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Title: TK 1003: Wealth Planning and Management


1
TK 1003 Wealth Planning and Management
  • Pre-examination Seminar
  • By Dr Shaikh Hamzah

2
Whats On Our Menu
  • 900 - 1030 a.m. -- All About CIFP Part I
    Assessment Methods
  • 1030 - 1045 a.m. -- Break
  • 1045 - 1200 noon -- Review of TK 1001(Session
    I)
  • 1200 -- 100 p.m. -- Break
  • 100 -- 330 p.m. -- Review of TK 1001
    (Session II)

3
Learning Outcomes
  • At the end of the PES, candidates should be able
    to
  • comprehend the assessment methods for the CIFP
    Part I program
  • have a clear idea of the final examination format
    and procedures, NOT the questions ?
  • understand the Dos Donts in the final exams

3
4
Learning Outcomes
  • At the end of the PES, candidates should be able
    to
  • have a better idea on how to maximize your
    scores/marks for each question in the exams
  • avoid common pitfalls and/or mistakes in the
    final exam
  • Reviews of the Module
  • Q A

5
Assessment Methods
  • The Assessment of the CIFP Part I Comprises of
    the followings
  • One Project Paper - 20 (Due on 17th
    July 2009)
  • Final Examination - 80 (Aug 4th,
    2009)

6
Format of the Final Exam
  • Duration 3 Hours (excluding 15 minutes reading
    time)
  • The Final Examination Consists of the Followings
  • Twenty MCQs 20 points
  • Five short essay questions 20 points
  • Choose three out five long questions 60 points

7
Assessment Methods
  • Distribution of Grades
  • 80 to 100 A
  • 60 to 79 B
  • lt 60 F

8
Dos and Donts
  • Dos
  • Read and follow the instructions carefully
  • (write legibly, read all of the questions, begin
    your answers for each question on a fresh page,
    etc.)
  • Observe your time management
  • Lead a healthy lifesyle few days before the exam

9
Dos and Donts
  • Donts
  • Leave any questions unanswered -- this you will
    surely get ...
  • Leave the examination hall before the time is up,
    i.e. never give-up
  • Make any Pleas or Confessions

10
Maximizing Your Marks
  • Analyze the framing of the question and response
    appropriately
  • e.g. Critically analyze, critical assessment,
    discuss, soliciting for opinions, understand,
    compare and contrast, analysis of statements,
    current issues, etc.
  • Answer what you are asked for, NOT what you know
  • Plan your answer

11
Maximizing Your Marks
  • Each question comes with the distribution of
    marks
  • Read and go through all questions and jot down
    your first thoughts on each question
  • Answer questions that will give you the most
    marks first
  • Write in full complete sentences
  • Write legibly

12
Topic 1
Topic 2
Topic 3
Topic 4
Topic 10
Topic 5
Topic 6
Topic 7
Topic 8
13
Common Pitfalls/Mistakes
  • To write what you know, NOT what is being asked
  • To leave questions unanswered
  • To write about the sad stories of your life
  • To write uneven answers according to marks
    distribution
  • To sit for the exam with insufficient
    stationaries required
  • To study until the last minutes, thus coming in
    late

14
Topic OneWealth Creation And Mobilisation From
Conventional And Islamic Perspectives
15
Review Questions Answers
  • Differentiate the concepts of wealth between the
    Islamic and conventional perspectives. Are there
    any points of similarities? How do you reconcile
    the two concepts in reality?
  • In Islam
  • All wealth belongs to Allah.
  • Man is a trustee and needs to use it in
    accordance with Islamic teachings
  • Wealth is in abundance
  • Everyone has been allocated what is due to him.
    It is up to him to work on it.
  • From conventional perspective
  • Wealth is generated by individual and hence he is
    the rightful owner
  • Wealth is scarce
  • It is man who generates wealth and not
    apportioned to him.
  • He has complete freedom to use it
  • Efforts are needed to generate wealth under both
    perspectives
  • To reconcile Mans effort can only be successful
    with the permission of Allah

16
Review Questions Answers
  • Describe the nature of goods that Islam
    distinguishes for public consumption. Why do you
    think Islam distinguishes them from those that
    could rightfully be privately owned?
  • Two kinds of assets for public consumption
  • First is public utilities such as large streams,
    bridges, land for common use and river banks.
  • Second, natural resources water, herbage fire
    and salt
  • However, jurists are of the opinion that those
    goods with the same attributes should be included
    as well

17
Review Questions Answers
  • The rationale is that those goods whose
    production are too costly and burdensome to
    individuals yet are very much needed by the
    public at large should belong to public.
    Otherwise the good can be privately owned

18
Review Questions Answers
  • Explain why wealth is considered as a two-edged
    sword? How could one protect oneself from going
    beyond the bounds permitted by the Shariah and
    why?
  • It is useful when one uses it in accordance with
    Shariah. It helps man to perform his obligations
    and he should get the blessings of Allah
  • On the other hand he will suffer in the hereafter
    especially when asked to account how he has
    attained and spent it.
  • If he has used them for things forbidden it will
    be worst for him
  • Some examples?

19
Review Questions Answers
  • Is wealth planning permissible in Islam? How much
    different will it be done from the conventional
    approach?
  • Define wealth planning
  • What are the components of wealth planning in
    Islam and in conventional practice
  • Why is it permissible in Islam? Wealth planning
    is permissible in Islam in order to ensure that
    man is able to live comfortably in his old age.
    Islam does not want Muslims to suffer in this
    world
  • It will be very different because
  • a Muslim needs to cleanse (pay zakat, voluntary
    sadaqah and spending on others) his property.
  • He must not indulge in unIslamic activities while
    generating, accumulating, preserving, protecting
    and spending his wealth.

20
Review Questions Answers
  • The three prohibitive elements that would make a
    commercial transaction non-shariah compliant are
    riba (usury), maisir (gambling) and gharar
    (uncertainty ambiguity). Why are they
    considered prohibitive to Shariah?
  • They obstruct justice and equity
  • The players are not in the same playing fields
  • Information is incomplete (gharar)

21
Review Questions Answers
  • They ask you what they should spend (in
    charity). Say Whatever you spend that is good,
    is for parents and relatives and orphans and
    those in want and for wayfarers. And whatever ye
    do that is good, -(Allah) knows it well Quran
    Chapter 2 (Al-Baqarah) Verse 215
  • Spending ones wealth on others is strongly
    encouraged by Islam as is mentioned in the above
    verse of the Holy Quran. Briefly explain the
    importance of spending in the context of wealth
    purification in Islamic wealth planning.

22
Review Questions Answers
  • Purification is of two kinds, the physical and
    the spiritual
  • Wealth purification is manifested by sharing with
    others what we have and better still what we love
    most (physical, purifying from non-Shariah
    compliant income that may be earned unknowingly
    or within tolerable limits)
  • It is in the spirit of searching for the
    blessings of Allah that we give away what we have
    (spiritual)

23
Review Questions Answers
  • The main distinction between the conventional and
    Islamic wealth planning is the Shariah
    requirement of wealth purification. Briefly
    explain each of the different Islamic wealth
    purification processes.
  • Spending (infaq)
  • Voluntary charity (sadaqah)
  • Compulsory wealth tax (Zakat)
  • Endowment (Waqf)

24
Topic TwoNature and scope of wealth planning
25
Review Questions Answers
  • Describe the differences and similarities between
    wealth planning and financial planning
  • Similarities
  • Both aim at enhancing the value of wealth or
    resources
  • Both use similar methods to enhance or preserve
    value
  • Both have specific objectives when formulating
    plans
  • Differences
  • FP is for specific projects or periods. WP is for
    the end of the period
  • FP is for relatively shorter term but WP is for
    long term
  • FP is meant to have enough for all periods but WP
    is for future

26
Review Questions Answers
  • Explain the differences and similarities between
    the objectives of conventional and Islamic wealth
    planning
  • Similarities
  • Both contain functions of generation,
    accumulation, protection or preservation,
    enhancement and distribution
  • Both aim to have a good life during retirement
  • Differences
  • Islamic need to do cleansing (zakat, etc)
  • Islamic cannot contravene Shariah

27
Review Questions Answers
  • Describe the significance of the different stages
    in wealth planning process
  • Inventory taking
  • Analysis Evaluation
  • Plan Designing
  • Implementation
  • Monitoring and Reviewing

28
Review Questions Answers
  • Explain the trade-off concept and its relevance
    in the preparation of a comprehensive wealth
    management plan.
  • Trade-off between risk and return
  • May not get the rate of return expected
  • Client may have different risk appetite
  • Risk-free concept means return is very low
  • Consistency of performance
  • Asset allocation can improve or worsen return
  • Trade-off between service and return
  • Trade-off between this world and the next

29
Review Questions Answers
  • How different is the conventional trade-off
    concept from the Islamic concept?
  • Trade-off between this world and the next
  • A Muslim believes in fate and destiny (qadha and
    qadar)
  • There is effort (ikhtiar) and leaving it to Allah
    (Tawakkul)

30
Review Questions Answers
  • Explain the similarities and differences between
    the conventional and Islamic Trade-off Concept
    in relation to wealth planning.
  • Similar answer to the previous question

31
Review Questions Answers
  • To Allah belongs all that is in the heavens and
    on earth To Him do all questions go back (for
    decision) Quran Chapter 3 (Ali Imran) Verse
    109
  • Based on the above verse from the Holy Quran
  • can you explain the concept of wealth ownership
    in Islam
  • what implications do you think the second part of
    the verse has on the generation and utilization
    of wealth in Islam?
  • what should the objectives of wealth planning in
    Islam be and relate its importance especially in
    the modern world.

32
Review Questions Answers
  • To Allah belongs all creations and hence all
    resources and wealth and man is just the trustee
    who has the right to use in accordance with His
    Will
  • We are accountable for all our actions
  • To generate and accumulate wealth in order to be
    closer to Him in whatever way. E.g. spend in His
    way, sharing with others, etc.

33
Topic ThreeWealth (asset) allocation process
34
Review Questions Answers
  • One of the most important aspects of successful
    wealth planning is the process of wealth
    allocation. Describe the main components of
    wealth allocation process and explain the
    significance of each to the success of wealth
    planning.
  • Establishment of objectives
  • Identifying potential opportunities
  • Determining risks and constraints
  • Potential investment channels

35
Review Questions Answers
  • One of the important processes in wealth planning
    is the wealth allocation. In order to ensure that
    the wealth allocation process is carried out
    properly, one needs to formulate the investment
    policy statement. List four important elements
    that should be included in the investment policy
    statement for wealth allocation process and
    briefly explain what each entails.

36
Review Questions Answers
  • Brief client description
  • Purpose of establishing policies and guidelines
    regarding objectives, goals, restrictions and
    responsibilities
  • Identification of duties
  • Statement of investment goals, objectives and
    constraints
  • Schedule of review of investment performance,
    Shariah compliance, etc.
  • Asset allocation considerations
  • Rebalancing guidelines for portfolio adjustments
    based on feedback

37
Review Questions Answers
  • If you are appointed to be a consultant for a
    high net worth Muslim individual to draft and
    execute a plan for his wealth, what would be the
    four important steps that you would take to
    ensure that his financial goals are fulfilled?
  • Planning
  • Identifying investors objectives and constraints
  • Creating investment policy statement
  • Forming capital market expectations
  • Creating strategic asset allocation
  • Execution
  • Feedback
  • Performance evaluation
  • Monitoring and rebalancing

38
Review Questions Answers
  • Suppose your client has USD200,000 and he wants
    to get a return of 10 per annum from the
    investments that you propose.
  • (a) What would his total asset be at the end of
    three years? Hint Use the formula A P(1
    r)n where A total asset at the end of n years,
    P Principal amount invested, r annual rate of
    return and n number of years invested)
  • (b) If you allocate 50 of the investment in
    fixed income instruments which give a return of
    5 per annum and the rest in equities with an
    expected rate return of 11 per annum, would such
    allocation meet with the expected rate of return
    of your client in three years time?

39
Review Questions Answers
  • (a) P total amount invested 200,000
  • r rate of return per annum 10
  • n number of years of investment 3
  • A total asset at end of n 3 years
  • Using formula A P(1 r)n
  • We have A 200,000 (1 0.10)3
  • A 266,200

40
Review Questions Answers
  • (b) If 50 of principal amount is invested in
    fixed income instruments that give 5 return
    and 50 in equities that give 11 return, then
  • A 100,000(1.05)3 100,000(10.11)3
  • 115,762.50 136,763.10
  • 252,525.60
  • (c) This investment does not meet with the
    objective of the investor.

41
Topic 4 Investment In Real Estates
42
Review Questions Answers
  • Real estate is one investment that seems to
    appreciate in value more than depreciate.
    Explain.
  • Real estate refers to land and anything affixed
    to it
  • It has special features
  • Durable/ Perpetual
  • Over time the property will be surrounded by
    development
  • More facilities become available
  • Scarcity and immobility

43
Review Questions Answers
  • What are the common factors that determine the
    value of real estate? Give reasons why.
  • High demand
  • Short supply
  • Development surrounding it
  • Shape and size
  • Accessibility
  • No encumbrances
  • Scenic view
  • Location

44
Review Questions Answers
  • Why does locality of a real estate play such an
    important role in determining the value of a real
    estate?
  • It is immovable and hence depends on where it is
    located, near the town, country side,
  • Accessibility
  • Access to facilities (market, shops, school,
    hospital)
  • Landscape

45
Review Questions Answers
  • Describe and explain the various methods of
    valuation of real estate
  • Comparison method
  • Compare like for like and adjust the differences
  • Investment method
  • Comparing the returns to investment on the
    property
  • Cost method
  • Normally applied to public properties such as
    schools, hospitals, etc. Comparison is made
    between the cost of building and the replacement
    cost giving allowance to depreciation
  • Profit Method
  • It is based on the kind of profit that could be
    earned from the property
  • The Residual method
  • It is used to evaluate the development sites and
    properties suitable for redevelopment. It
    compares value of proceeds (after development)
    with development cost

46
Review Questions Answers
  • Explain the economics of real estate cycles
  • Increase in demand due to population growth,
    industrial development, public works and
    government services
  • Time is required to supply and construct
    properties which gives rise to rents and land
    value
  • Peak high volume of real estate transfers. By
    that time, SgtD. Rentals fail to readjust. This
    causes the break of building boom

47
Review Questions Answers
  • Mr. Ali bought a house for investment. He paid a
    total of RM200,000 for it which includes the
    legal and agency fees and all other miscellaneous
    expenses. He took a 90 financing based on Bay
    Bithaman Ajil (BBA) for 20 years at 4.0 per
    annum. He managed to get a tenant who pays a
    rental of RM1,500.00 per month.
  • (a) How much will Mr. Ali pay for the house in
    20 years?
  • (b) What is the rate of return on his
    investment?
  • (c) Is this a good investment? Why?

48
Review Questions Answers
  • (a) 90 financing at 4 per annum for 20 years
    will yield a total financing cost of (90/100) x
    200,000 x (4/100) x 20 144,000
  • Therefore the total amount paid by Ali in 20
    years is 200,000 144,000 344,000
  • (b) The rate of return on his investment is
    1,500 x 12 200,000 x 100 9 p.a.
  • (c) Since the rental is 1,500 per month and the
    monthly instalment is 344,000 240 1433
    per month, it is not a bad investment at all.

49
Topic 5 Investment InSecurities
50
Review Questions Answers
  • Briefly explain the following terminologies as
    used in the securities market
  • Authorised Capital
  • Market Value of Firm
  • Bonus Issue
  • Earnings per Share or EPS

51
Review Questions Answers
  • Compare and contrast the debt and equity
    instruments
  • Debt and equity instruments are differentiated by
    claim and time.
  • Debt or borrowing is fixed in time and fixed in
    claim. i.e. they are terminal and have fixed
    maturity period. They must be paid in full or
    within the stipulated time. Once it is paid,
    creditors have no links with them

52
Review Questions Answers
  • Claim on debt is fixed (principal interest).
  • Equity provides ownership, is residual in claim
    and perpetual in time. Equity owners own the firm
    net of the firms obligations. The net residual
    portion belongs to equity holders. All values
    created beyond the firms obligations belong to
    the equity holders.
  • Equity being ownership is not terminal and does
    not have fixed maturity. Hence equity instruments
    are perpetuities.
  • Most common equity instruments is the common
    stock.

53
Review Questions Answers
  • What makes securities so attractive that
    shareholders are willing to part with their
    ownership when they go public?
  • The capital gain is normally very high when the
    company goes public (IPO price is much higher)
  • It provides instant cash
  • It is too long to wait for dividends to recover
    the capital gains
  • Shareholders can easily repurchase the securities
    if they want to
  • It is better to have cash now than to keep
    papers which may bring in losses too

54
Review Questions Answers
  • Identify risk elements inherent in the investment
    in securities
  • Business risk refers to uncertainty of income
    flows caused by firms business performance
  • Financial risk refers to uncertainty
    originating from the way the financing is done
    (equity- debt combinations etc)
  • Liquidity risk refers to un certainty
    introduced by the secondary market for investment
  • Currency risk exchange rate risks due to the
    fluctuations in exchange rates

55
Review Questions Answers
  • Country Risk also called political risk arising
    out of sudden change in policies or government
  • Bond risks and rating can be categorised as
    follows
  • Default risk
  • Interest rate risk
  • Liquidity risk
  • Inflation risk

56
Review Questions Answers
  • Explain the stock screening process adopted by
    the Shariah Advisory Council of the Securities
    Commission
  • Step 1 Identify the universe based on core
    business. SC has also listed activities that are
    non-Shariah compliant
  • Step 2 Takes into account the level of
    contribution of interest income from conventional
    fixed deposits or other interest bearing
    financial instruments. Dividends from investment
    in Shariah non-compliant securities are also
    considered.

57
Review Questions Answers
  • For companies with activities comprising both
    permissible and non-permissible elements the SAC
    considers two additional criteria
  • Public perception of the company must be good
  • The core activities of the company are important
    and considered maslahah (benefit in general) to
    the Muslim ummah and the non-permissible element
    is very small and involves matters such as umum
    balwah (common plight and difficult to avoid)
    uruf (custom) and the rights of the non-Muslim
    community which are accepted by Islam.

58
Review Questions Answers
  • To determine the tolerable level of mixed
    contributions from permissible and
    non-permissible activities towards turnover and
    profit before tax of a company the SAC has
    established the following benchmarks
  • a. The 5 benchmark is used for activities that
    are clearly prohibited such as riba gambling
    liquor and pork
  • b. The 10 benchmark is used for activities
    considered as umum balwah. E.g. interest from
    fixed deposit

59
Review Questions Answers
  • c. The 20 benchmark is used to assess the
    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.
  • d. The 25 benchmark is used to assess the
    level of contribution from activities that are
    generally permissible and have an element of
    maslahah to the public but there are other
    elements that may affect the Shariah status of
    these activities such as hotel and resort
    operations share trading stockbroking and
    others because these activities may involve
    non-permissible activities

60
Review Questions Answers
  • When there is a change of status from
    Shariah-compliant to Shariah non-compliant
  • Sell the securities immediately if it is
    profitable to do so and take the profits
  • Wait until the price of security equals cost if
    at the time of change of status the market price
    is less than purchase price.
  • While waiting if there is dividend received the
    company may take it.
  • If the company delays selling any profit made
    must be cleansed.

61
Review Questions Answers
  • Explain how an ijarah sukuk is structured
  • Refer to notes

62
Review Questions Answers
  • What are the main differences in the nature of
    real estate and securities?
  • Real estate physical properties not liquid no
    structured market information not readily
    available not easily transferable requires
    third party or real estate agents immobile huge
    in size value depends on state of development in
    the surroundings location view size and shape
    long term appreciating in value

63
Review Questions Answers
  • Securities two types of securities- equity and
    debt structured markets complete information
    available prices fluctuate wildly price is
    known lots of players easy transfer easy entry
    and exit small investment volatile risky but
    high returns short term

64
Review Questions Answers
  • What are the differences between investing in
    real estate and investing in stock market?
  • Refer to previous answer

65
Review Questions Answers
  • Investing in debt instruments is different from
    investing in equity instruments. What are the
    main differences in the nature of debt and equity
    instruments?
  • Refer to previous answer

66
Review Questions Answers
  • Explain the difference between equity and debt
    instruments
  • Refer to previous answer

67
Review Questions Answers
  • What are the features of sukuk that are globally
    acceptable?
  • Should be asset backed
  • Should not be based on debt

68
Review Questions Answers
  • Do you think harmonization of global Shariah
    opinions would enhance further development of
    Islamic finance industry?
  • Open question

69
Review Questions Answers
  • When the core business of a company is Shariah
    compliant, it may still have income from
    non-Shariah compliant sources. For such
    companies, the Shariah Advisory Council of the
    Securities Commission, Malaysia has issued four
    benchmarks that set the maximum level of
    non-Shariah income that could be tolerated for
    such companies to be considered as
    Shariah-compliant stock. Briefly explain each of
    the four benchmarks.
  • Refer to previous answer

70
Review Questions Answers
  • What are the main features of investments in
  • Real estate and
  • Securities?
  • Discuss their differences
  • Real estate physical properties not liquid no
    structured market information not readily
    available not easily transferable requires
    third party or real estate agents immobile huge
    in size value depends on state of development in
    the surroundings location view size and shape
    long term appreciating in value

71
Review Questions Answers
  • Securities two types of securities- equity and
    debt structured markets complete information
    available prices fluctuate wildly price is
    known lots of players easy transfer easy entry
    and exit small investment volatile risky but
    high returns short term

72
Topic 6 Insurance And Takaful Schemes
73
Review Questions Answers
  • Describe the roles of insurance and takaful in
    wealth planning
  • Insurance and takaful are very important for
    wealth preservation and distribution as they
    create an instant estate with a small premium
  • It helps in case of sudden death temporary or
    permanent disability in providing
  • Income replacement needs
  • Funeral expense needs
  • Debt repayment needs
  • Education needs

74
Review Questions Answers
  • Explain the differences between the underlying
    principles of insurance and takaful contracts
  • Insurance contract between the company and the
    client is one of indemnity
  • Takaful contract is one among the participants
    who are willing to donate part of their
    contributions to compensate losses incurred by
    any participant. This donation is called
    tabarru. The company is only the manager or
    operator.

75
Review Questions Answers
  • Briefly compare the differences in the takaful
    models
  • Mudharabah model where the company is the
    operator (mudharrib) and the group of
    participants is the provider of capital (rabbul
    mal). The company shares the underwriting surplus
    and the investment profits with the participants
  • Wakalah model company takes an upfront fee for
    managing the takaful business (underwriting and
    investment plus the operations). The company may
    share the profits from investment if it only
    takes fee for underwriting and operations.
  • Wakalah-waqf model similar to wakalah model but
    the donation portion is used to create waqf fund
    which is used to pay off losses incurred by
    participants.

76
Review Questions Answers
  • Explain the main differences in the life
    insurance contracts
  • Term life
  • For a specific period.
  • It is least expensive.
  • Can terminate and renewed at a higher premium
  • Could be until age 65 or 75 or 100 with no
    renewal guarantees
  • To remain insured the insurer issues renewable
    term insurance which will be converted to
    permanent coverage

77
Review Questions Answers
  • Whole life is for insureds whole life time
  • Very long period such as 88 or 90 or 100 years
  • Is a form of permanent insurance
  • It has element of savings called cash value
  • Straight life premium payable as long as
    insured lives
  • Limited-pay life policy premium payable for
    specific period say 20 years or until 65
  • After that no payment needed but insured is
    covered until death

78
Review Questions Answers
  • Endowment is another form of permanent insurance
    similar to whole life.
  • The only difference is that the contracts provide
    death benefits for a specified period of time.
  • It has cash value and insured is paid face amount
    at the end of the period if insured is still
    alive.

79
Review Questions Answers
  • Investment-life insurance contracts is different
    from any other life insurance contracts
  • The premium is divided into two accounts
    investment account and risk account
  • Investment account belongs to insured
  • Risk account belongs to company who will conduct
    operations and pay off compensations.
  • At death the insured party will get the
    investment account plus the face value of the
    risk account
  • The same as investment link insurance

80
Review Questions Answers
  • List the main differences between the
    conventional insurance operations and those of
    takaful (Islamic insurance).
  • Insurance is a contract of indemnifying the
    policy holders from the risks related to the
    policy. Takaful is the mutual sharing of risks
    and compensating those that face any hazards
  • Insurance involves ambiguity (al-gharar),
    gambling (al-maisir) and interest bearing
    investments (riba). Takaful avoids all three

81
Review Questions Answers
  • Explain the concept of tabarru as is used in
    takaful.
  • Tabarru comes from the Arabic root word
    al-birr which means righteousness. Tabarru
    is a sincere or voluntary donation by takaful
    participants from part of the contribution for a
    policy. The participants have no right to the
    amount donated and will not receive any benefit
    out of it because he has given up his right on
    it This is the part that is managed by the
    takaful operator to pay out claims.

82
Review Questions Answers
  • What are the means available today that can help
    us protect our wealth?
  • Insurance and takaful
  • There are available takaful products that are
    meant to compensate losses on property due to
    fire, theft, and where a piece of property is
    being purchased under some financing arrangement,
    the purchaser can have a policy that would pay
    out the total financing in case of death or
    incapacitation of the purchaser

83
Review Questions Answers
  • There are three main models of takaful in
    operation today. Describe the basic Quranic
    principle that underlies all the different
    takaful models.
  • The basic Quranic principle of Taawun or
    helping one another in righteousness and piety is
    the underlying principle that is being employed
    in formulating takaful models. Surah Al-Maidah
    (5) verse 3) which means, Help ye one another
    in righteousness and piety, but help ye not one
    another in sin and rancour

84
Review Questions Answers
  • Explain in some detail the operations of one of
    the models.
  • Refer to the previous answer

85
Topic 7 Estate Planning
86
Review Questions Answers
  • What is the purpose of estate planning and why is
    it important to have a plan?
  • Estate here means all the movable and immovable
    properties of an individual
  • Estate planning therefore concerns the various
    steps to be taken in order to accumulate,
    conserve, enhance and distribute the estate of
    the individual. In Islam, it also includes
    cleansing or purifying the estate which involves
    voluntary and compulsory distribution and after
    death, the implementation of the law of
    inheritance.
  • It is very important to have a plan so that the
    wishes of the individual can be fulfilled and his
    dependents are well taken care of.

87
Review Questions Answers
  • What are the most important components of a Will?
    Briefly explain the purpose of each component.
  • A will is a declaration of the intentions of a
    testator (owner of an estate) with respect to his
    property which he desires to be distributed upon
    his death.
  • It should include
  • The list of his properties ( to know what he has
    as property)
  • The list of beneficiaries and the proportions of
    the property he allocated (to whom should be
    given)
  • The administrator or executor of the will (to
    execute his will)

88
Review Questions Answers
  • When does a Will take effect and can one change
    his Will? If so, how many times?
  • A will takes effect only after the death of the
    testator
  • One can change his will any number of times until
    his death

89
Review Questions Answers
  • What is the Power of Attorney? When does it
    become necessary? Who can get it?
  • It is an instrument created by the person
    granting the power of attorney (Donor) in favour
    of a person or persons named by the Donor in the
    power of attorney instrument (Donee)
  • It becomes necessary when the Donor may not be
    available to execute his plan or transaction
  • The person named by the Donor in the instrument
    of the Power of Attorney

90
Review Questions Answers
  • Differentiate between a contentious and
    non-contentious Probate.
  • Non-contentious Probate is when the deceased has
    left a Will and named an executor, or if all the
    beneficiaries have consented to a particular
    executor, even if his name is not mentioned in
    the Will
  • Contentious Probate is when the executor is not
    named in the Will or when the beneficiaries do
    not give consent to the executor.

91
Review Questions Answers
  • Differentiate between a Trust and Will
  • Will is a declaration of the intentions of an
    estate owner on how his estate is to be executed
    when he dies.
  • Trust is the right given to a person or persons
    to manage or handle an interest (could be a
    property or anything of value) on behalf of
    another person

92
Review Questions Answers
  • What are the roles of a Representative in the
    administration of an estate?
  • He has to fulfil all the intentions of the
    testator according to the Will
  • Essentially, he has to ensure that the estate is
    well managed, transacted and distributed to the
    rightful beneficiaries

93
Review Questions Answers
  • Explain the differences between the Contested and
    the Non-Contested Beneficiaries
  • Non-contested beneficiaries are those whose names
    have been listed and their proportions of estate
    have been allocated
  • Contested beneficiaries are those whose names are
    not listed, these may come from spouses,
    unmarried daughters, infant sons and/or mentally
    or physically disabled minors who are incapable
    of looking after themselves

94
Review Questions Answers
  • Islamic Law of inheritance seems to give favour
    to males than females. What seems to be the
    rationale?
  • Islamic law of inheritance is based upon the
    responsibilities of the males over the females.
    This is clear from the Quranic injunctions
  • The husband for instance are to provide
    everything for the wife even if the wife has her
    own income and the wife does not have to share
    her income if she does not want to. The husband
    can only use her income if she consents

95
Review Questions Answers
  • Can somewhat give away his property according to
    his own personal preference?
  • He can do so while he is still alive and not on
    his death bed

96
Review Questions Answers
  • A man dies leaving a wife and a son. What are the
    proportions of the estate that the wife and the
    son should get?
  • The wife should get 1/8, and the rest goes to the
    son

97
Review Questions Answers
  • A lady leaves her husband, her father and two
    daughters. What proportions of her property will
    each get?
  • husband gets ¼ or (3/12) two daughters get 2/3
    or (4/12 each) and father will get the residue
    which is 1/12. This is the case where the father
    will not get his fixed share of 1/6.

98
Review Questions Answers
  • List the main features of the Islamic law of
    inheritance (faraid).
  • Distributed based on responsibilities, need and
    nearness or closeness to the deceased

99
Review Questions Answers
  • Explain why it forms the basis of estate
    distribution in Islam.
  • Because it is comprehensive, covers all the heirs
    and is essentially Quranic

100
Review Questions Answers
  • A man dies and leaves behind two wives, a son,
    two daughters and a brother from the same parent.
    If his total estate is worth USD100,000 how much
    will each of the beneficiaries get?
  • The two wives will share 1/8 or 1/16 each or 2/32
    each
  • The two daughters and the son will share 7/8 in
    the proportion that the son will get two portions
    and the daughters one each. So, 7/8 to be divided
    by 4 which is 7/32 each. So the son gets 14/32
    (43,750), the daughters 7/32 (21875) each and
    the wives 2/32 (6250) each
  • The brother does not get anything as he has been
    blocked by the son

101
Review Questions Answers
  • The Islamic law of inheritance is derived mainly
    from the Quran. List down the main principles of
    the law
  • See the previous answer

102
Review Questions Answers
  • A woman dies and leaves behind a daughter, a
    brother from the same parents, two granddaughters
    and a grandson who are the children of her late
    son. If his total estate is worth USD100,000 how
    much will each of the beneficiaries get?
  • Daughter will get ½ 50,000
  • Grandson and 2 granddaughters will share the
    other half with the grandson getting 2 portions
    and granddaughters get one portion each. The
    brother gets nothing.
  • So the grandson gets ¼ 25,000
  • The granddaughters get 1/8 each or 12,500

103
Topic EightRetirement planning
104
Review Questions Answers
  • What do you understand by retirement planning?
  • Retirement planning is a comprehensive process of
    reviewing and analysing our assets, liabilities,
    saving and investment strategies to ensure there
    is sufficient income for all our needs when we
    retire.
  • In other words, based on the wealth that we have
    we would like to make a comprehensive plan to
    ensure we have enough during our retirement.

105
Review Questions Answers
  • Why is retirement planning becoming more
    important now?
  • In the past, the average income level of
    individuals were not high enough to warrant a
    comprehensive plan.
  • Secondly, the average life expectancy has
    significantly increased due to advancement of
    medicine and improvement in quality of life.
  • Thirdly, there is also an increase in the cost of
    living especially medical, which requires proper
    plan for healthy life.
  • Fourthly, there is significant increase in the
    average income level of society that warrants a
    comprehensive plan to meet all the needs of
    modern living.

106
Review Questions Answers
  • There are many factors that lead to the need for
    retirement planning. List four of them.
  • Refer to previous answer

107
Review Questions Answers
  • Explain the six stages of retirement planning
    process.
  • The six stages of retirement planning process
    are
  • Setting retirement plan goals (setting retirement
    goals and the desired life style they must be
    specific, realistic and measurable)
  • Obtain necessary information to determine
    retirement needs (information pertaining to
    financial statement, required retirement income,
    resources available, interest and inflation rate,
    investment opportunities will help achieve the
    goals set above) These information will be
    necessary to calculate the future income needs
    using the Replacement income method or the
    Expense method

108
Review Questions Answers
  • Analyse information and calculate saving needed
    to meet the objectives (we need the cash flow
    statement showing clients current annual sources
    of income and uses of cash, annual budget listing
    of present and future income, review of all
    available assets that will be utilized to meet
    retirement needs)
  • Plan the distribution of the income (must take
    into consideration the risk appetite, the
    inflation rates, etc)
  • Implementation of the plan
  • Reviewing the plan (to revisit and rebalance the
    strategies)

109
Topic NineTax Planning and Management
110
Review Questions Answers
  • What are the criteria used to evaluate a tax
    system?
  • Certainty All tax liabilities should be certain
    and not arbitrary
  • Fair All transactions should be treated fairly
    for tax purposes
  • Efficiency The tax system should be able to
    generate the amount of revenue required by the
    Government
  • Low compliance cost Tax laws should be simple
    so that compliance costs can be kept to a minimum
  • Flexibility Aspects of the tax system can be
    varied quickly to have an immediate impact and to
    achieve other economic objectives

111
Review Questions Answers
  • Define the following terms
  • Chargeable income
  • Scope of taxation
  • Tax rebates
  • Tax exemptions
  • Chargeable income income that is taxable which
    is gross income less all relief allowed
  • Scope of taxation the definition of income that
    is taxable. It depends on whether the person is a
    resident of the country or not and that his
    income is earned from activities conducted in the
    country or remitted from outside. If a person is
    a resident then all income he drives from the
    country or remitted from abroad will be taxable.

112
Review Questions Answers
  • Tax rebate deduction from the tax charged. E.g.
    tax rebate is granted to individuals whose
    chargeable income is less that 3,500. The rebate
    is fixed at say 350.00
  • Tax exemption income that is not taxable, such
    as pension, interest payment on certain loans

113
Review Questions Answers
  • Explain the following terms
  • Deductible expenses
  • Tax avoidance
  • Tax evasion
  • Double deductions
  • Capital allowance
  • Deductible expenses expenses that can be
    deducted from chargeable income, such as expense
    on computer, books, medical bills for parents,
    etc.

114
Review Questions Answers
  • Tax avoidance legal way of reducing tax by
    using lacunae or means of escape or loopholes in
    tax laws
  • Tax evasion illegal way of evading the payment
    of tax
  • Double deductions double deductions are special
    deductions given to some expenses. It means that
    if you spend 20,000 then you get a tax deduction
    of 40,000
  • Capital allowance capital expenditure on
    machinery, buildings for certain businesses can
    be deducted from the income before computing the
    chargeable income

115
Review Questions Answers
  • Explain the advantages of tax planning
  • Tax planning is a way of organising businesses in
    order to reduce the payment of tax in a legal
    way. E.g. one may create subsidiaries in a way
    that allows for more tax deductions and hence
    reduce payment of tax.
  • There are many ways that can be done to reduce
    tax in a business environment. E.g. the
    government may want to encourage certain industry
    and hence gives tax holidays provided certain
    conditions are fulfilled. Then one should take
    advantage of such advantages by fulfilling the
    necessary conditions from the beginning so that
    when it comes to tax computation, you are able to
    comply with the requirements to reduce the tax.

116
Topic 10Zakat (zakah)
117
Review Questions Answers
  • Describe the conditions of Zakat payment
  • Must be a Muslims
  • Giver is freeman and not a slave
  • The wealth has reached the nisaab. Nisaab is the
    amount upon which the zakat is due and obligatory
  • A minimum duration of 1year (hawl) has passed
    since ownership of the wealth concerned
  • Ownership of the wealth is known
  • The wealth is fully owned (milkut taamm)
  • When a person dies, his zakat due must be paid
    from the inheritance before distribution. When a
    person dies four payments need to be made
  • Debts which include zakat due.
  • Wasiyyah a will
  • Burial expenses
  • inheritance

118
Review Questions Answers
  • Describe the eight (8) categories of people who
    can receive Zakat
  • Needy Muslims (faqeer/fakir)
  • Poor Muslims(miskin)
  • Aamil
  • Mu-allafatu quloobohum (new converts to Islam)
  • Fir-riqaab- slaves who are Muslims who are
    mukaatab slaves. They are slaves who have been
    allowed by their masters to work towards freeing
    themselves and paying their masters the amount
    due in instalments
  • Al-ghaarimeen- Muslims who are in debt
  • Fisabilillah strive in the cause of Allah
  • Ibnus-sabil travellers (musafir) who are
    travelling for a pious or permissible purpose, or
    to return to their own country

119
Review Questions Answers
  • Describe those who cannot received the Zakat
  • Non Muslims
  • Rich people they still can get zakat if the
    falls under ghaarim, or the amil of the
    fisabililah category
  • The dependents of those who give zakat provided
    they are poor and no longer considered his
    dependants
  • The families of the Prophet (pbuh)
  • Slaves cannot receive zakat because they already
    receiving maintenance from their masters.

120
Review Questions Answers
  • What are the TWO types of Zakat?
  • Zakatul-Maal ( zakat on wealth) namely gold,
    silver, currencies, stock in trade or business
    merchandise, livestock (al-anaam), cereal and
    fruits like dates and the dried grapes.
  • Zakatul-fitr - zakat on the person paid during
    the month of Ramadhan. Zakatul-fitr is
    approximately 2.3kg of the staple food of the
    country or its value.

121
Review Questions Answers
  • What are the conditions of Zakatul-fitr?
  • Giver is a Muslim
  • Is a mukallaf
  • Is a free man and not a slave
  • Able to pay the zakatul-fitr
  • He is living during or before the sunset on the
    eve of eidul-fitr on the alst day of Ramadhan. If
    a child is born after the sunset on the eve of
    eidul-fitr, zakat is not obligatory on him since
    the eve is the start of 1st shawal.

122
Review Questions Answers
  • What are the characteristics of Waqf?
  • Irrevocability consensus among Muslim jurist
    that the founder cannot revoke the dedication if
    the property has already been declared a waqf
  • Perpetuality majority of Muslim jurist believe
    waqf must be perpetual once it is created and
    this will ensure that no confiscation of waqf
    property by government or by individuals.
  • Inalienability- feature originates as the
    property of waqf is transferred to Allah(swt)
    although the usufruct derived from it can benefit
    man.

123
Topic 11Waqf
124
Review Questions Answers
  • What are the 3 types of waqf
  • Waqf Khayri (public waqf) is an endowment made
    by the founder to support the general good and
    welfare of poor and the needy in society.
  • Al-waqf al-Dhurri, Alwaqf al-ahli and waqf
    ala-wlad are same and refer to family waqf. The
    founder endows his property to his children,
    grandchildren, relatives or other persons whom
    he specifies. If the beneficiaries not longer
    alive, then waqf property will be given for
    public welfare purposes. Encourage by the Prophet
    (pbuh)
  • Al-waqf al-mushtarak (combined public and family
    waqf) created by the founder to support both
    the public and his family.

125
Review Questions Answers
  • Describe the conditions for validity of waqf
  • Founder must be aqil (sound mind), baligh
    (adult) and hurr ( a free man/women) and capable
    to transfer the ownership to the ownership of
    Allah.
  • Dedicated property can either be movable or
    immovable
  • Appoint a muttawalli (trustee) either himself or
    someone else
  • Beneficiaries can be specified by the founder in
    his waqfiah (waqf deed), it can be either his
    family members, society
  • Creation can be either oral i.e verbal or written

126
Review Questions Answers
  • Describe the endowment Assets (al Mawquf)
  • Immovable and movable property land field,
    farms, buildings., mosque are immovable. Movable
    are cattle and implements of animal husbandry,
    books, money, crops, weapons, and share of
    company.
  • Waqf sahih (sound waqf) and waqf ghair sahih
    (unsound waqf)- waqf sahih is the waqf upon mulk
    land i.e. Privately owned freehold property over
    which the owner held complete rights of
    alienation. Waqf ghair sahih are state owned land
    and whose property belongs to the empires public
    treasury
  • Direct and indirect waqfs direct waqf is a waqf
    created to serve the people free of charge like
    mosque, schools. The creation of indirect waqf is
    needed in order to provide running expenses e.g.
    Renting properties.

127
Review Questions Answers
  • What are the restrictions to waqf
  • irrevocability founder cannot revoke the
    dedication if the property has already been
    declared as waqf
  • Perpetuity waqf created must be perpetuity this
    will ensure no confiscation of
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