Islamic Investment Planning

 

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1.  ISLAMIC INVESTMENT PLANNING Islamic investment does not offer interest or riba. It is based on profit and loss. But

it does not keep you in dark and tell you all the probabilities of both the outcomes of your business. It neither guarantees profit nor does it assure you would not lose your money. But, mostly it brings profit because it is managed by expert fund managers. They have vast experience of dealing with Islamic investment products and have perfect command over minimizing risk and maximizing returns. Islamic investments are investments that fall in line with the principles of Islamic banking. Islamic banking, in turn, is banking that follows the rules of Shariah Shariah--the --the sacred law of Islam. The rules of Islamic banking prohibited most of the financial practices that led to the collapse of the housing bubble and the subsequent financial crisis. As the result, Islamic investments fared better than other investments. Investors throughout the world are looking at this form of investing with new interest. Making Islamic investments has its own, unique challenges, but so long as investors understand what they are, they should be able to manage just fine. One of the most notable differences between Islamic investments and other forms of investment is the existence of the Shariah Board. This is comprised of a group of independent Islamic scholars that must check whether  potential investments comply with Islamic law. They also make periodic reviews to make sure that the investments remain Shariah-compliant every step of the way. No Islamic investment can be made without their approval. Under Islamic law, investors can't invest in any businesses that deal with alcohol, tobacco, pork, gambling, entertainment media, financial services (such as banks) or pornography or in anything else that is deemed Haraam deemed Haraam (unlawful).  (unlawful). The Shariah boards evaluate whether an investment is Haraam is  Haraam according to the following criteria, first is Gharar   (uncertainty).This includes any investment whose outcome is uncertain and in which risk is significant. It also includes any investments with uncertain or unclear characteristics. To put it another way, if the investment does not involve any tangible objects, odds are pretty good that it will be considered Haraam considered  Haraam.. Second is ,  Maysir  (gambling)   (gambling) Somewhat overlapping with the above, this includes "games of chance involving money." Aside from the kind of gambling one would find in casinos, the term includes things like insurance products and any investments that generate derivatives. Lastly , Riba (interest)  Riba (interest) Simply put, this covers any investments that generate any and all forms of interest. Investment is usually explained as the choice by the individual to risk his saving with the hope of gain. The 1

 

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term “investment” is used used differently in economics and in finance. Economists refer to a real investment while finacial economist refer to financial asset such as money that is  put into a bank or market which may then be used to buy a real asset. Financial investments are usually made through banks, intermediaries, stock brokers in case of investing in company shares, mutual funds, pension pensio n funds and insurance company. 2.  IMPORTANCE OF INVESTMENT 

People invest to get money in the future. Investment will help to provide capital and income at some future time, either to t o meet a future obligation or need, or to transfer to the next generation. Investment is necessary because it increased i ncreased value of the product  purchased at present  where there are some things that lose their charms and values as and when the time passes. On the other hand, there are certain things that gain value and increased rates along with the passing days. For an instance, gold, silver and other such precious metals have increased values. Their rates fluctuate and an intelligent intelli gent mind knows when to sell them, if he ever invested in these metals. Whenever the rate is at its highest and the investor thinks that this is the time to earn profits from the same, he sells that precious metal and enjoys higher profit rates.  Next, investment can act as Security for the future where where if we are totally bankrupt bankrupt yet still have a few assets and investments left, we can easily opt for those investments and get money out of them to enjoy your life once again. we don’t have to t o beg in front of others to give shelter during bad times. Investment not only lets we earn good amount of profits, but also gives enough strength to feel secured for our future. Moreover, we can make our family proud as it knows that no matter what happens, we still have invested enough to feed them even if there are no sources of incomes left for you and them. This is why the retired people enjoy the amounts they receive from the investments they once make. To achieve financial goals, one need to start investing as early as we can. The power of compounding will help the investment to grow at snowballed rate. The earlier someone start to invest, the better potential for them to achieve their financial goals. 

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3.  SHARIAH OVERVIEW OF INVESTMENT

Shariah is divine guidance from Allah. Shariah usually is understood as Islamic Law. Shariah is comprehensive, immutable and eternal. It covers all aspects of human life, on the individual as well as collective levels in matter of faith, worship, and human relations in personal and public rights. As Muslims, we need to ensure that we earn that which is wholesome and pure. Thus, we are required to acquire Halal H alal and pure income, as impure income that is consumed by us produces ill-flesh and keeps us devoid of spirituality. Insha-Allah a body sustained and nourished with that which is Halal  becomes a body whose supplications are accepted a ccepted by Almighty Allah. Alla h. One of the key elements of Islamic investing is lawful activities and avoidance of interest (Riba).The literal definition of interest or Al-Riba as it is used in the Arabic language means excess or increase. In the Islamic terminology interest means profit derived free from compensation. Riba has been described as a loan with the condition that the borrower will return to the lender more than and / or better than the quantity borrowed. Riba also has other connotations not mentioned here.As Muslims, when it comes to financial transactions, our main concern is to avoid Riba in any and all of its forms despite the fact that the  basic foundation of economics and finance today globally globally is based on Riba and dealing in usury.The Prophet (SAW) has foretold of a time when Riba would be so overwhelming that it would be extremely difficult for Muslims to avoid it. This situation calls for Muslims to be extra cautious before deciding on investment opportunities. Before get involved into an investment, there are some guide or principle that all muslims should be aware with it which called “Islamic Investment Principles”. The general qualitative and quantitative Islamic Investment Principles are, the investment must comply with Shar'iah principles that govern Islamic Investment Funds and that  prohibit investment in companies whose primary business is not consistent with Shari'ah principles. Stocks that do not meet specified financial parameters are excluded. This would include limits on interest bearing debt, interest earning assets,

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net liquid assets and interest or other forms of non-permissible income. The fund manager conducts a purification process on the impermissible income generated. The impure income is distributed to charity.  

4.  Shariah Concept Relevant To Investment Investment

4.1 Time Value Of Money The time value of money is a basic investment concept and a basic element in the conventional theory of finance. Once the money is deposited into the banking system, the money will earn interest. The Shariah does not rule out this consideration, for it does not prohibit any increment in a loan given to cover the price of a commodity in any sale contract to be paid at a future date. What is prohibited, however, is making money’s time value an element of any lending relationship that considers it to have a  predetermined value. In Islam, the practice of charging interest on loan l oan is condemned due to its injustice to the borrower. The same goes to saving deposits whereby, stipulating interest upfront is considered injustice to both parties, i.e. the bank and the depositor. Distribution of  profit is only allowed at maturity. This is due to the fact that Islam accepts the earning capacity of the money provided that the money is put into good use. Muslims should spend the money wisely and invest them in productive business. In the Quran, Allah have said; “consider “consider the flight of time! Verily, man is bound to lose himself. Unless he be of those who attain to faith, and do works, and enjoin upon one another the keeping to truth, and enjoin upon one another patience in adversity”(al adversity ”(al-asr:1-3).In -asr:1-3).In credit-based sale contracts, where a commodity’s price is allowed to differ from the spot price being time element is involved in the process of exchange, can be considered a sort of recognition of money’s time value in Islamic finance. Besides, as far as rents and wages are concerned, when they include a fixed and  predetermined element as a compensation for time, the Islamic prohibition of riba denies any recognition for the money’s time value. In case time’s monetary valuation is not recognized by Islam, as it may be assumed, there would be no need for money’s time value in project evaluations and feasibility feasibilit y studies.The preferred course is derived from the Quran and the Sunnah of Prophet Muhammad SAW. The guiding principle in contracts, terms, and conditions is permissibility when there is no explicit prohibition. 4

 

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Given this, any modern type of contract not mentioned in the Shariah is allowed if it does not conflict with the Quran or the Sunnah and is based on ijma (consensus) and qiyas (reasoning by analogy) and maslahah mursalah (considerations of the public good), and also is free of any evil. Islam acknowledges an increment in a commodity’s price in any sale contract to  be paid at a future date, as long as money’s time value is not claimed as a predetermined predetermined value. In other words, any conditional increase in the loan’s principal in return for a deferred repayment due to an expected depreciation in the value of the money, asset, or other factors (e.g., inflation and commercial losses) is prohibited. The key characteristics of Islamic economics is that economic and financial activities are linked to real economic sector activities and there is encouragement to equity based structures backed by tangible assets instead of debt based ones in investment where in the conventional world the transactions may not necessarily have to be backed by any real asset.

4.2  L i quidity Pla Planning nning The liquidity planning is part of the near-term finance planning with the task of the exact, daily coordination between in- and out-payments.In the Quran, Allah says;  says;   “those of you who die and leave widows should bequeath for their widows a year’s maintenance and residence; but if they leave (the residence), there is no blame on you  for what they do with themselves, provided it is reasonable. And Allah is exalted in  Power,  Po wer, Wise”. (al-baqarah: 240). This verse serve as a guideline that Muslims must have a saving of atleast one year income for liquidity and emergency purposes. This fund must be invested in a highly liquid and low risk product to ensure that in emergency situation, that money could be retrieved. Thus, financial planners must advise the client to establish emergency fund before planning to invest in relatively higher risk investment product for other financial goals.

4.3  R i sk M ana nagem geme ent Risk is part of all our lives. As a society, we need to take risks to grow and develop. From energy to infrastructure, supply chains to airport security, hospitals to housing, effectively managed risks help societies achieve. In our fast paced world, the risks we 5

 

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have to manage evolve quickly. We need to make sure we manage risks so that we minimise their threats and maximise their potential.Risk management involves understanding, analysing and addressing risk to make sure organisations achieve their objectives. So it must be proportionate to the complexity and type of organisation involved.Because risk is inherent in everything we do, the type of roles undertaken by risk professionals are incredibly diverse. They include roles in insurance, business continuity, health and safety, corporate governance, engineering, planning and financial services.   Islams always encourages Muslims to do risk management. In Islamic history, there are various examples on risk management practices applied by Prophet Muhammad SAW and the companions.  In the history of Prophet Prophet Muhammad SAW migration from Mecca to Madinah, Pro Prophet phet Muhammad

SAW applied various types of risk management methods to avoid

enemies. For that process of migrating, Prophet Muhammad SAW asked the muslims to move in small groups to avoid being detected and ambushed by the enemies. The movement was also tricky, where Prophet Muhammad SAW asked the muslims to move to the opposite direction before moving towards Madinah. Prophet Muhammad SAW also hide in a cave for a few days before continuing the journey when he sensed enemies were approaching his group.  This shows that risk management technique is permissible in Islam, contrary to the old belief by certain quarters that muslims have to accept accept everything as qada’ and qadar, without having to put effort to avoid misfortune. Indeed, risk management is highly encouraged as it is in line with Maqasid al-Shariah. al -Shariah.

4.4 R i sk R eturn T Trr adeoff The risk-return trade-off is the concept that the level of return to be earned from an investment should increase as the level l evel of risk increases. Conversely, this means that investors will be less likely to pay a high price for investments that have a low risk level, such as high-grade corporate or government bonds. Different investors will have different tolerances for the level of risk they are willing to accept, so that some will readily invest in low-return investments because there is a low risk of losing the investment. Others have a higher risk tolerance and so will  buy riski ri skier er inves i nvestme tments nts in pursuit pur suit of a higher high er retu r eturn, rn, despi d espite te the t he risk r isk of o f losin lo sing g their the ir investments.

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Some investors develop a portfolio of low-risk investment, low-return investments and higher-risk, higher-return investments in hopes of achieving a associated d with greater probability more balanced risk-return trade-off. Higher risk is associate of higher return and lower risk with a greater probability of smaller return. This tradeoff which an investor faces between risk and return while considering investment decisions is called the risk return tradeoff . In Islam, to get a return, the requirement of counter value or compensation (‘iwad) is critical as it is one of the cornerstones in Islamic principles of profit in the muamalah contract. This is revealed  by the legal maxim “al “al-ghunmu -ghunmu bil-ghurmi” bil-ghurmi” (no reward without risk) and “al-kharaj “al -kharaj  bil-daman”  bildaman” (in any benefits lies a liability).  liability).  

4.5 R i sk re r eturn and and r i sk Investment means putting down some money today to get more of it later. Investment is enable the money to work for the owner. In investment, it is important to  be noted that investing is not a “get rich quick” scheme. s cheme. Investing need a knowledge about the investment products and the risk return profile of those product. Return are the gains or losses from a security in a particular period and are usually quoted as a  percentage. What kind of returns can investors expect from the capital markets? A number of influence returns. Risk is the chance that an investment actual return will be different than expected. Risk means you have the possibility of losing some, or even all, of your original investment. low level of uncertainty ( low risk) are associated with low potential returns. high level of uncertainty (high risk) are associated with high potential of returns. Investment risk can be divided into two which is systematic risk and unsystematic risk.

4.6  I nve nvestm stme ent di ve verr si siffi ca cati tio on Diversification is a technique that reduces risk by allocating investment among various financial instruments. It aims to maximize return by investing in different areas that would each react differently to the same event. Most investment professionals agree that, although it does not guarantee against lost, diversification is the most important components of reaching long-range financials goals while minimizing risk. Diversification means spreading risks, which is accomplished a ccomplished with the act of spreading the money into various type of investment. Technically risk diversification refer to the 7

 

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 process if combining many securities that do not move together in a portfolio to reduce overall risk.

4.7   Mod  Mode er n por tfo folio lio the heo or y One of the most important and influential economic theories dealing with finance and investment, MPT was developed by Harry by Harry Markowitz and published under the title "Portfolio Selection" in the Journal the Journal of Finance in 1952. The theory is based on Markowitz's hypothesis that it is possible for investors to design an optimal portfolio to maximize returns by taking on a quantifiable amount of risk. Essentially, investors can reduce risk through diversification using a quantitative method. Modern portfolio theory says that it is not enough to look at the expected  risk and return of one particular stock. By investing in more than one stock, an investor can reap the benefits of  diversification –   diversification –  chief   chief among them, a reduction in the riskiness of the  portfolio. MPT quantifies quantifies the benefits of diversification, or not putting all of your eggs in one basket. For most investors, the risk they take when they buy a stock is that the return will  be lower than expected. In other words, it is the deviation from the average the average return. Each return. Each stock has its own  own standard deviation from the mean, the mean,   which modern portfolio theory calls "risk." The risk in a portfolio of diverse individual stocks will be less than the risk inherent in holding any one of the individual stocks, provided the risks of the various stocks are not directly related. relat ed. Consider a portfolio that holds two risk risky y stocks: one that pays off when it rains and another that pays off when it doesn't rain. A portfolio that contains both assets will always pay off, regardless of whether it rains or shines. Adding one risky asset to another can reduce the overall risk of an all-weather portfolio. In other words, Markowitz showed that investment is not just about picking stocks, but about choosing the right combination of stocks among which to distribute one's nest one's  nest egg.   egg. Modern portfolio theory states that the risk for individual stock returns has two components:  Systematic Risk   –  components: –  These  These are market are market risks that cannot be diversified away. Interest rates, recessions rates, recessions and wars are examples of systematic risks. Unsystematic  Risk   –  –  Also   Also known as "specific risk," this risk is specific to individual stocks, such as a change in management or a decline in operations. This kind of risk can be diversified away as you increase the number of stocks in your portfolio (see Figure 1). It represents the component of a stock's return that is not correlated not  correlated with general market moves. 8

 

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For a well-diversified portfolio, the risk –  risk  –  or  or average deviation from the mean  –  of  of each stock contributes little to portfolio risk. Instead, it is the difference _ or   covariance –  covariance –   between individual stock's levels of risk that determines overall  portfolio risk. As a result, investors benefit from holding diversified portfolios instead of individual stocks. 

Figure 1

  What MPT Means for You 

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Modern portfolio theory has had a marked impact on how investors perceive risk, return and portfolio and portfolio management. The management. The theory demonstrates that portfolio diversification can reduce investment risk. In fact, modern  modern  money managers routinely follow its  precepts. Passive investing also incorporates MPT as investors choose index funds funds that are low cost and well-diversified. Losses in any individual stock are not material enough to damage performance due to the diversification, and the success and  prevalence of passive investing is an indication of the ubiquity of modern portfolio theory. That being said, MPT has some shortcomings in the real world. For For starters, it often requires investors to rethink notions of risk. Sometimes it demands that the investor take on a perceived risky investment (futures, for (futures, for example) in order to reduce overall risk. That can be a tough sell to an investor not familiar with the benefits of sophisticated portfolio management techniques.

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Furthermore, MPT assumes that it is possible to select stocks whose individual  performance is independent independent of other investments in the portfolio. But market historians have shown that there are no such instruments. In times of market stress, seemingly independent investments do act as though they are related. Likewise, it is logical to borrow to hold a risk-free asset and increas increasee your  portfolio  portfolio returns, but returns,  but finding a truly risk-free asset is another matter. Government-backed bonds are presumed to be risk free, but, in reality, they are not. Securities such as Malaysia Treasury bonds are free of  default  default risk, but risk, but expectations of higher inflation and interest rate changes can both affect their value. 4.8  Collective investment scheme A type of investment scheme that involves collecting money from different investors different  investors and then combining all the money collected to to fund  fund the investment. A collective investment scheme may also be called a mutual a  mutual fund. Similar fund. Similar to a mutual fund, a collective investment scheme provides almost absolute control absolute  control of the investment to the company pooling and investing the money

5.  SHARIA COMPLIANT PRODUCT

5.1 SH   SH A R E S  Investment shares is the basic unit of ownership in a company. Shareholders have the right to vote at general meetings. Shareholders can expect to benefits from the profits earned by the company in the form of dividends if any and also form for m the growth in the value of the company.

Risk associated with the buying shares: 

  Value of shares may fall

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  Dividends may not be paid

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  Loss of the entire investment if the company goes out of business

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  Difficult to sell if the demand for them is lacking.  

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IS THE INVESTMENT INVESTMENT SHARES IS PERMISSIBLE?

  Investment shares is permissible in Islam, it is a form of partnership. The share

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certificate represents the equity of the company where shareholders are the capital provider (rabb al-mall) and the company is the entrepreneur (mudarib). Buying and selling of the shares on the stock market are also permissible as the shares are legal property that can be traded. tr aded. The permissible status also applied to their bonus and right issues. In Malaysia, the screening process of the Sharia compliant companies listed on Bursa Malaysia is done by the SC. The list is published twice a year which is in May and November.

5.2 I SLAMI C U UNI NI T T TRUST RUST Islamic Unit Trust Funds, more commonly referred to as Shariah funds are a group of specialized collective investment funds which offer investors the opportunity to invest in a diversified portfolio of securities that are managed and selected by  professional portfolio managers in a accordance to Shairah principles.A Shariah Fu Funds nds offers similar benefits to any other funds with the same investment objective the only difference is that it only in companies that are in compliance with the Sharia principles as outlined by the Sharia Advisory Council (SAC) of the Malaysian Securities Commission like all the other non-Islamic Funds in Malaysia., Sharia Funds are registered by the Securities Commission and placed under the same stringent regularity criteria.

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WHAT KIND OF COMPANIES ARE SHARIA FUND ALLOWED TO INVEST IN? Companies whose core activities are not the Sharia principles are classified as approved securities. The securities that are from the list approved securities are based on the following criteria: 

  Financial services based on riba (interest)   Gambling (maysir)

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relat ed products   Manufacture or sale of non-halal products or related

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  Conventional insurance

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  Entertainment activities that are non-permissible according to Shariah

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  Manufacture or sale of tobacco-based products or related to Shariah

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  Stockbroking or share trading in Shariah non-approved securities and

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  Other activities deemed non-permissible according to Shariah.

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5.3 I SLA SLAMI MI C PRODCU PRODCUT T E TF ETF is an exchange-traded funds, is a unit trust funds that is listed liste d and traded on a stock exchange. ETF are open-ended with unique kind creation and redemption mechanism supported by a system of participating dealers and liquidity providers. The difference  between ETF and unit unit trust is in the manner in which their units are bought and sold. An ETF is an index tracking fund. Most ETF are passively managed index although there is ongoing work to create enhanced and actively managed ETF. In managing index funds passively, mangers do not pick stocks based on fundamental analysis. Instead managers track the performance of a benchmark index. WHAT IS AN ISLAMIC ETF? An Islamic ETF and conventional ETF share common characteristics. The main difference between a conventional ETF and Islamic ETF is the benchmark index that the Islamic ETF tracks. An Islamic ETF only tracks an Islamic benchmark index where the index constituents comprise companies which are Sharia companies.

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5.4 I SLA SLAMI MI C PRODU PRODUCT CT REI T REITs is an investment vehicle that proposes at least 50% of its total assets in real estate. It can be through direct ownership or through a single company whose asset comprises of real asset. Islamic REITs is a collective investment scheme in real estate whose operate permissible that are in line Sharia principles.

PERMISSIBLE ACTIVITIES :  : 

  Financial services based on interest

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  Gambling manufacture/sale on non halal products

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  Conventional insurance

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  Entertainment activities not in line with sharia

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  Stock broking and trading in conventional securities

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  Hotels and resort

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COMPARISON BETWEEN REITs AND IREITs Feature

Conventional REITs

Shariah commite/advisor

There is no necessity for any IREITs Shariah committee advisor

Islamic REITSs should

assign

a

shariah committee to certify conformity

with

shariah

conditions Permissibility of activities  No constraint

Only

 perform by tenants

approved

Insurance for properties

allowable

activities

Conventional insurance with The manager has to be insurance

companies

 permitted by trustee

as concern availability

about of

the Islamic

insurance before going to conventional insurance Financing

No limitations

Financing should be shariah compliant

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5.5 I SLA SLAMI MI C PRO PRODU DUCT CT DER I VAT VATII VE A financial instruments used to manage one’s exposure to today volatile markets. A derivative product’s value upon and is derived from an underlying instruments, such as commodity prices, interest rate, indices and share prices. Derivative instruments can be traded in an organized exchange or over-the counter (OTC). Future and options are essentially elementary derivative mostly mostl y traded on exchange. 5.5.1 FUTURE CONTRACT Is a between two parties to buy or sell the underlying instrument at a specific time in the future for a specific price determined today.An option, providers the holder/buyer the right, but not the obligation, to purchase or sell a certain quantity of the underlying instruments at a stipulated price within a specific time period by paying at a stipulated  price within a specific time period by paying a premium.

5.5.2 OPTION CONTRACT Financial instruments that convey a right, but not an obligation to engage in a future transaction on some underlying securities or in futures contract.Option are traded both on exchange and in the over the counter market. Call option gives the holder the right to buy the underlying asset by a certain date for a certain price. Put option gives the holder the right to sell the underlying asset by a certain date for a certain price. The  price in the contract is known as the exercise prices or strike prices. The date in the contract is known as the expiration date or maturity.

SHARIA COMPLIANT DERIVATIVE INSTRUMENT All Islamic Financial instruments in general must meet a number of criteria in order to  be considered halal (permissible) 

  Riba

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  Gharah

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  Maysir

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5.6  I SLAMI C PRODU PRODUCT CT SU SUKUK KUK Sukuk are bonds based on Islamic principle. Sukuk are monetary determined  participants certificate of equal unit value issued to investors, to represents their  proportionate share in the ownership ownership of the underlying assets and and a pro rata share in the income generated by those assets.The sukuk certificate holders can earn a pro rata share in the receivables generated appreciation by the assets and depending on the type of assets in any capital appreciation of the assets that is realized once those assets are sold. Sukuk certificate are traded in the secondary s econdary market.

DIFFERENCE BETWEEN SUKUK AND BOND CONVENTIONAL BOND

ISLAMIC SUKUK

Papers which evidence indebtedness issued

Papers which evidence in indebtedness

 by the issuer/borrower an IOU with a ownership and investment issued by the  promise to pay debt at maturity

issuer/borrower using Shariah principles

loan

Not a loan: based on sale, lease, partnership or agency relationship

Paper in exchange for months

Asset in exchange for months

interest

Profit/income from asset

Trades-sales of debt instruments

Trades-sales of asset

 No restriction on utilization off proceeds

Utilization of proceeds for Shariah compliant  purpose

5.6.1  TYPE OF SUKUK   a)  SUKUK AL-IJARAH The popularity of this structure can be attributed to a number of different factors; some commentators have described it as the classical sukuk structure from which all other sukuk structures have developed, whilst others highlight its simplicity and its favour with Shari’a scholars as the key contributing factors. In the Islamic finance industry, the term ijara is broadly understood to mean the ‘transfer of the usufruct of an asset to another person in exchange for a rent claimed from him or, more literally, a lease. In order to generate returns for investors, all sukuk structures rely upon either the  performance of an underlying asset or a contractual arrangement with respect to that 15

 

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asset. The ijara is particularly useful in this respect as it can be used in a manner that  provides for regular payments throughout the life of a financing arrangement, together with the flexibility to tailor the payment profile and method of calculation in order to generate a profit.

 b)  SUKUK AL-MURABAHAH contractual arrangement between a financier (the seller) and a customer (the  purchaser) whereby the financier would sell specified assets or commodities to the customer for spot delivery in the expectation that the customer would be able to meet its deferred payment obligations under the murabaha agreement. The deferred price would typically include the cost price at which the financier had purchased the assets/commodities, plus a pre-agreed mark- up representing the  profit generated from its involvement in the transaction. The payments of tthe he deferred  price from the customer may be structured as periodical payments on dates dates specified at the outset, thus creating an income stream for the financier for the term of the transaction. The same characteristics of the murabaha structure can also be adapted for use as the underlying structure in a sukuk issuance. Sukuk proceeds from Investors may be applied by Issuer to acquire commodities and on sell such commodities to the Originator to generate revenue from the murabaha deferred price which would be distributed to the Investors throughout the term of the sukuk al- murabaha.

c)  SUKUK AL-SALAM A salam contract involves the purchase of assets by one party from another party on immediate payment and deferred delivery terms. The purchase price of the assets is typically referred to as the salam capital and is paid at the time of entering into the salam contract. The assets sold under the salam contract are referred to as al-muslam fhi, delivery of which is deferred until a future date. A salam contract may be construed as being synonymous with the objective of a forward sale contract. Forward sale contracts are generally forbidden under Sharia unless the element of uncertainty (gharar) inherent in such contracts is effectively eradicated. For this reason, certain criteria must be met in order for a salam contract to  be Shari’a compliant. 16

 

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d)  SUKUK AL-MUSHARAKAH Its simplest form, a musharakah arrangement is a partnership arrangement between two (or more) parties, where each partner makes a capital capit al contribution to the partnership (musharakah), in the form of either cash contributions or contributions in kind. Essentially, a musharakah is akin to an unincorporated joint venture but may, if required, take the form of a legal entity. The musharakah partners share the profits of the musharakah in pre-agreed proportions and share the losses of the musharakah in  proportion to their initial capital investment.

e)  SUKUK AL-MUDHARABAH The term mudarabah is broadly understood to refer to a form of equity-based  partnership arrangement whereby one partner provides capital (the Rab al-Mal) and the other provides managerial skills (the Mudarib).The same characteristics of the mudarabah structure can also be adapted for use as the underlying structure in a sukuk issuance as each Investor’s purchase of sukuk would represent units of equal value in the mudarabah capital, and are registered in the names of the sukuk certificate holders on the basis of undivided ownership of shares in the mudarabah capital. The returns to the Investors would represent accrued profit from the mudarabah capital at a pre-agreed ratio between the Rab al-Mal and the Mudarib, which would then pass to the Investors according to each Investor’s percentage Investor’s percentage of investments in sukuk mudarabah.

f)  SUKUK AL-ISTISNA In the modern day context of Islamic finance, the istisna has developed into a  particularly useful tool in the Islamic funding of the t he construction phase of a project, it is often regarded as being similar to a fixed-price turnkey contract. In order to enable investors to receive a return during the period where assets are being constructed under an istisna arrangement, some Shari’a scholars have permitted the use of a forward lease arrangement (known as ijara mawsufah fi al-dimmah) alongside such istisna arrangement. Accordingly, sukuk al-istisna often combines an istisna arrangement with a forward lease arrangement  –   whilst the istisna is the method through which the investors can advance funds to an originator, the ijara provides the most compatible  payment method to those investors. 17

 

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5.7  I NVE STMENT ACCO ACCOUNT UNT Investment account offered by Islamic banks is known as general investment account (GIA). It is the Islamic version of fixed deposit. Investor has no authority to interfere in the management of the funds.The bank has the right to manage the investment as it thinks fit by placing it into profitable businesses that are Shariah compliant. This type of partnership is known as Mudharabah Mutlaqah. The profit sharing ratio is determined on the asset and forms the basis of the aggrement between the investor and the bank. Investor determines how long l ong his investment period would be upon maturity. maturity.  

5.8 STR  ST R UC UCTUR TUR E D PR ODU ODUCT CT

Structured product is a new investment alternative, giving investor’s access to a wider range of markets and pay-out structures. It is linked to various classes of assets. Which may include foreign shares, interest’s rates, foreign currencies, indexes and commodities.The returns may vary, are not guaranteed and are subjected to the bank of fluctuation in the underlying asset. Structured product must be with SC on structured  products. 

5.9 I NVESTM NVESTMENT ENT LINKE DD-TAKAFUL TAKAFUL   An investment-linked takaful is a family takaful plan that combines investment and takaful cover. Your contribution will provide takaful cover which includes death and disability benefits, and part of the contributions will be invested in a variety of sharia approved investment funds. Participants may choose the type of investment depending on the takaful operators.

5.10 

TAKAFUL CONCEPT CONCEPT I N I NVESTM NVESTMENTENT-LI LI NKE D TAKAFUL

Part of your contribution will be allocated to a takaful fund in the form of participative part icipative contribution (tabarruq), and the balance of the contributions will be used to purchase the investment-linked units. You will undertake a contract (aqad) to become one of the  participants by agreeing to mutually help each other, should any of the participants 18

 

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suffer a misfortune arising from death or disability. If you did not make any claim during the period of takaful, you are entitled to a share of the surplus in the takaful fund. The surplus will be shared between you and the takaful operator based on the concept of surplus sharing according to a pre agreed ratio. rati o. Your share of the surplus will be used to purchase additional investment-linked units. The takaful operator acts as a manager to oversee the management of the investment fund. In return, the takaful operator receives a fee (ujrah) for its service.  

6.  ALTERNATIVE INVESTMENTS

6.1  Property

Investment property is real is real estate estate property  property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property or both. An investment property can be a long-term endeavor or an intended short-term investment such as in the case of  flipping, where  flipping, where real  real estate is  bought, remodel or or renovated, and sold at a profit. Investment in property property is permissible in islam as long as the financing is done according to shariah and the property is rented out to those carrying permissible activities. Protection of the property must also be obtained from takaful operators. Property has traditionally been regarded as a hedge against inflation. In a diversified portfolio,  property works to balance the portfolio as it has the potential potential to reduce the risks without significantly reducing returns. An investor must know the market in which he is searching for property or hire an expert to help. For investors seeking an income stream from rental properties, the most important i mportant aspects to consider are propert property y location and market rental rates. As for location, many successful rentals are located in close  proximity to major schools. For example, if you buy a property property near a state university, students are likely to want to rent it year after year. There are also many other features of a profitable rental property, and some take time to learn. the biggest difference  between a rental property pr operty and other investments is the amount of time and work you have to devote to caring for it. If you don't want to, you can hire a profess professional ional property  property manager. But manager.  But his or her salary salar y then becomes an expenses that impacts your investment  profitability.

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6.2 Gold   In order to fully understand the purpose of gold, one must look back at the start of the gold market. While gold's history began in 3000 B.C, when the ancient Egyptians started forming jewelry, it wasn't until 560 B.C. that gold started to act as a currency. At that time, merchants wanted to create a standardized and easily transferable form of money that would simplify trade. Because gold jewelry was already widely accepted and recognized throughout various corners of the earth, the creation of a gold coin stamped with a seal seemed to be the answer. Following the advent of gold as money, gold's importance continued to grow. History has examples of gold's influence in various empires, like the Greek and Roman empires. Great Britain developed its own metals-based currency in 1066. The British pound (symbolizing a pound of sterling silver), shillings and pence were all  based on the amount of gold (or silver) that it represented. Eventually, Eventually, gold symbolized wealth throughout Europe, Asia, Africa and the Americas. Gold is a type of precious metal. Gold and other precious metals are assets that are both tangible but not liquid unlike real estate which is tangible but not liquid or company shares and bonds which are liquid but not tangible. The most important reason for investing in gold is diversifying risk. Gold is an excellent portfolio diversifier, since it has very low correlation with other assets. This is why the yellow metal is one of the most effective hedges or safe havens. Gold can be seen as an insurance against tail risks, financial black swans, high and accelerating inflation or systemic crises. There are many ways many ways to invest in gold. gold. The  The most traditional way of investing in gold is by b y buying bullion bars or coins. However, investors can also  purchase gold gold exchange-traded exchange-traded products products or gold certificates, to avoid the risks and costs associated with the transfer and storage of physical bullion. Investors can also invest in gold via derivatives, such as forwards, futures and options. The indirect way to have exposure to the price of gold is buying the shares of gold mining companies.

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6.3 Commodity Commodities are raw materials that are sold in bulk, such as oil, wheat, silver, gold,  pork bellies, oranges and cocoa. They are generally raw materials that are ar e eventually used to produce other goods such as oil for gasoline, cocoa for chocolate, wheat for  bread, etc. As such, they give an investor the opportunity to invest in the materials that a country (or corporation) produces as well as those that it consumes. Most larger manufacturers buy the commodities they need on the "spot market," where the full cash  price is usually paid on the spot. Speculators typically buy and sell commodities with option and futures contracts. There are several types of commodity investment which is direct and indirect. Direct refers to cash purchase of physical commodities such as agricultural  products, metals, crude oil. Indirect refers to the acquisition of indirect claims on commodities such as equity in plantation companies or future contracts. Commodities offer investors a number of benefits. First, Hedge Against Inflation: Commodity cash  prices may benefit from periods of unexpected inflation, whereas stocks and bonds may suffer. Commodities are "real assets", unlike stocks and bonds, which are "financial assets". Commodities, therefore, tend to react to changing economic fundamentals in ways that are different from traditional financial assets, particularly with respect to inflation. Commodity prices usually rise when inflation is accelerating, so investing in commodities can give portfolios a hedge against inflation. Conversely, stocks and  bonds tend to perform better when the rate of inflation is stable or slowing. Faster inflation lowers the value of future cash flows paid by stocks and bonds because those future dollars will be able to buy fewer goods and services than they would today. However, this inflation advantage is captured more efficiently by direct investment in commodities than, for example, investment in commodity-related equities whose prices also reflect the financial prospects of the issuer or actively activel y managed commodity futures accounts, which tend to reflect the manager's skills at selecting the right commodities.

Second, Performance/Return: Performance/Return:  Investor interest in commodities has soared in recent years as the asset class has outperformed traditional assets such as stocks and  bonds. Over the five-year period ended March 31, 2006, the Dow Jones AIG Commodity Index has returned 10.6%, versus 2.6% for the S&P 500. Part of this

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superior performance is attributable to a rise in commodity prices driven by increased demand from China and other emerging countries. Third , Enhanced Diversification: Diversification: Portfolio diversification is the primary  benefit of holding commodities. The reason for that is the commodity investor is exposed to commodity futures prices. Changes in those prices reflect changing expectations about future supply and demand for commodities. Factors that change expectations - such as a weather event in the Midwest or a strike in a copper mine in Chile - typically don't have anything to do with stock and bond markets.

7.  SHARIAH SCREENING ON SHARIAH COMPLIANT SERVICES.

Shariah screening methodology was formulated by the Shariah Advisory Council (SAC) of Securities Commission (SC) of Malaysia to assist investors in identifying Shariah-compliant securities. This is to ensure that their investments are in accordance with Shariah principles which prohibit the elements of riba, maysir and gharar. The earlier methodology which adopted quantitative assessment that comprises four activity-based screening benchmarks and qualitative assessment assess ment was introduced in mid 1990s keeping in view the infancy of the Islamic capital capit al market in Malaysia. Malaysia . Based on the methodology, the SAC classified securities issued by companies as either Shariahcompliant securities or Shariah non-compliant securities.

The methodology had recently been revised as an effort to harmonize the standard to global expectation with the introduction of the two-tier quantitative approach which applies the business activity benchmarks and the newly- introduced financial ratio  benchmarks, while existing qualitative assessment continues to be applicable. The main references for the screening methodologies are the Quran and Sunnah.

However, the Holy Quran and the Sunnah do not explicitly explicitl y state the guidelines for the quantitative criteria. For instance, the thresholds for financial ratios are based on interpretation in the form of ijtihad  (reasoning  (reasoning from the source of Shariah by qualified Shariah scholars) and Shariah statements that are not directly related to capital markets. There is some degree of freedom for scholars to specify their quantitative criteria. These different opinions and judgements of the scholars can be due to complexity of transforming the historical and verbal Shariah sources into quantifiable and formal 22

 

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guidelines to be used within a modern guideline evaluation and portfolio management system”(Derigs syst em”(Derigs & Marzban, 2008). Therefore, screening guidelines and strategies among users of screening process varies and changes over time. Dated back to the mid 1990s, Shariah screening methodology in Malaysia has been established in accordance with the infancy of the Islamic Capital Market (ICM). Since then, the ICM has shown a tremendous progress. In year 2000, market capitalisation of Shariah-compliant securities was RM254.1  billion and it has increased to RM1.017 trillion in May 2013 (Malaysian International Islamic Finance Centre, 2013). In Malaysia, the SAC of the SC plays an important role in certifying and updating the list of securities that have been classified as Shariah-compliant securities. This Shariah-compliant certification is done through the input and support received from the t he SC. To classify security as whether Shariah comply or not, SAC will analyse the data gathered by SC from various sources including the annual reports and enquiries made to the companies. Based on the latest annual  audited financial statements of the companies, the SAC continuously reviews the Shariah status of listed companies. The SAC has applied a standard criterion to evaluate the business activities acti vities of the companies and companies whose activities are not contrary to the Shariah principles will be classified as Shariah-compliant securities (Securities Commission Malaysia, 2013a).

In classifying securities listed in Bursa Malaysia as whether Shariah-compliant or not, there are two stages of screening applied by the SAC of SC of Malaysia in the  previous Shariah screening methodology. In the first stage screening, based on the data gathered by the SC, the SAC will be focusing on the activities of the company who issues the securities. As long as the activities a ctivities of those companies are not contrary to the Shariah principles, their securities will be classified as Shariahcompliant securities. However, their securities will be classified as Shariah non-compliant securities if they are involved in any of the following core activities: a)  Financial services based on riba (interest);  b)  Gambling and gaming; c)  Manufacture or sale of non-halal products or related products; d)  Conventional insurance; e)  Entertainment activities that are non-permissible according to Shariah; 23

 

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f)  Manufacture or sale of tobacco-based products or related products; g)  Stockbroking or share trading in Shariah non-compliant securities; and h)  Other activities deemed non-permissible according to Shariah.

Shariah screening process involves two assessments, quantitative assessment and qualitative assessment. :

7.1 T he q quanti uantita tatitive ve assessme assessment  nt   In the quantitative assessment, the SAC will measure the level of mixed contributions from permissible and non-permissible activities towards group turnover and group  profit before tax of the companies. The calculated contributions from non-permissible activities will then be compared with the benchmarks which have been established by the SAC based on ijtihad . If the contributions from non-permissible activities exceed the benchmark, the securities of the company will be classified as Shariah noncompliant securities. The benchmarks are as follows: a) The Five Percent (5%) Benchmark

The contributions from activities which are clearly prohibited such as riba (interest based companies like conventional banks), gambling, liquor and pork should not exceed 5%.

b) The Ten Percent (10%) Benchmark

The contributions from activities that involve the element of `umum balwa (a prohibited element affecting most people and difficult to avoid) must not be more than 10%. The interest income from fixed deposits in conventional banks and tobacco-related activities are good examples of the activities that t hat belong to this benchmark.

c) The Twenty Percent (20%) Benchmark

The contributions from rental payment of Shariah non-compliant activities such as the rental payment from the premise that involved in gambling, sale of liquor, sale of pork, conventional bank etc. must be below 20%.

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d) The Twenty Five Percent (25%) Benchmark

This benchmark is for activities that are generally permissible according to Shariah and have an element of maslahah (benefit in general) to the public. However, there are other elements that may affect the Shariah status of these activities due to the attachment of activities which are non-permissible according to Shariah. Among good examples of the activities that belong to this benchmark are hotel and resort operations, share trading, stock broking and others. The contributions must be lower than 25%. 7.2 The qualitative assessment As for the qualitative assessment, the SAC considers two additional criteria for mixture activities companies. This assessment will be taking into consideration the followings: a)  The company must have a good image i.e. public perception towards the company must  be good; and

 b)  The core activities of the company are important and considered maslahah to the Muslim ummah (nation) and the country, and the non-permissible element is very small and involves matters such as `umum balwa, balwa, `uruf (custom) and the rights of the nonMuslim community which are accepted by Islam.

Hence, it can be summarized that for securities issued by mixture activities companies to be classified as Shariah-compliant securities, it must pass both assessments i.e. quantitative assessments as well as qualitative assessments (Securities Commission Malaysia, 2013a).

The revised Syariah screening methodology

On 18 June 2012, the SAC of SC of Malaysia made an announcement on the adoption of a revised Shariah screening methodology to determine the Shariahcompliant status of companies which are listed on Bursa Malaysia. This revised methodology adopts a two-tier quantitative approach which applies the business activity  benchmarks and the newly introduced i ntroduced financial ratio benchmarks, while maintaining the existing qualitative assessment.

The outcome outcome of the revised methodology is

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reflected in the List of Shariah-compliant Securities announced and published by the SAC effective from November 2013 (Securities Commission Malaysia, 2012).

The main differences between the t he revised methodology and previous methodology are as in Table 1 below: Table 1: The Main Differences between the Revised Methodology and Previous Methodology  Revised Methodology

All companies must undergo all screening stages which covers:

CHANGES Drop

1. Quantitative assessment

First-tier : Compute the contribution of non-permissible activities and compare with the group turnover and group profit  before tax. Benchmarks used; i.  5% ii.  20%

Second-tier : Compute the financial ratios: i. Cash/ Total Assets ii.

Reduced

Previous Methodology Methodology First Stage Screening - focusing on the activities of the company to determine the non-permissible activities if any.  Second Stage Screening  –  a mixture activities company should undergo: 1. Quantitative assessment

Compute the contribution of nonpermissible activities and compare with the group turnover and group profit before tax. Benchmarks used; i.  5% ii. 10% iii. 20% iv. 25%

benchmark from four to two

Debt/ Total Assets must be lower than Each 33%.ratio Newly introduced 2. Qualitative assessment a.  Image of the company  b.  Maslahah  Maslahah,,`umum balwa, balwa, `uruf etc.

2. Qualitative assessment assessment a.  Image of the company  b.  Maslahah  Maslahah,, `umum balwa, balwa, `uruf etc. Unchanged

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The reduced business activity benchmarks

The first-tier of the quantitative assessment in the revised Shariah screening methodology is the business activity activit y benchmarks. Under the revised methodology, met hodology, the  business activity benchmarks wh which ich previously previously consisting of four four benchmarks benchmarks had been reduced to only two benchmarks. Basically, the contribution of non-permissible activities which are allowed for 10% benchmark under previous methodology had been reduced to 5%. In other words, the contributions from nonpermissible activities that involve the element of `umum balwa now must not be more than 5% only. The other benchmark is 25% benchmark which had been reduced to 20%  benchmark. It means the contributions from non-permissible activities such as hotel and resort operations, share trading and stock broking now must be lower than 20%. Under the revised Shariah screening methodology, the list of non-permissible activities under each benchmarks are as follows:

  The Five Percent (5%) Benchmark



The contributions from the followings activities to the group turnover and profit before taxation should not exceed 5%:

         



conventional banking;



conventional insurance



gambling



liquor.



Pork and non-halal food and  beverages;

  interest income from conventional accounts and instruments, including dividends from investment in Shariah non-compliant instruments and interest income awarded arising from a judgement by a court or arbitrator;   tobacco and tobacco-related activities   other activities deemed non-compliant according to Shariah.



 

  The Twenty Percent (20%) Benchmark



The contributions from the followings activities to the group turnover and profit before taxation should not exceed 20%:

 





   



hotel and resort operations; share trading stockbroking business 27

 

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rental received from Shariah non-compliant activities

 

and other activities deemed non-compliant according to Shariah.





The newly-introduced financial ratio

In the second-tier of the qualitative assessment, each company who issues the securities need to undergo the financial ratio screening. This screening is newly introduced under the revised methodology whereby there was no screening process for this financial ratio under previous methodology. In this assessment, the SAC will calculate the following ratio which intended to measure riba or riba riba-based -based elements in the company:

  Cash over total assets



Cash to be included in the calculation includes cash placed in conventional accounts and instruments only. If the company placed the cash in the Islamic Islamic account, it should  be excluded from the calculation.

  Debt over total assets



Debt to be included in the calculation includes interest-bearing debt only. If the company used Islamic financing such as  sukuk , it should be excluded from the calculation. To fulfil the requirement for this assessment, each ratio must be less than 33% and only securities issued by company that meet the requirement in all assessments will be classified as Shariah compliant securities (Securities Commission Malaysia, 2013c).

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8.  REFERENCE  Internet : https://i-epistemology.net/v1/economics-a-business/899-the-time-value-of-moneyconcept-in-islamic-finance.html http://www.business-guard.com/en/definitions/liquidity-planning   http://www.business-guard.com/en/definitions/liquidity-planning https://www.theirm.org/the-risk-profession/risk-management.aspx https://economictimes.indiatimes.com/definition/risk-return-trade-off   https://www.accountingtools.com/articles/2017/5/13/risk-return-trade-off Modern

Portfolio

Theory:

Why

It's

Still

Hip

Investopedia  https://www.investopedia.com/man Investopedia https://www.investopedia.com/managing-wea aging-wealth/modern-portfo lth/modern-portfolioliotheory-why-its-still-hip/#ixzz theory-why -its-still-hip/#ixzz54BOi09za 54BOi09za  

Book : ISLAMIC FINANCIAL PLANNING AND WEALTH W EALTH MANAGMENT

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