
- Free (of not being a slave)
- Complete ownership. Usage not restricted in any way / unencumbered.

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 - Hawl ( and exception). Completion of one year
- Nisab. Stand as threshold / minimum zakatable value

Taxation
- Under Sec 3 of Income Tax Act 1967 a tax is to be known as Income Tax
shall be charged for each year of assessment upon the income of any person
accruing in or derived from Malaysia or received in Malaysia from outside
Malaysia’.
- Two main objectives of Taxation are to finance the administration and
development and to promote economic growth
- Tax in Malaysia is administered by the Inland Revenue Board of Malaysia
(IRBM) or Lembaga Hasil Dalam Negeri Malaysia (LHDNM)
- Self assessment system was introduced and fully implemented in 2004 to
replace the official assessment system
- Tax Audit - is an examination of a Taxpayer’s business records and financial
affairs to ascertain that the amount of Tax due being reported and paid are in
accordance with Tax laws and regulations
- Tax Investigation – is an examination of Taxpayer’s business and/or
individual books, records & documents to ensure that the correct amount of
Income has been reported and Tax thereon paid in accordance with the Tax
laws and provisions. The Investigation will only be carried out in cases where
it is suspected based on precise and definite evidence that the Taxpayer is
deliberately trying to avoid paying Tax or has committed willful evasion
- Capital Allowance is an annual deduction allowable in ascertaining the
statutory income from business. Fixed Assets that are acquired new will be
given initial and annual allowance.
- Qualifying criteria to claim Capital Allowances: Carrying on a business,
incurred qualifying plant expenditure / capital expenditure, used such assets
in business till year end / end of accounting period

Responsibilities of a Citizen and e-Filing

- Understand the Income Tax Law and Public rulings
- Keep proper accounting records (Section 82)
- Change of Mailing Address (Section 89)
- Pay Income Tax – PCB/STD (Section 103)
- Submit Income Tax Return Form – (Section 77)
- Compute Income Tax Payable
- Pay final Income Tax installment (Section 103)

Advantages of using e-filing?

- e-filing allows taxpayers to submit their forms electronically via the internet –
Form C, R, B, BE, M, P and E
- Tax Return Forms submitted via the e-filing application are protected by
Public Key Infrastructure technology
- e-filing users may file Tax Return Forms electronically at any time from any
location
- The application assists taxpayers to fill, compute and submit their Tax Return
Forms electronically with ease, accuracy and safety
- Failure to submit return form is under section 112 of the ITA whereby the
offender is liable to:
- A fine of between RM200 and RM 2,000; or
- Imprisonment not exceeding 6 months; or
- Both

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Types of Return Forms:
BE – resident individuals with employment income.
B – Resident individuals with other sources of income besides employment
income.
M – Non resident individuals
C – Companies & form R – information on Tax Credit
C1 – cooperative societies
P – Partnership
T – Trusts, deceased person estates, club, association, societies and Hindu joint
family
E – Return by employer. Form EA/EC

Zakat treatment in Tax Plannng

- is a series of measures taken by a taxpayer to manage the taxpayer’s sources
of income with the objectives of minimizing, deferring or eliminating the
taxpayer’s tax liabilities within the ambit of tax legislation
- Tax Avoidance – legal i.e. reduce Tax liability according to provisions of the
laws
- Tax Evasion – illegal i.e. reduce Tax using illegal means
- Zakat is obligation to Allah while Tax is obligation to the Federal Government
- Muslims must know their zakat liabilities and pay their zakat obligations when
they become due and should take steps to minimize their taxes through tax
avoidance ways

- Zakat paid by Individual and Sole Proprietor is treated as tax rebate

- For company, if zakat paid is less than 2.5% of aggregate income then fully
deductible in arriving at the chargeable income
- Some tax planning techniques:
- Income splitting: from joint assessment to separate
- Income splitting: from sole proprietor to Sdn Bhd
- Transfer Company’s profit to individual
- Fixed Tax Rate against Scale Tax Rate
- Pay zakat as obligation and use as Tax Rebate
- Set up business entity to claim Capital Allowance for assets use in business
- Appoint Tax Consultants to maximize tax savings

Islamic Estate Planning

- Estate planning is a process of planning how one’s assets and liabilities are
administered upon death
- Estate planning is a process of planning one’s assets (and liabilities) with the
intent of enhancing and sustaining the financial security of individuals, their
families and future beneficiaries of the estate without incurring unnecessary
costs and loss of time
- The estate planning process must conform to Shariah in respect to the tools
and intentions of the person making the plan. The tools must be in compliant
with Islamic contract rules and the intentions must be with the objective of
achieving al-Falah
- Estate planning becomes essential when a person has dependants who are
disabled, terminally ill or elderly, adopted children or wishes to benefit (other
than his/her heirs under Faraid-for Muslims and for non Muslim will be under

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 Distribution Act
- For the Muslim, the estate must include properties and rights belonging to the
deceased but registered under third party’s name, and must exclude
properties and rights not belonging to the deceased but registered under the
deceased’s name
- Some of the primary laws relating to estate administration are the Probate
and Administration Act 1959, Small Estates Distribution Act 1955 and
Public Trustee Act 1955

Legal Framework in Malaysia

- Malaysia has a parallel system of Laws
- Syariah Court – adjudicate on Muslim personal and family rights

Estate administration
- The process (i.e. application, administration and distribution) upon death is
depending on the value of the estate, type of estate (movable or immovable),
the application can be made to either (i) Amanah Raya Bhd or (ii) Small Estate
Distribution Dept. or (iii) High court
(i) Determine the application procedure whether it is through the High Court, the
Small Estate Department or through the Amanah Raya Berhad.
(ii) Once an administrator is appointed, he will collect inventing of all assets and take
legal control and settle all liabilities, by selling assets if need be.
(iii) Upon settling of assets, all fulfilling, all obligations against the Estate, the
Administrator shall distribute the balance of Estate either according to the Faraid or
by Deed of Family arrangement.
(iv) Winding up the Estate to discharge the responsibility of the Administrator /
Executor
- For a Muslim estate, the distribution of the estate must be in accordance to
the Faraid after settling of debts, harta sepencarian and wasiyah, if any
- Testate - This term basically means that the property left behind by the
deceased is provided in the will. An executor has been appointed by the
deceased before his death to implement his wishes relating to the distribution
of the property to beneficiaries who may or may not be his family members
- An Administrator gets his or her power from the Grant of Letters of
Administrations (“LA”).
- Both governed by the Probate and Administration Act 1959 (“PAA”).
- Duties of an Executor
- Locating the Wasiat / Will.
- Identifying the Assets.
- Tracking down all ownership documents
- Determining liabilities and establishing proof for amounts outstanding.
- Applying for Grant of Probate
- Calling in testator’s assets (including debts to be collected).
- Paying testator’s debts.
- Preparing s periodic statement of Account.
- Distributing testator’s assets according to Wasiat / Will.
- Distributing testator’s assets according to Faraid (for Muslims only).
- Duties of Administrator
- Identifying the assets.
- Tracking down all ownership documents.
- Determining liabilities and establishing proof for amounts outstanding.

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 - Applying for Letters of Administration.
- Calling in testator’s assets (including debts to be collected).
- Paying testator’s debts.
- Preparing a periodic statement of Account.
- Distributing testator’s assets according to Faraid / Distribution Act.
- The Small Estate Distribution Act 1955 (“SEDA”)
- Section 3(2) SEDA: A small estate means an estate of a deceased
person consisting wholly or party of immovable property situated in
any State and not
exceeding RM600,000.00 in total value
- Probate & Administration Act 1959 (“PAA”)
- To regulate and govern all aspects and matters relating to the extraction of
Probate
and Letters of Administration
- Public Trustee Act 1995 - Role of Amanah Raya Berhad
- Amanah Raya is creature of statute set up under the Public Trust Corporation
Act
1995. Amanah Raya is wholly owned by the government of Malaysia
with its shares held by the Minister of Finance (Incorporated).

Waqf
- Waqf is philanthropic gift. A Waqf is created when a Muslim gives away his wealth for
others to benefit and the wealth are not diminished while the benefits are consumed or
being used by those others
- In Malaysia, Waqf is under the purview of State Islamic Religious Councils.
Waqf are of two kinds: Waqf Am and Waqf Khas. In Khas, the benefit goes to
specified group of people or for specific purpose; and in Am, not specified

Will
- means a declaration intended to have legal effect of the intentions of the
testator with his respect to his property or other matters which he desires to
be carried into effect after his death…. Section 2(1) of the Wills Act 1959 but
this Act shall not apply to the wills of persons professing the religion of Islam
Section 2(2) of the Wills Act 1959

Wasiyah
- is a gift which takes effect after the death of the testator.
- Bequest shall not exceed 1/3 of the entire estate after payout of testator’s
debts (Hadith reported by Saad Ibn Abi Waqqas).
- The doctrine of obligatory bequest (Wasiat Wajibbah) is to enables
grandchildren who are not waris to inherit from the estate of the grandfather
whereby the father of the grandchildren had predeceased the grandfather and
the grandchildren inheritance rights are blocked by the brother of the
deceased father of the grandchildren.

Wisoyah
- means making a request or entrusting someone to do or implement
something after the giver of the trust (amanah) passes away or in his
absence.
- The Wisoyah was also used to entrust someone to settle debts, to return

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 borrowed goods and to take care of individual rights of minor heirs upon death
of their parents.

Faraid
- Law of inheritance, source is Quran (4:11-12, 176), heirs are defined, shares
of estate to heirs are fixed
- A system to distribute an estate that is devised by Allah. The system gives importance to
immediate family and blood ties. It supports the family nucleus as an important
component of a civil society. Being a system from Allah Himself, the all-Wise, Muslims
should never try to circumvent the system as it will only cause frictions and circumventing
is not a quality of a person with taqwa (God-fearing).

Hibah
- It is a gifting during the lifetime, given without consideration but for the blessings of Allah
s.w.t.

Harta Sepencarian (matrimonial Asset)

- It is property jointly acquired by the husband and wife during the subsistence of marriage
which was carried out in accordance with the Syariah Law.

Basic differences between Islamic and conventional

- The Retirement planning of a Muslim must also consider his life in the
Hereafter. After his death, he needs the “currency” of the Hereafter as well.

Retirement & Waqf Planning

- Factors to consider in Retirement planning are: age of retirement, period of
retirement, lifestyles
- The Retirement planning of a Muslim must also consider his life in the
Hereafter. After his death, he needs the “currency” of the Hereafter as well.
- The key objectives of Retirement planning are to accumulate sufficient asset
and income to support living and lifestyle expenses during retirement period

What is the key understanding between Estate, Retirement

and Waqf?
- In all three types of planning, the common thread is that they are related to
the wealth that has been accumulated. Wealth being an Amanah from Allah,
undertaking to properly plan the wealth is a major test to the Muslim
-

“There is no compulsion in religion. Verily the right path has become distinct from
the wrong path. Whoever disbelieves in Taghut (anything worshipped other than
Allah) and believes in Allah, then he has grasped the most trustworthy handhold
that will never break. And Allah is All-Hearer, All-Knower”
(Surah Al-Baqarah 2:256)

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