Muslims have to abide to the Shari’a in every aspect of their life including marriage, divorce, child-rearing, inheritance, social conduct and economic transactions. The latter is often negated, and there is a palpable nonchalance amongst many Muslims towards how to conduct their economic transactions. Fortunately, the Islamic finance industry has provided an avenue for individuals to ensure that this part also adheres to the Shari’a. However nowadays compliance with Shari’a teachings is becoming too complex and it requires the help of professionals such as Islamic financial planners and advisers, who are currently a rare species. Dr Wafica Ali Ghoul highlights areas where the average Muslim may need help from such professional advice.
Hajj Savings
Hajj is one of the five fundamental pillars in the Islamic religion; it is an obligation for every Muslim who can afford it. Hajj is not valid if it is performed “on credit”: the cost of hajj has to be earned and saved, although it could be paid for as a gift from another person. Millions of Muslims around the world have been unable to go on hajj because they do not have the requisite amount of funds. They would have been able to afford to undertake the pilgrimage if they had been provided with the guidance to start saving for it from an early age, possibly through a wadi’ah account, a mudaraba account, a musharaka account, or by investing in Shari’a-compliant mutual funds.
To cite an example: In Malaysia, the Pilgrims Fund Corporation, better known as Tabung Haji, was created in 1963 to enable Malay Muslims to save gradually for hajj expenditures and to provide services for those pilgrims such as a special withdrawal network in Saudi Arabia during their pilgrimage trip. The fund recently boasted having around 4 million members out of 12 million Malay Muslims, as well as more than USD 2 billion in deposits.
Saturna Capital, which is based in the USA, has developed a simple worksheet that can help Muslims determine the amount of savings needed to cover the cost of hajj by a certain target date. This is done by calculating the annual contribution needed to accumulate the projected cost of hajj in a future year by assuming an average annual inflation rate and a pretax average annual return, keeping in mind that taxes will have to be paid on income from the investment.
To illustrate the importance of professional advice, a financial planner could advise a client to select a growth fund for a hajj saving account, rather than an income fund, in order to minimize the impact of taxes. Another way would be recommending saving for hajj through setting up a retirement account if the trip is planned after retirement.
2. Obligatory Charitable Donation ( Zakah)
Islam frowns upon wealth concentration which results in a big divide between the “haves” and the “have-nots.” A rich man’s wealth is considered to be a gift from God that needs to be shared with the poor and needy. A Muslim can donate in various ways such as zakah – which is compulsory – establishing waqfs and paying sadaqa, which are both voluntary. By doing so, he/she would be spending in the way of Allah. As the Holy Qur’an (2:261) states “The likeness of those who spend their wealth in the way of Allah is as the likeness of a grain (of corn); it grows seven ears, and each ear has a hundred grains. And Allah gives manifold increase to whom He wills. And Allah is All-Sufficient for His creatures’ needs.
Like hajj, zakah is one of the five pillars in Islam. However, it is the least understood pillar. Zakah means purification as well as growth and increase. It is the portion of assets that Islam mandates being spent in the ways specified by the Shari’a. Zakah benefits the payer spiritually in this life as well as reaping benefits in the afterlife. In addition, it helps recipients such as the poor, orphans, widows and the handicapped to gain security and independence in their lives.
Muslims have to contribute a certain percentage of their annual income. Assets which are subject to zakah are those that have the potential of growth or increase, such as cash, gold, silver, livestock and agricultural crops. Zakah is required only on the remaining value of these assets at the end of the year, not on the amount of these assets which are spent during the whole year.
There are some views that the Holy Qur’an did not explicitly specify the details of enforcement and the distribution of the collected funds. During the respective caliphates, the state was responsible for the collection and distribution of zakah; however this practice has come to an end. In recent times, individuals have become responsible for distributing their own zakah to people whom they consider to be qualified as zakah recipients.
The calculation of zakah is not straightforward; even university graduates would have a hard time comprehending the rules. More complicated is deciding who the qualified recipients are. Trained professionals can assist Muslims in this area.
3. Voluntary Charitable Donation through Waqf
Waqf (endowment) is a non-bank financial institution with the objective of managing Muslims’ lifelong, voluntary charity. Waqf means the non-negotiable transfer of ownership of property which can be used to generate recurring income that is directed to a specific charitable purpose. The transfer of ownership can be established during a person’s lifetime or in a will after the donor’s death.
Waqf has been used as a means by which Muslims voluntarily supply funds for constructing and maintaining universities, libraries, hospitals and orphanages in Muslim countries. Experts distinguish three main types of waqfs in Islam:
- Religious waqf: Property is donated to mosques and religious schools;
- Philanthropic waqf: An asset is donated to benefit the poor and to promote social activities such as the provision of free health care;
- Family waqf: assets are donated by parents to children and inheritors while specifying that extra income will be spent for helping the needy.
The waqf market is estimated to be a USD500 billion capital pool. Reuters estimates the size of the waqf market in Saudi Arabia to be between USD100 billion and USD 250 billion. Waqf assets are currently managed by charitable trusts, usually in real estate or real estate-related financial products, resulting in high concentration and low returns.
A financial planner can help in optimizing this huge source of funding by directing Muslims to favour philanthropic waqfs, which would help in the alleviation of poverty instead of having most of it tied up in real estate assets which can go unutilized for decades.
4. Asset Acquisition
Most Muslims have been relying upon interest-based conventional banks when financing an asset acquisition. A financial planner would direct a Muslim to an Islamic bank for buying a house or a car through qard hasan (benevolent loan), a murabaha contract (cost plus markup) or through ijara wa, iqtina (lease with the option to buy).
Previously, asset acquisition in Islamic banking was not favorable tax-wise. For instance, procuring a Shari’a-compliant mortgage would mean the property changes hands twice subjecting the transaction to double stamp duty. However, governments around the globe are competing to capture a piece of the Islamic finance bounty by creating a more attractive regulatory environment for Shari’a-compliant banking and finance. In countries such as the UK, the tax code has been amended to remove the double-taxation disadvantage.
5. Inheritance Planning
This is needed for transferring assets to inheritors. It is similar to conventional estate planning. Shari’a spells out how an estate should be divided up among heirs. The distribution of an inheritance estate is a huge topic with intricate details, and there are a number of verses in the Quran that deal with this topic. In most Muslim countries, traditions supersede religious teachings. A Muslim parent is expected to divide the estate among offspring such that the son gets twice as much as the daughter; the reason is that males are responsible for looking after females. However, it is typical to find parents leaving the largest part of their estates to the sons with little, if anything, to the daughter. This violates Shari’a.
Writing a will that abides to the Shari’a can be very complex especially in situations when there are many beneficiaries (such as in situations where there are several spouses and stepchildren) and professional help would be valuable.
6. Saving for the Marriage Dowry
Islam places a large value on the institution of marriage. There is no specific Shari’a rule regarding a man paying a woman a dowry at the time of a marriage proposal although there is a concept that is similar to today’s pre-nuptial agreement: an upfront gift along with the specification of a deferred future payment should a divorce take place.
In some Muslim countries, a man has to offer a pre-marital monetary gift whereas in others, such as Egypt, the woman’s parents have to come up with the dowry. Many parents would reject a marriage suitor who does not have a significant lump sum as a minimum, and they compete in requesting a higher dowry which has become a status symbol. Financial planning would help a man or a family to save for this very important life goal.
7. Divorce, Child Custody and Alimony Payments
A century ago the rate of divorce in Muslim societies was negligible; in fact divorce was unheard of. It was a taboo to describe a woman as a divorcee, and it was disgraceful to dissolve a marriage because it indicated a failure. A Muslim woman used to endure unfair and very difficult conditions within the marital institution. Returning to her parents’ home she would have very restricted mobility outside the home. She typically lost custody of her children and had zero chances of re-marrying. Those days are over; with globalization and increasing access to education, women are choosing divorce over living under severe marital conditions.
There are rules in Shari’a that govern divorce: Parents of both spouses have to attempt to resolve differences, and a divorce is only used as a last resort. If divorce does happen, Shari’a dictates the payment by the man to the woman of a pre-agreed lump sum to help maintain herself for a short period of time. It also specifies who should get custody of the children, although cultural traditions tend to surpass Shari’a in this regard.
A divorced woman can benefit from seeking the advice of professionals in investing money received in a divorce settlement, or she can get legal assistance for claiming her money, a right which she is denied in many cases. In addition, she can benefit from assistance in the case of a dispute for child custody.
8. Asset Protection
Conventional insurance is prohibited in Islam because it involves elements such as speculation, riba, and gharar. Takaful is the Islamic equivalent of conventional insurance. It is based on the principle of cooperation and works through participants’ voluntary and collective risk-sharing. It represents a joint guarantee mechanism that protects against certain exposures to perils. It involves pooling money from a group of people to create a contribution fund which is owned by contributors as opposed to being owned by the company in the case of conventional insurance. The fund is invested by the takaful company and used to pay participants’ claims in a Shari’a-compliant manner. Almost every major type of conventional insurance policy has a takaful equivalent. The various policies differ in the allocation of premiums. For instance, takaful life insurance enables participants to accumulate a target amount over a certain period. In addition, it serves as a mechanism for protecting all participants against certain events that may hurt their financial position. Takaful life insurance can be used to fulfill other financial objectives such as creating a fund for children’s education, or to payoff the outstanding balance in the case of the premature death of a home buyer.
The takaful industry is estimated to represent an insignificant share of 1% of the global insurance market; however experts project great growth opportunities. A financial planner can advise a Muslim about resorting to the takaful industry to hedge various risks.
9. Wealth Management
Experts estimate that on a global level, only 12% of Muslims use Islamic financial products. Financial planners can help Muslims sift through the many investment options. Muslim investors have a variety of alternatives when constructing a financial portfolio, including interest-free bank deposits, investments in Islamic mutual funds, private placements in Muslim businesses and investments in conventional businesses which invest the funds in Shari’a-compliant activities. Forbidden investments include conventional bank savings and investment deposits, the purchase of interest-yielding bonds, and the acquisition of shares in companies which are involved in forbidden business activities such as gambling, pornography, weapons, entertainment, as well as the production or distribution of alcohol, contraceptives, and non-halal meat or pork products. It is worth pointing out that Islamic investing is not restricted to businesses owned or operated by Muslims.
Islamic investing has been facilitated by the creation of Shari’a-compliant indexes such as the Dow Jones Islamic Indexes and Standard and Poor’s Islamic Indexes, which identify Shari’a-compliant corporations. The availability of Shari’a-compliant indexes should in principle render investing more affordable and accessible for the public, particularly Muslim individuals who want to manage their own portfolio. In addition, there are currently over 800 Islamic mutual funds available worldwide for the benefit of passive investors. Islamic investing and indexing in particular are fairly new and so are familiar only to a limited number of the global Muslim community.
Going back to Tabung Haji in Malaysia, we note that it enabled Malay Muslims to direct their savings to Shari’a-compliant investment activities through a minimum monthly installment of RM10 for adults and RM2 for children. Thus, the overall benefits of investing can have a long-term impact on both the investor and his or her dependents.
10. Saving for the Children’s Education
Muslim countries suffer from a high illiteracy rate which in many cases arises from parents’ inability to pay the tuition fees. It can become unaffordable as early as nursery school. This usually results in child labor and a high rate of crime, or migration to Western countries to work as unskilled workers.
Creating saving accounts following the birth of the first child would be helpful, especially if Muslim countries develop a Shari’a-compliant system for paying schools and universities. Ideally speaking, this would be subsidized by matching contributions from zakah and waqf funds for qualified recipients such as poor account holders. Saturna Capital for instance offers special accounts for building education funds for children savings accounts.
11. Counseling Potential Entrepreneurs
Most of the Islamic world is underdeveloped with very few large corporations. Small and medium enterprises are prevalent; they are known for promoting innovation and job creation which leads to economic prosperity, social justice, equitable distribution of wealth, as well as enhancing social inclusion.
Islam recognizes the importance of conducting business activities in developing communities and supports fair trade, commerce and entrepreneurship. The Holy Qur’an (4: 29) states “O Believers! Do not consume each other’s wealth unjustly, but only [in lawful] business by mutual consent.” In another sura, the Holy Qur’an (62:10) emphasizes that searching for a living through fair business earns one Allah’s blessings.
Conducting business activities in a Shari’a-compliant manner is considered to be a form of worship since it is the antithesis of hoarding money in a bank account and benefiting from the forbidden riba element. In addition, it helps other Muslims through job creation. As evidence that entrepreneurial activities are important, it is worth pointing out that pilgrims are allowed to carry out business transactions during the annual hajj season (Qur’an, 2:198). This fact has contributed to the spread of Islam and the exchange of goods from different parts of the world among pilgrims, many of whom are merchants meeting in one place annually.
Counselling potential entrepreneurs would help reduce unemployment, and it would be especially helpful in creating home-based work for Muslim women who are raising children and need additional income.
12. Career Planning
With very high unemployment rates, Muslim youth can benefit from career counselling. In some Muslim countries, the education system prior to college years does not prepare an individual to make sound choices, focusing on memorization of information, lacks of laboratories that demonstrate technical concepts, and neglects of emphasizing extra-curricular activities.
It is a known fact that the Muslim world lags behind in the area of scientific progress and publications and that universities typically graduate a large number of liberal art and business administration students who compete for a limited number of job opportunities. There is a general lack of emphasis on entrepreneurship development as a major in business schools. However, this is beginning to change.
13. Advice about Accessing Financial Aid for Higher Education
This involves advising the Muslim youth about the possible alternatives for obtaining financial support, grants or scholarships for pursuing a college education. The Islamic Development Bank, as well as other organizations, is making an effort to provide financial support to students who wish to pursue higher education in the field of Islamic banking and finance, although such programs remain known to a select few. Other tactics have involved subsidized college education, as in the case of Arab Open University which has campuses in several countries, and which is funded by a joint effort between Prince Talal of Saudi Arabia and UNDP.
In the 1960s and 70s, the Soviet Union won a lot of converts by offering full university grants to poor Muslim Lebanese young people who for the most part accepted the communist ideology for the rest of their lifetime. Nowadays, many Western embassies are following the same strategy by offering Muslim young people attractive graduate assistant positions or full scholarships in an effort to shape future Muslim leadership. This strategy has already borne fruit since the most visible leaders in the Muslim world are graduates from Western universities who adhere to Western advice hence enabling the exercise of Western influence.
14. Retirement Planning
Most Muslim countries lack a social security system that provides supplementary funds to retirees who do not have a pension income. Setting up a defined contribution plan and lobbying for exempting it from taxes, or at least deferred tax payments, would enable Muslims to look forward to a more comfortable phase of life in their senior years.
Shari’a-compliant retirement planning is becoming accessible even in countries which have a Muslim minority population. For instance, in January 2011 the UK’s new national pension scheme, the National Employment Savings Trust (NEST), developed a Shari’a-compliant global equity fund in order to widen its choice of funds for the 200,000 Muslim pensioners out of the 2.5 million Muslim who live in the UK. Shari’a-compliant fund options are available through 25% of the defined contribution retirement plans offered to employees in the UK’s top FTSE 100 major corporations.
15. Health Protection
Conventional health insurance plans are not halal, thus Muslims need professional advice in terms of creating a halal method for paying health care bills. The takaful industry is now designing policies that provide hospitalization and disability benefits. It is interesting to note that some takaful companies do not provide coverage for serious illnesses such as AIDS, which is controversial.
Conclusion
More needs to be done to develop financial planning in the Muslim world, but the seeds that have been planted are taking root. The advent of Islamic banking and finance has undoubtedly thrust the notion of planning for one’s future or protecting ones dependents to the fore. In pre-modern states, there was more of a fatalistic attitude towards life, and perhaps a greater reliance on meeting basic needs. The world has changed. The growth of both the manufacturing and the services sector has meant spreading education to a wider audience. It has also created more economic actors, as opposed to dependents, and increased the number of goods on the market as well as demand. There are also more people in the world. Overall, this calls for an intelligent way of planning, and through the Shari’a this is very possible. We have only seen the beginning.
