ISLAMIC FINANCIAL PLANNING

Define the following

a) Financial Planning
Budget or investment strategy that helps an individual take the necessary steps to achieve his/her
financial goals. Financial plans may be constructed for a number of reasons, but they are
commonly done for retirement planning. The plan may factor in income, investments, forecasts
and supplemental advice. Some financial plans are done by licensed professionals that have
experience in investing and guiding individuals to make the right decisions
b) Financial Products and Services
Financial products and services have a wide range of choices according to financial
objectives. Financial products includes banking, mortgages, investments, insurance, pensions
Banking involves in providing products such as loans, and receiving deposits and providing
credit card services. Meanwhile, mortgages are used by individuals and businesses to make
large real estate purchases without paying the entire value of the purchase up front.
Investments generaly are being made in the securities market with the purpose to get dividend
and capital gain. Insurance and pensions are normally provided by insurance companies.


c) Risk Mitagation
Risk mitigation also known as hedging of risks, can generally be viewed as analyzing the
exposure to risks and then either managing, mitigating, transferring, retaining, reducing or
avoiding such risks in finance. In finance, it may be viewed as assuming the risk of loss for the
uncertain probability of receiving some form of reward. In Islam, there is a lack of consensus
among Islamic finance practitioners on what constitutes the principles and objectives of risk
(Khatib, 2009).
From the Quranicverse 275 of Chapter 2, where Allah prohibits usuary (al- riba) and
permits exchange (al- bai), it clearly implies that increase in wealth cannot but must be
consequence of risk taking (Abbas Mirakhor Wither Islamic Finance, unpublished). To
mitigate risks, the above verse demands, the sharing of risk and not transfer of risk
management, in other words, the maqasid al-sharia of Islamic risk management Since all the
transactions are contractual, they must meet certain conditions to make them valid.Two elements
that would nullify any contract are alriba and gharar (ambiguity).

d) Conventional and Islamic Financial Planning
Conventional financial planning is essentially based on the debtor-creditor relationship
between the depositors and the bank on one hand, and between the borrowers and the bank on
the other. Interest is considered to be the price of credit, reflecting the opportunity cost of money.
The functions and operating modes of conventional banks are based on fully manmade
principles. It aims at maximizing profit without any restriction. Lending money and getting it
back with compounding interest is the fundamental function of conventional banks. In
conventional financial planning there is nothing to consider for the Hereafter because the
conventional man has no notion of the Hereafter and not believe that he will be resurrected and
judged by his Creator (Zaher, 2002). All his efforts are for the life in this world, and death is the
end of the conventional mans time horizon. Thus, it is utterly important to bear in mind that in
Islamic financial planning, both the planner and the Muslim client have to plan for and are truly
concerned with goals and financial strategies for the Hereafter, unlike their conventional
counterparts.
Islamic nancial planning is a nancial system, the fundamental aim of which is to
fulll the teaching of the Holy Quran, as opposed to reaping maximum returns on nancial
assets. The basic principle in the Sharia (Islamic Common Law) is that exploitative contracts
based on Riba (interest or usury) or unfair contracts that involve risk or speculation Gharar are
unenforceable. However, the Holy Quran contains no condemnation of morally acceptable
investments that yield fair legitimate prots and economic or social added-value (Siddiqi
1999). Two more principles are fundamental to understanding Islamic nance. First, the Islamic
law reects the totality of Allah(Gods) commands that regulate all aspects of the life of a
Muslim. Second, Islamic nance is directly involved with spiritual values and social justice.
Under Islam, there is no separation of mosque and state or of business and religion
(Nicholas,1994).

e) Give example of financial products and services offered in money market and capital
market.
Products/Services Underlying Contracts
Deposit Services
Current Deposit
General Investment Deposit

Qard Hasan
Mudaraba
Retail/Consumer Banking
Hire purchase
Working Capital Financing

Ijara Thumma Al-Bai
Murabahah
Corporate Banking/Trade Finance
Project Financing

Ijara
Venture Capital
Leasing
Letter of Credit
Musharaka
Ijara
Murabaha
Money Market Investment Products
Islamic Bonds
Sell & Buy-Back Agreements

Istisna
Bai al-Einah
Other Products/Services
Stock-Broking Services
Funds Transfer

Wakala
Joala
Referred in: Obaidullah, Mohammed. "I slamic Financial Services." (2005).


REFERENCES:
1. Siddiqi A Moin. 1999. The growing popularity of Islamic banking. Middle East,
London, 291, 3335.

2. Obaidullah, Mohammed. "Islamic Financial Services." (2005).

3. Zaher, Tarek S., and M. Kabir Hassan. "A comparative literature survey of Islamic
finance and banking." Financial Markets, Institutions & Instruments10.4 (2001): 155-
199.

4. Nicholas B; Angell. 1994. Islamic and Western banking: Part I-Major features,
structural forms, comparison with Western banks, Riba. Middle East Executive
Reports. 17; 12; 914.

5. (2012, 06). Differences Between Islamic and Conventional Financial. StudyMode.com.
Retrieved 06, 2012, from http://www.studymode.com/essays/Differences-Between-
Islamic-And-Conventional-Financial-1017910.html

6. http://ifp.law.harvard.edu/login/view_pdf/?file=Riskmangement.pdf&type=workshops.

7. http://www2.warwick.ac.uk/fac/soc/law/newsandevents/arc/events/managing_systemic_ri
sk/pres/syeothmalhab.pdf