Unveiling the Story Behind Finovate Financial Group
Financial planning is a comprehensive process that helps individuals make informed financial decisions, achieve their goals and navigate the complexities of managing their financial resources.
At its essence, the process of crafting an Islamic financial plan closely parallels that of a conventional financial plan, particularly when considering the seven steps involved in the financial planning process. These steps encompass establishing SMART goals and objectives, collecting relevant data and information, analysing the current financial situation, formulating a financial plan, executing the plan, ongoing monitoring and review and periodic reassessment and updating.
It is important to note that financial planning is not a one-time event but an ongoing process. Life happens, and personal circumstances, financial markets and personal goals could change over time, necessitating adjustments to the financial plan. Regular reviews and updates help ensure that the plan remains relevant and effective in achieving the desired financial outcomes.
Islamic financial planning differs from conventional planning in a few key aspects. Firstly, it involves Faraid law in estate planning, which follows specific rules for asset distribution based on Islamic inheritance principles. Secondly, zakat calculations on both income and savings are integral to Islamic financial planning, distinguishing them from conventional methods. Thirdly, the inclusion of Takaful and the tabarru’ concept sets a unique tone in risk management planning, emphasising cooperation and ethical considerations. Lastly, the selection of investments in Islamic financial planning adheres to Shariah principles, introducing an ethical dimension to the investment strategy. These distinctive elements highlight the differences between Islamic and conventional financial planning.
ISLAMIC FINANCE WISDOM
Shariah is the Islamic legal and ethical framework that is mainly derived from the Quran and Sunnah (the practices and teachings of the Prophet Muhammad SAW) and plays a crucial role in Islamic financial planning. Shariah principles give guidance to financial decisions and transactions, ensuring that they comply with ethical standards.
Intent (Niat) is the core difference when performing advisory services for Islamic financial planning. Essentially, in Islam, having wealth is a form of test. This considers the principle that Allah is the sole provider of all His creations on this planet: “For Allah is He who gives (all) sustenance…” (Al-Dhariyat 51:5). The Muslim needs to follow Shariah rules because on judgement day, Muslims will be questioned regarding their wealth, especially how they earned and
spent it.
In Islam, the view is that Allah SWT is the provider of sustenance, and all resources and wealth belong to Allah. Man seeks wealth and Allah’s bounty. Man, as a vicegerent of Allah, enjoys ownership merely as a trustee of the wealth in this world.
The Quran states to plan both for this life and for the hereafter. Financial planning is a form of worship (Ibadah) and a way to plan for any adversity that may arise in life. The story of the Prophet Yusuf (AS) contains an important model that depicts the importance of saving during the period of opportunity to bridge the gap during the period of hardship.
This can be illustrated by the following verses:
“Joseph, O man of truth, explain to us about seven fat cows eaten by seven [that were] lean, and seven green spikes [of grain] and others [that were] dry—that I may return to the people [i.e., the king and his court]; perhaps they will know [about you].”
[Joseph] said, “You will plant for seven years consecutively; and what you harvest leaves in its spikes, except a little from which you will eat. Then will come after those seven difficult [years], which will consume what you advanced [i.e., saved] for them, except a little from which you will store. Then will come after that a year in which the people will be given rain and in which they will press [olives and grapes].”
This guidance from these verses is sensible and applicable even to our era now.
The major obligation for Muslims during the time of opportunity (harvest) is to save for future periods. Also, during the period of threat (drought), one will be protected by consuming from his savings. It is also vital to ensure proper planning is done to the best of one’s ability to alleviate hardship for surviving family members upon death. The aim of avoiding hardship by planning and managing your resources well is part of worship.
PRINCIPLES FROM SHARIAH IN RISK MANAGEMENT, CHARITY AND LEGACY
1. Avoidance of Riba (Usury/Interest): One of the fundamental principles in Islamic finance is the prohibition of riba, which refers to the charging or paying of interest. Instead, Islamic financial transactions are based on profit-sharing arrangements, interest free loans or other Shariah-compliant structures.
2. Tabarru’ concept in risk management: Tabarru’ concept is also known as Takaful contribution, a concept in Islamic finance that is based on mutual-cooperation and shared responsibility for promoting risk-sharing. The term tabarru’ is derived from the Arabic noun
of ‘ءرب’ or ‘bara’a’, which means donation or giving voluntarily.
In Takaful, participants voluntarily contribute a certain amount of money into what is called a Tabarru’ fund. This tabarru fund is established for the purpose of aiding other participants in need at any particular time who may suffer financial losses or hardships due to unforeseen circumstances.
In Islamic finance, both parties share the risks and rewards of a financial transaction, fostering a sense of fairness and mutual responsibility. It aligns with the idea of helping individuals in times of need and sharing the financial burden collectively.
3. Avoidance of Gharar: Islamic finance discourages transactions with excessive uncertainty (gharar), ambiguity or hazard in a contract. The sale of goods or services that are not defined or do not exist is also an example of gharar. The good practice of avoiding gharar includes contracts that need to be clear and transparent. All parties should have a clear understanding of the terms and conditions before entering into any contract.
4. Avoidance of Qimar: Qimar is a form of gambling transaction that is viewed as inequitable in Islam. This is because qimar means the game of chance, in which one gains at the expense of another. This unjust enrichment relies on chance and not productive effort.
This speculative nature of qimar is contradictory to the principle of fairness in Islamic finance.
“The selection of investments in Islamic financial planning adheres to Shariah principles, introducing an ethical dimension to the investment strategy.”
5. Selecting Shariah compliant Investments: Islamic financial planning encourages investments in activities that align with Islamic principles and ethics. Investments in businesses involved in prohibited activities such as gambling, alcohol and riba activities are generally avoided.
6. Prioritising zakat and sadaqah. Islamic financial planning includes allocating a portion of wealth that is also known as zakat, a form of charitable giving. Muslims are required to donate a portion of their wealth to help those in need, promoting social welfare and community development.
Sadaqah is a form of voluntary charity given to those in need in order to please God. Anyone can give sadaqah for any amount. Some of the companions of the Prophet Muhammad SAW were incredibly generous in giving sadaqa, often giving away large portions of their wealth and keeping only enough to meet their needs. A good balance for us may be to divide our wealth between what we need for sustenance and charity.
7. Faraid laws for legacy and estate planning. In estate planning, ensure that the Faraid principles, which are the laws of inheritance stated in the Quran, are observed in the distribution of wealth. This includes structuring wills and trust structures.
Islamic finance reflects principles of integrity, fairness and responsibility. Islamic financial planning, guided by these ethical principles, aims to create a financial system that is
fair, transparent and aligned with Islamic values. By aligning Islamic financial planning and ethical principles, this will inherently contribute to a trustworthy and sustainable financial environment that fosters responsible financial planning and prioritises clients and the community while ensuring social welfare and economic development are intact.
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