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