Wealth Creation and Mobilisation from Islamic

and Conventional Perspectives

Rights to Wealth
Rights to wealth from
Islamic perspective
Methods of Accumulating Wealth
Rational for wealth
accumulation
Objectives of wealth
accumulation
Factors in wealth
accumulation
Islamic concept of wealth
accumulation

What is wealth?
-It is a stock of items of economic value
comprising money, movable or immovable
property (livestock, crops), etc.
-It is also measured by the access to essential
services such as healthcare, education, etc
-It is also considered as an accumulation of past
net savings
It is also defined as surplus net income
Income is a flow and wealth is a stock

It is a relative concept
-One is rich in relation to others around him
-A community or society is richer than others
-Three fundamental characteristics of wealth:
-The Growth Criterion: wealth must grow
-Consumption Criterion: wealth must generate -
consumption benefits to the owners
-Marginal Value Criterion: wealth must be scarce
so that the marginal increases in its size are of
value to its rights-holders

From the conventional perspective
wealth is important in human life. Man
has developed various means to
generate more wealth without having
to take from others. This can be done
by various means: increasing the size
of work force, production efficiency,
resource endowments, inventions,
innovations and availability of capital

Wealth is limited especially in the
short term
Those who look at short term tend to
emphasise on wealth distribution
Those who look at long term tend to
emphasise on generating more wealth
Generally the conventional view is that
wealth is scarce
From the Islamic view point all forms of wealth
belongs to Allah and it is in abundance rather
than scarce. The scarcity is due to mans inability
to generate more wealth
Surah Al Syura 42:4 To him belongs all that is in
the heavens and on earth; and He is most High,
Most Great.
Surah Taha 20:6 :to him belongs what is in
heavens and on earth and all between them and
all beneath the soil);
Surah Al-Anam 6:133:And your lord is Rich (Free
of all needs ),full of mercy; if He (Allah) wills, He
can destroy you, and in your place make whom
He wills as your successors, as He raised you from
the seed of other people.
Surah Adh-Dhariyyat 51:58: Verily, Allah is the
All-Provider, Owner of Power, the Most Strong
Other surah:- Al-Israa 17:70; Al-Hajj 22:65; Al-
Jaathiyah 45:12; surah Ibrahim 14:7;

Prophet Muhammad emphasise Allahs refusal to
provide His bounty on those who are lazy to
work, but that Allah strongly condemns them.
The prophet reminded:
Charity is allowed neither for the rich nor for the
able-bodied (narrated by Al-Tarmizi)
Anyone who begs from people in order to
increase his wealth will have his face scratched on
the Day of Resurrection, and will eat burning
stones from hell (narrated by Al-Tarmizi)
The two aspects of wealth in Islam:
-The material (physical wealth)
-The spiritual (knowledge and virtue)
One can generate the other. In other words, the
material wealth can generate the spiritual wealth
and vice versa.


Wealth planning and management is an effort to
analyse and organise financial affairs to achieve
the desired financial and lifestyle goals.
Generally it deals with generation, accumulation,
protection and distribution of wealth.
Islamicaly it also includes the proper means of
generating and utilising wealth including its
purification

Financial Planning
Retirement Planning
Education Planning
Tax Planning
Estate Planning
Small Business Planning
Insurance
Cash Flow Analysis
Investment Management
Wealth is mans basic need to acquire other
essential needs. However the concept depends
on underlying philosophy adopted by the
doctrines of capitalism, socialism or Islam. See
Figure I
Concep
t
Capitali
sm
Socialis
m
Islam
Wealth/
Resour
ces
Scarcity
of
resourc
es
Scarcity
of
resource
s
Allahs
bounty
& no
scarcity
Owners
hip
Individ
ual
freedo
m
The
source
for the
exploita
tion of
labour
A Trust
Lifestyl
e goals
Persona
l
satisfact
ion
Equal
welfare
among
workers
Al-
Falah
(prosper
ity)

Rights to wealth from Islamic perspective
-All wealth belongs to Allah and man has been
appointed as trustee to the wealth
-As trustee he can utilise the wealth but will be
responsible in using it and is made accountable to
it both in generating and spending it
-Islam requires its adherents to strictly follow the
prescribed rules of generating and using wealth


A bless wealth is wealth that brings benefits to
oneself and others.
The Prophet (s.a.w) said the upper hand is better
than the lower hand
In Islam, wealth is vital for the enhancement and
the development of the economy system. Giving
alms is a form of purification.

Mans rights as a trustee
Everything on earth has been created for mankind.
However some are for public consumption while
others can be privately owned. (Surah Al-
Baqarah2:29; Al-Jaathiyah 45:13).
Properties , the private ownership of which may
cause hardship to general public should be given
to private ownership.Those for public are:
First: public utilities such as large streams, bridges,
land around town left for common use and banks
of a stream;
Second: natural resources such as water, grazing
area, fire and salt
Man has been given propriety rights for all other
properties subject to the terms of that trusteeship
(amanah)

Private ownership has two aspects:
Formal ownership title; and
Exercise of ownership rights
=Formal ownership title refers to legal ownership
bestowed upon individuals. Nobody can deprive
him of the ownership except where Shariah
provides express sanctions for that.
=Exercise of ownership rights refers to the rights of
enjoying the benefits of using the property or
wealth
=All in all man must use the wealth bestowed on
him prudently.

Rights of others in ones wealth
The wealth of Muslims is subjected to zakat and
the zakat recipients are those others who have the
right to the wealth of Muslims.
They do not have to be among the inheritors of the
wealth such as the next of kin etc.
Apart from the verse (surah At-Taubah 9:60) on
the 8 recipients of zakat there are also those who
never ask for charity who also have the right on
the wealth of Muslims



METHODS OF ACCUMULATING WEALTH

-Wealth accumulation is considered as the most
important function of wealth management. The
main objective is to accumulate the capital sum
required to meet the financial and life objectives
as soon as possible.
-This requires very high level of returns on
investment.
-It depends on asset allocation strategies that
would minimise risk and maximise returns by
diversifying the investment portfolio

The primary objective of wealth accumulation is to
preserve accumulated wealth under all
circumstances.
Any capital loss will require more than higher
returns to recover the capital loss
This requires capital to be invested in higher risk
investments

This does not mean that all capital must
be invested in fixed deposits that
guarantee our capital.
One should consider capital erosion by
inflation or even by foreign exchange
loss.
There is need to have a balanced
investment strategy that could reduce
capital loss but at the same time
promises higher returns as well.


Rational of wealth accumulation
In the conventional approach, any form of wealth
can be used in three ways:
- Immediate consumption (consume)
- Savings (store)
- Investment (invest)
Investment will forsake current consumption but
will increase future satisfaction in terms of
increasing wealth

Wealth generation is often equated with
investment which can be done in many ways:
- Investment in a production process
- Financial investment in paper assets
- Investment in real estates
- Human capital investment (training or
education)

Wealth is also considered as something that helps
you to live when you are no longer earning income
or productive or when you retire. 2 important
reason to save:
- The crucial thing is how long will the
wealth you have accumulated sustain
you? Sustainability refers to net worth
- It depends on how much and how often
you withdraw and use your wealth
(retirement life cycle)
- Hence you need to save to finance
future expenditure and to protect
consumption against unexpected
shocks (precautionary)

Success in wealth accumulation is dependent on
prudent & strategic asset allocation that would
protect capital and ensures good returns that
exceeds or at least equal withdrawals
Wealth accumulation can be done through:
- Selling natural resources
- Processing materials into higher value
products
- More efficient production process to
increase wealth generation
- Ideas, innovations, to increase
production with new methods, etc

Objectives of wealth accumulation for High Net
Worth Individuals (HNWI)
- To preserve accumulated wealth from
investment loss, erosion by inflation
and loss of purchasing power
- To achieve reasonable capital growth.
There should be a good balance
between strategies that would maintain
existing wealth and increasing it or
capital growth


3 main reasons why saving is important and
contribute to wealth accumulation
Savings is important to accumulate wealth
because;
the more we save the more we
accumulate;
the more we save the less we spend;
and
the more we save the less rate of
investment we need

wealth accumulation should take into
considerations Four (4) main factors/issues:
- Externalities: environmental and health
hazards generate extra cost. Impose
environmental tax
- Commercial activities that are
destructive to natural resources
- Natural resources plundered for profit
- Harmful goods and services- for profit
- Ethics


Islamic concept of wealth accumulation
Generation vs accumulation:
generation is more akin to Islamic
concept because it means adding from
what is already in existence
Islam insists that wealth should be
lawfully accumulated
Islam abhors devouring of other
peoples wealth (orphan, others)
It should also be lawfully spent
Islam allows private ownership because
it is a strong incentive to generate more
wealth
Muslims are expected to work hard and
efficient
-Islamic concept of wealth accumulation (contd)
Example of Abdul Rahman Ibn Awf who was not
only very rich but very generous with his wealth
(start with nothing, yet his wives inherited 80000
dinars (RM20mn) sold his land for 40000dinars
(RM10mn give to his family members, 50000
dinars to charity
Islam lays down clear injunctions on how Muslims
should accumulate, distribute and spend their
wealth
Wealth generation is allowed even during the
sacred months of Hajj
Muslims are expected to seek Allahs bounty
immediately after performing the congregational
prayers on Fridays
Wealth should not be hoarded neither to be
circulated only among the rich
Saying of Prophet Muhammad. A true and honest
trader, on the day of judgement, would be in the
ranks of the Prophets, the Truthful and the
Martyrs. (Sahih Bukhari)


According to conventional perspectives there are
three modes of mobilising surplus wealth:
Left to the dependents;
Bequeathed for public purposes; and
Administered by the possessors during
their lives
Left to dependents:
In monarchical countries the estates are left to the
eldest son with the hope that his name and title
will descend unimpaired to succeeding
generations. But this is not always so.

Left to dependents:
Under republican institutions the division of
property among the children is fairer yet many feel
that such bequests are an improper use of their
means
Bequeathed for public purposes:
Even this method has not met with complete
success
Finally to leave it to be administered by the
possessor

Skills in mobilising wealth
Planning and management
skills
Financial skills
Communication skills
Marketing skills
Credit skills
Technical skills

Glaring differences in spending habits and life
styles between rich and poor today has badly
affected youths who are encouraged to emulate
the life styles of the rich. This is not helping them
at all.

Islamic concept of spending
Should not exhibit wealth by
conspicuous consumption of luxuries
Should not be wasteful but should
spend wealth productively for the
benefit of society (creating more
employment; reducing cost of
production; etc)
Goal of a Muslim is to attain al-falah(Ibn Masud
said, The Prophet Muhammad saw cursed the one
who devours riba, the one who pays it, the one
who witnesses it and the one who documents it.


Spending as a means of purifying wealth
Wealth needs to be purified for two reasons:
One may unknowingly earn illegal
income
There is the rights of the poor and
needy in the wealth of Muslims
The payment of compulsory sadaqah (zakat)
The payment of voluntary sadaqah (infaq)
Infaq should start with oneself; dependents; next
of kin; neighbours and then others

Although wealth belongs to Allah and man holds it
in trust he is encouraged to generate more wealth
for the benefit of society.
Wealth is for mans benefit but must be generated
and spent in accordance with the clear Islamic
injunctions.
Devouring other peoples wealth is strongly
prohibited

1. 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?
2. 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?
3. 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?
4. Is wealth planning permissible in Islam? How
much different will it be done from the
conventional approach?
WEALTH PLANNING AND MANAGEMENT
LECTURE 2
Wealth Creation and Mobilisation from Islamic and
Conventional Perspectives
Definition of wealth planning
Aspects of wealth planning
Elements of wealth planning
Process of wealth planning
The process
The liquidity issue
Wealth planning process
from the planners
perspective
The Islamic angle
The trade-off concept
The trade-off concept in
Islam
The objectives of wealth planning
Wealth planning in Islam

-Islam encourages Muslims to be wealthy but need
to spend the wealth in the way of God.
-WP has been invoked since the time of the
Prophet (saw).
-The wealth of a Muslim should be spent first on
himself then on his family then his immediate
relatives and then on others. (hadith)

DEFINITION OF WEALTH PLANNING
-WP is defined as formulating a comprehensive
plan to guide us in making our retirement, estate,
tax, education and investment decisions so as to
achieve our financial goals.
-It may also be defined as a process whereby an
individual plans to achieve his financial goals
through a comprehensive programme

Wealth Planning. Wealth Planning merges the
disciplines of retirement planning (accumulation)
and estate planning (distribution). It addresses the
three most critical
issues facing high net worth clients:
1. Creating, growing, and preserving wealth. (Will I
have enough during my life?)
2. Planning for the use of wealth during life.
(Where will the money come from to support my
lifestyle and other objectives?)

3. Planning for the distribution of wealth at death.
(Who gets it when I die?)
Understanding Tradeoffs. Wealth
Planning involves tradeoffs between:
Growth & Income
Risk & Return
Spending & Security
Wealth Transfer & Wealth Control
When clients dont have a clear understanding of
these tradeoffs, it is difficult for them to make and
carry out decisions that involve change.
Achieving a Balance. An effective Wealth Planning
program creates a life plan for the customer that
helps them understand the big picture and how
to balance these objectives, make decisions, and
implement changes that provide a total wealth
planning solution.


Investment Management Process: key to Wealth
Planning
Five Step Process
Define Objectives
Personal profile and individual financial goals
Set Asset Allocation Policy
Set short and long-term asset allocation policy and
Investment Policy Statement
Implement Plan
Identify and select best mix of investments with a
top-down approach
Monitor and Rebalance
Periodic reviews
Report the results
Monthly, quarterly, annually

Investment planning: It is designed to help
individuals with investment strategies with the
objective of generating positive return on
investment. The following steps are necessary:
Analyse the clients current portfolio
and asset allocation to determine if
they are appropriate for the financial
objectives and lifestyles of the client
and his family
Assess his risk appetite
Develop an investment strategy by
choosing a wide array of investments
Provide continuous counselling to help
client invest and save his time and
energy

Aspects of WP
WP normally comprises five major
parts:
Investment planning
Tax planning
Retirement planning
Estate planning; and
Education planning

Tax Planning
It is a plan to pay less tax by structuring the right
mix of investments. E.g.
-By investing in different countries where tax rates
are lower.
-By leveraging on tax laws that allow for tax
restructure so that you can pay the tax later when
you have enough money to pay
Tax avoidance is legal but not tax evasion. Tax
avoidance is to pay less tax based on what the law
allows. Tax evasion is to manipulate the tax
calculation in order to pay less tax

Retirement Planning
It is a plan to ensure that we have
enough money to spend when we
retire.
It should also consider the future
inflation rate, the life style expected
etc.
It includes the amount to save and to
invest in the diversified portfolio


Estate Planning: The term estate here implies the
total wealth of a person which may include
estates. The main objectives of estate planning
are:
To protect the heirs so that they
continue to have control of the estate
Assets are transferred to the rightful
heirs and beneficiaries
To determine who will receive and
manage assets after the death of the
client
Minimise administrative and legal fees

Estate planning is a lifelong affair and may change
according to circumstances such as:
Change in clients financial goals
Marriage
Birth of a child grandchild or other
beneficiaries
Significant change in net worth
Sale or purchase of a property or
business
Death of a spouse or beneficiary
Changes in tax laws

Education Planning
Education plan is becoming more necessary as cost
of education increases
There are benefits in tax and estate planning by
properly planning for education
The earlier one starts to plan for education of their
children the more beneficial it is

Elements of wealth planning
Three main elements of WP
-Use of private banking technology
-Customer relationship management; and
-Financial planning tools
Private Banking Technology
-WP has to be holistic. It can be achieved by having
all important financial information in one place.
Aggregation of such important information in one
place enables wealth planner have a holistic view
of the clients assets.
This aggregated information combines with a
robust planning platform makes WP complete

Consumer Relationship Management (CRM)
=Gives high net worth clients more information
about opportunities to plan their wealth.
=More information can be fed at lower cost
=Banks can reach out to more customers

Wealth Planning Tools
More sophisticated planning tools are emerging to
serve the HNWCs.

Common Agreements
Wealth enables them to buy the best
products
Wealth gives them Freedom of choice
Wealth is a reward for hard work

Process of WP. The 5 step process are:
Inventory taking
Analysis and evaluation
Plan designing
Implementation
Monitoring and reviewing

The liquidity issue
-Liquidity is necessary for immediate consumption
Assets should be kept in different grades of
liquidity so that it is easy to liquidate when
necessary
-The amount of assets that are near liquidity
should commensurate with the need
-At the same time there should be a balance
between liquidity requirement and investment
returns

WP process from planners perspective
-Establishing and defining client-Planner
relationship
-Should explain and document services and
responsibilities
-Should agree on the fees and how the planner
should be paid
Should decide on the period of the relationship

WP process from planners perspective
Gathering client data including goals
Wealth planner needs to seek detailed
information about clients financial
position
Both need to define personal and
financial goals
They should decide on time frame to
achieve those goals
They should know the strategies and
risks associated with the strategies

Wealth planner must assess clients
financial status to know what client
must do to meet his goals
This includes analysing clients assets,
liabilities, cash flows, investment, tax
strategies, retirement plan and
insurance coverage

WP process from planners perspective
Developing and presenting financial planning
recommendation and alternatives
Wealth planner should underline the
recommendations he made to the
client
The client should go over all the
recommendations and understand their
implications
Wealth planner should be concerned
with the clients point of view and if
need be make amendments as
requested by the client

WP process from planners perspective
Implementing the Financial Planning
recommendations
The client and the planner should
mutually agree on how the
recommendations will be carried out
The planner should serve the client as
per the agreement
The planner will coordinate the whole
process with the client and other
relevant parties such as solicitors,
stockbrokers, etc.

WP process from planners perspective
Monitoring the financial planning
recommendations
The client and the planner should agree
on the monitoring process to meet the
clients goals
The planner must report to the client
periodically as agreed
Reviews will be done when necessary
to ensure the results are in line with
clients expectations

-Muslims are supposed to have surplus wealth to
be strong
-Surplus wealth can only be obtained through
higher income as a result of hard work or surplus
production
-Having surplus income alone is not enough. One
must also know how to generate more wealth
through WP

According to Islam the process of WP should
include the following
Co-operative effort through helping one
another (Help ye one another in
righteousness and piety al-Maidah 5:2)
Peace and stability to ensure greater
development
Service to others is an important social
responsibility.(surah Al-Anam, 6:160
who brings a good deed and deeds of
obedience to Allah and his Messenger,
shall have ten times the like thereof to
his credit..)
Charity to help others . (surah Ar-Rum
30:38 So give to the kindred his due,
and to Al-Miskin (the needy) and to the
wayfarer. That is best for those who
seek Allahs countenance; and it is they
who will be successful.
Principle of sharing
Responsibility towards development


THE TRADE-OFF CONCEPT
-The traditional trade-off concept is between risk
and return
-Higher risk will yield higher return and vice versa
Wealth planner needs to understand the trade-off
concept and the clients willingness to take risks
-The concept of risk-free investment where capital
is guaranteed means that the returns are low since
the product provider charges a fee for the
guarantee
-Another risk the clients might face is the
consistency of performance. While on average it
looks like the return is high but this does not
guarantee that the client will always get the
average rate.


-With more complex financial instruments like
fixed income instruments, with its own individual
risk characteristics, the wealth planner has to be
more skilful in drawing up the right strategies to
ensure the required rate of returns for the clients
-Apart from trade-off between risk and return,
clients are also looking into the trade-off between
service and return. The level of service is also
important for the client who may even forego
higher returns.

-In Islam the trade-off is not only between risk and
return but it is also between life in this world and
the hereafter
-The Quran has in various places guided man to
diversify their risk (Story of Jacob who tells his sons
to enter from different gates to collect food from
Egypt)(surah yusuf 12:67)
-The Quran also reminds Muslims not to sell life in
the hereafter for the life in this world. In other
words the life in this world is not worth compared
to life in the hereafter (surah Al Baqarah 2:86-
those are they who have bought the life of this
world at the price of the Hereafter, their torment
shall not be lightened , nor shall they be
help/support)(surah An-Nisa 4:74


OBJECTIVES OF WEALTH PLANNING
To get a certain minimum level of
return at no risk
To get consistent regular income
To obtain capital gain
To get a level of return within a certain
level of risk
To have a high level of liquidity
To preserve assets
To increase lifestyle options
To reduce taxes
To distribute assets at or within a
certain time to certain people

The story of Prophet Yusof (Joseph) who became
the Minister of Finance of Egypt during the period
of extended drought and famine is a good example
of the importance of wealth planning (surah Yusuf
12:47-49)
Secondly the comprehensive plan of the Holy
Prophet Muhammad (saw) on his migration to
Medinah is another example of planning
Muslim must protect their religion, by being
wealthy that this role can be performed.
Whatever it is the generation and distribution of
wealth should be in line with Shariah (surah Al-
Hadid 57:7 Believe in Allah and his Messenger ,
and spend of that whereof He has made you
trustees. And such of you as believe and spend in
Allahs way, theirs will be a great reward) narrated
by Abu Hurairah r.a. Prophet s.a.w. Said,everyday
two angels come down from heaven and one of
them says O Allah! Compensate every person who
spends in your cause, and the other angels says, O
Allah, destroy every miser. Sahih Al-Bukhari)

For Muslim by practising wealth planning
according the Shariah rulings, additional three
things are achieved:
They can better defend Islam if they
have wealth charity work, donation
and waqf
They will enhance their faith in Allah.
Wealth honestly earned and
responsibly managed could in fact
strengthen their faith in Allah as they
have sufficient financial resources to
acquire more religious knowledge as
well as other useful knowledge
They can live in harmony. Wealth also
brings them security and therefore it
will contribute to peace of mind to
perform their spiritual obligations to
Allah
2. Islamic wealth planning are subject to 3 major
conditions:
Wealth must be planned in an absolutely honest
manner
Wealth must be planned and managed in a highly
responsible manner to benefit its owner, family
and the community
Wealth must be planned through halal means


Objective of Wealth Planning from Islamic
perspective

-To obtain only income which is not forbidden
according to Shariah principles. Permissible or
Halal income is an absolute necessity.
-To encourage mankind to work hard and honestly
in increasing income and managing weatlh (surah
Al-Isra 17:70)
-To accumulate and generate wealth in legitimate
way.(surah At-Taubah 9:103; surah Ibrahim 14:7)
To donate and develop well-being. (surah At-
Taghabun 64:16)





WEALTH PLANNING AND MANAGEMENT
LECTURE 3
WEALTH ALLOCATION PROCESS

The planning step
Identifying and specifying
investors objectives and
constraints
Creating investing policy
statement (IPS)
Forming capital market
expectations
Creating strategic asset
allocation
Execution, feedback,
performance evaluation
Monitoring and rebalancing

Wealth or asset allocation is a very
important process in the financial
planning
It is dynamic and continuous and not a
one off process. It needs continuous
revision and rebalancing
It consists of two major components:
-Investment Policy Statement (IPS)
-Portfolio Management Process (PMP)

Investment policy statement (IPS) is a written
document that sets out
the clients return objectives
risk tolerance over the relevant time
horizon
Liquidity requirements
Tax considerations
Regulatory requirements; and
Unique circumstances such as Shariah
requirements

Portfolio management process (PMP) is an
integrated set of steps taken consistently to create
and maintain an appropriate portfolio to meet the
clients investment and other goals












Identifying And Specifying Investors Objectives
and Constraints
-The basic elements in investment objectives are
the return requirements and the risk tolerance
levels.
-They must be suitable, realistic and capture all the
objectives specified by the investor.
-Return requirements for individuals depend also
on their life cycle stage and their risk tolerance
levels
-Even if the risk tolerance levels are the same, the
choice of portfolios may be different, depending
on circumstances such as to be Shariah compliant
for Muslims, etc.
-Constraints can be internal (liquidity needs, time
horizon) or external (tax issues, regulatory
requirements)


Creating Investment Policy Statement
-IPS contains both objectives and constraints
It is a document governing all decisions pertaining
to investment
-It would also cover issues such as reporting
requirements, rebalancing guidelines, frequency
and format of communication, manager fees,
purification methods, time frame, etc.

A typical IPS would include:
-Brief client description
-Purpose of establishing policies and guidelines for
objectives, goals, restrictions and responsibilities
-Identification of duties and investment
responsibilities of parties involved (e.g. the client,
investment committee, Shariah advisor,
investment manager and trustee), particularly
regarding fiduciary duties, Shariah compliance,
purification, communication, operational efficiency
and accountability

A typical IPS would include: (Contd)
Statement of investment goals,
objectives and constraints
Schedule for review of Shariah
compliance, investment performance
and of the IPS itself
Asset allocation considerations to be
taken into account in developing the
strategic asset allocation; and
Rebalancing guidelines for portfolio
adjustments based on feedback

-The IPS acts as the investment strategy that
reflects the risk-return policy, liquidity
requirements, income and tax strategy.
-The result is a set of portfolio choices between
safe and risky assets
-The allocation of resources is called the asset
allocation decision and is the most fundamental of
investment decisions.

-Sometimes IPS include strategic asset allocations
in broad terms so that the choice of specific
securities can be left to the investment manager
-In the broadest sense, the Islamic financial
planner should assist the investor understand
passive, active and semi-active investment
strategies

-In a passive investment approach, portfolio does
not react to changes in expectations. E.g. a
portfolio indexed to the Shariah Index, might add
or drop a holding when there is a change in the
index composition, but not in response to changes
in expectations concerning the securitys
investment value.

-Indexing refers to the holding of a portfolio of
securities designed to replicate the returns on a
specified index of securities which is a common
passive approach to investing
-A strict buy and hold strategy, which holds say a
fixed portfolio of Islamic bonds, is the second type
of passive investing

-An active investment approach is based on
responding to changing expectations.
-Active managers establish a benchmark in an
attempt to produce positive excess risk-adjusted
returns or positive alpha
-The semi-active, risk-controlled active or
enhanced index approach makes very controlled
use of changes in expectational data. E.g. an
index-tilt strategy seeks to track closely the
Shariah index while adding a targeted amount of
incremental value by tilting portfolio weightings in
some direction that the investment manager
expects to be profitable

-At this juncture, asset allocation decision may
have been made. Market timing technique may be
introduced at this level.
-Lower level portfolio managers fill in the next
stage in the decision process by making security
selections.
-Below the level of the asset allocation decision
stage, investors will need to decide whether or not
to adopt an active or passive approach to security
selection

Forming Capital Market Expectations

-This sub-step involves the forming of the capital
or Islamic capital market expectations
-The basis for choosing the portfolios that
maximize expected return for given levels of risk or
minimize risk for given levels of expected returns is
the long run forecasts of risk and return
characteristics
-Once the long run risk-return characteristics are
known, investors would be able to make their
decisions on portfolio choices


Creating the Strategic Asset Allocation
This is the final step of the planning process.
The IPS and capital market expectations are
combined to determine the strategic asset
allocation targets
The risk-return characteristics of the asset
allocations could be single or multi-period.
Traditional mean-variance analysis is the starting
point
Constraints include after tax allocation, liquidity
needs and time horizon
Time horizon can also raise issue of non-Shariah
compliancy when stocks change status


The Execution Step
The execution step is represented by the portfolio
construction and revision box in Figure 3.1.
This is the step where the manager constructs and
revises a portfolio within the guidelines of the
strategic asset allocation.
Investment strategies are integrated with market
expectations to build a portfolio (selection and
composition)

The portfolio decisions are initiated by portfolio
managers and implemented by trading desks or
the managers (portfolio implementation)
Subsequently, portfolio is revised as investors
circumstances, Shariah compliance or capital
market expectations change
Portfolio optimization uses quantitative tools to
combine assets efficiently in order to achieve the
return and risk objectives. It is important to
integrate strategies with expectations as a tool to
determine asset allocation.

-Although the financial planner may not involve
portfolio implementation, he must know the
negative effects of transaction costs.
-A poorly managed transaction costs can reduce
fund performance
-Transaction costs include all costs of trading such
as explicit transaction costs, implicit transaction
costs and missed trade opportunity costs


The Feedback Step

Investing is a dynamic process even if the
investment objectives and constraints do not
change
-Differing rates of return between asset classes
will result in shifts in portfolio composition
-Evaluation of any change in investment
constraints and the effectiveness of investment
methodology may be undertaken periodically and
revised if necessary.
-The feedback step consists of two components:
Performance evaluation and
Monitoring and rebalancing

Performance evaluation:
Performance measurement
Performance attribution
Performance appraisal
Performance measurement is the calculation of
rates of return for the portfolio
Performance attribution is the analysis of why the
portfolio performed as it did and the
determination of what factors caused such a
performance

Performance appraisal is to find out whether the
manager has performed by comparing his results
with the benchmark
-In performance evaluation, the financial advisor
should ask questions such as what decision led to
the managers results and why such decision were
made.
-The portfolios return could be due to strategies
asset allocation decision, market timing and
security selection.
-Besides evaluating the manager, a review of the
benchmark may also be necessary.

Monitoring and Rebalancing
Monitoring and rebalancing makes use of feedback
to manage ongoing exposures to available
investment opportunities so that the clients
objectives and constraints are satisfied

In sum, portfolio management is on ongoing
process in which the investment objectives and
constraints are identified and specified,
investment strategies are developed, portfolio
composition is decided in detail, portfolio
decisions are initiated by portfolio managers and
implemented by traders, portfolio performance is
measured and evaluated, investor and market
conditions are monitored and any necessary
rebalancing is implemented.

Investment Objectives and Constraints
-Since return and risks are interrelated we can
start with anyone of them. Here we start with
return first.
-Return objectives are normally financial objectives
that are not goals in themselves, but they enable
investors to achieve long term goals.

There are four categories of investors long term
goals:
-Specific goals, e.g. funds to buy a new home or to
put children through university
-Increase current income
-Accumulate wealth and attain financial security
-Provides funds during retirement years
Exact or specific objectives are four main types:
1. Stability of principal
2. Income
3. Growth of income
4. Capital appreciatio006E

1. Stability of principal
Emphasis is on preserving the original value of the
fund. Some beneficiaries cannot afford any loss of
income. This may be because the investor is an
institution required by statute to earn a certain
positive rate of return, or because of the investors
attitude towards risk

2. Income
Emphasis is on deriving a stable or reasonably
reliable stream of returns. Temporary declines in
principal value may be acceptable in the case of
marketable fixed income securities, particularly
when they return to their nominal value on
maturity

3. Growth of Income
Emphasis here is on the steady growth of income
in the long term that is at least equal to the rate of
inflation. There could be a need to sacrifice the
early payout to accumulate more investment for
higher returns in the future

4. Capital appreciation
Investors here do not need interim income stream
from their investments. They want their
investments to grow over time. Their investments
are normally over and above what they need for
spending. There might be different tax regimes in
different jurisdictions for periodic income earned
as opposed to lump sum returns on maturity

Formulating Return Objectives
To formulate return objectives, the following
questions must be addressed:
1. How is return measured? Usual
measure is total return from price
appreciation. It could be stated in
absolute amount or in percentage, e.g.
8% per annum. It may also be
expressed as net of tax, zakat,
purification, etc.
2. How much return does the investor
want? Often the investor wants
something higher than average.
Financial planner must continuously
assess the reasonableness of the rate
and the ability to take risk, etc.
3. How much return the investor needs
to achieve on average? This is the real
return the investor wants. This is more
realistic than what he desires. Planner
needs to take into consideration the
inflation rate to ensure the actual
investment return meets the investors
needs
4. How is the return objective set?
Planner must make sure that the
objective return takes into account the
requirement, the risk objective and
market expectations.

-The financial planner should take due care that
the anticipated return should be sufficient to meet
wealth objectives or liabilities that the portfolio is
intended or required to fund.
-For investors who require to spend from
investment income, the return objective should be
sufficient to meet the spending needs from capital
appreciation or investment income.
-If a well-considered return objective is not
consistent with risk tolerance, it may be necessary
to make other adjustments, such as increasing
savings or modifying wealth objectives

The financial planner needs to address the
following issues when formulating risk objectives
1. How do I measure risk? This is not an
easy job. It could be measured in absolute or
relative terms with reference to various risk
concepts. Modern portfolio theory uses variance,
which is referred to as volatility of return as a
measure of risk. Other risk factors, such as
exposures to specific economic sectors, may be
relevant as well. Downside risk concepts, such as
Value at Risk (VaR). May be important, particularly
to individual clients.

Issues to consider in establishing risk objectives
(Contd)
-What is the investors willingness to take risk?
This is the investors stated willingness to take risk.
Normally institutional investors have different risk
appetites than individuals

-What is the investors ability to take risk? The
willingness and ability to take risks normally differ
due to practical or financial limitations. E.g. if the
wealth levels are high relative to probable worse-
case short-term losses scenarios and /or long term
wealth targets or obligations, then more risk can
be taken.

How much risk is the investor both willing and
able to bear? This is known as risk tolerance which
is the capacity to accept risk and is a function of
both willingness and ability. Another way to
describe this is risk aversion, i.e. the degree of
inability and unwillingness to take risk.

What are the specific risk objectives? The
difference between specific risk objectives and risk
tolerance is the level of specificity. E.g. one with
lower than average risk tolerance may be
translated into the loss in any one year should not
exceed x percent of portfolio value under specific
risk objective.

As a rule of thumb, investors seeking safety of
principal will invest in safer instruments. Those
who seek capital appreciation will enjoy more
flexibility in the range of instruments they can
invest in, including investing in higher risk
portfolios that offer higher returns on average in
the long run.

More Than One Objective
Establishing one objective is already a big
challenge. To have more than one objective will be
more challenging.
One issue is that the objectives may contradict one
another. E.g. to achieve higher growth of income
may not achieve stability of principal. Or to have
stability of principal may not achieve capital
appreciation.

Identifying Constraints
Constraints represent special conditions under
which the investor or investment manager acting
on behalf of the investor must operate. Some of
the constraints are as follows:
1. The Investors investment time
horizon: The longer time horizon, the better. In
short term, rapid changes of investor sentiment,
risks and transient money market conditions may
cause dramatic changes in security prices. In
longer term, forcer from secular economic trends
and sustainable earnings momentum exert
steadier, more predictable forces.
three ways time horizon influences asset allocation
strategy:
a) Length of investment time
horizon itself: Meeting a wealth accumulation
target over 20 years compared to meeting it over
40 years will require different strategies
altogether.
b) The policy decision, or the
proportion, allocated to various asset classes over
time. If the proportion of asset allocated to various
asset classes is allowed to change, the number of
such re-allocations will depend on the length of
the time horizon

Three ways time horizon influences
asset allocation strategy (Contd)
c) The number of times asset
rebalancing occurs. There may be a larger number
of asset re-allocations over longer time periods.

Some say that when investing within a short time
horizon, one must invest in stable securities. When
investing within long time horizon, can take more
risk and invest in riskier securities.

2. The tax regime regulating the particular
investment or investor: The performance of an
investment that is relevant is its after-tax return.
Different tax laws and incentives would give
different sorts of advantage. Financial planner
must know the tax implications in order to gain
advantage or reduce taxes.
3. Liquidity needs may determine the type of
investment suitable for an investor: Liquidity may
be defined as the ability to realize the value of an
investment through a quick sale transaction
without much difference from the currently
observed market price. For many financial assets,
the bid / ask spread is a good indicator of the
liquidity of the asset.
Liquidity is different from marketability which is
the ability to sell to another party. Real estates are
marketable but not liquid.
Pensioners may require sufficient
liquidity to meet their spending needs. In this case
liquidity can become a constraint.
If liquidity requirement coincides
market downturns, liquidity can influence risk
objectives.

5. Legal considerations and special
circumstances faced by the investor:
These constraints may arise due to
investors ethics, beliefs, constitution or
statutes governing certain types of
investors.
For Muslims, all investments must be
permissible by Shariah
Central Bank regulations on restrictions
in investing certain grades of instruments is
another constraint.


Samuelson-Merton Model
Markowitz model focuses only on wealth at the
end of a single (long) period. The assumption is
that time diversification will make the equity safe.
The
Samuelson-Merton life cycle model, is a multi-
period model that stresses the need for hedging
and insurance in addition to precautionary savings
and diversification
Table 3.2 gives the comparison between the two
models. Markowitz looks into wealth as a stock at
the end of the planning horizon whilst Samuelson-
Merton takes lifetime consumption into
consideration. Hence the latter model looks at
wealth as a flow of consumption over time rather
than stock.

Drafting Investment Policy Statement
-An Investment Policy Statement (IPS) defines the
investors financial objectives, identifies
constraints and specifies the amount of funds
dedicated for investment, the investment
methodology and strategies to attain the
objectives.
-It outlines the expectations of the investor and
the responsibilities of the investment manager.
The investment manager uses IPS as a guide,
carries out portfolio construction and
maintenance. The manager must be
knowledgeable and the investor must be
transparent and cooperative.
-The IPS will help to communicate the investors
objectives and goals to the investment advisor or
manager and help him/her fulfill fiduciary duties
required of the investment manager/advisor
-Establishing procedures allow systematic
approach to be taken and will prevent arbitrary
decisions from being made. It will also facilitate
changes to objectives, constraints, investment
strategy etc. without much difficulty

If the investor is an institution which is
represented by an investment committee, the IPS
becomes very useful tool to communicate to the
investment manager in discharging his/her
fiduciary duties. The IPS will also allow for
continuity of policy decisions regardless of changes
in the fiduciary. To ensure integrity of the
organization, the IPS facilitates the audit process
by independent parties

-The investment manager may draw on unrealistic
objectives contained in an initial investment policy
statement to educate the investor on what is
feasible
-The manager must generate an explicit and
transparent asset allocation plan based on some
investment strategy with essential characteristics
of a possible portfolio
-The IPS helps to keep sight of objectives and
match them with long term goals
-Investor must also consider the risk that is taken
in the formulation of the investment plan

-The IPS is also useful in evaluating the
performance of the investment manager
-The writing of a careful IPS will give the investor
better control of his investments
-The IPS is also useful as a document to protect the
financial planner in case of any problems

The IPS must be customized for the investor. It
must be easily understood and contain the
following
Identification of a target for returns
Identification of risks and constraints
Spelling out the potential investment
channels and the asset allocation
The organizational set-up of the
investor, if it is an institution, detail the
responsibilities of the parties in that
set-up and the responsibilities of the
investment manager



Contents of IPS (Contd)
-Guidelines in respect of rebalancing the asset
allocation
-Permissible strategies and investment styles to be
adopted
-The manner in which the performance of the fund
is gauged
-Procedures for changes to be made to the IPS
-Guidelines in respect of rebalancing the asset
allocation
-Permissible strategies and investment styles to be
adopted
-The manner in which the performance of the fund
is gauged
-Procedures for changes to be made to the IPS


Return Objective
-Targets for return must be very clear, e.g. to
achieve a long term average return of X% p.a. or to
achieve a capital value of $15 million by 2015
-Returns are normally specified in terms of total
returns, instead of being broken up into income
streams and capital value comprising realized and
unrealized gains.
-They may be adjusted for risks undertaken for
comparison with economic rates of return
-The desired and required returns must be
identified together with the discussion on risk
tolerance.

-Financial planner must remember that the return
objectives must be achievable within the risk
constraints
-The return requirement here is the return level
necessary to achieve the investors primary or
critical long-term financial objectives while the
desired return is associated with the investors
secondary goals
-The return requirements are generally driven by
annual spending and longer-term saving goals.
-Financial planner must adopt the total return
approach. This approach first looks at the
individuals investment goals and then identifies
the annual after-tax and zakah / post purification
portfolio return necessary to meet them. This
identified return must be attainable within the
individuals identified constraints and risk
tolerance.

-When return objectives are not consistent with
the risk tolerance, the financial planner must find a
resolution. If it is impossible to achieve the return
objective without violating the risk tolerance
parameters, the intermediate goals may have to
be modified.
-Alternatively, it may be necessary to accept a
slightly les comfortable level of risk if the ability to
bear additional risk exists. E.g. if a person discovers
that his retirement goals are inconsistent with the
current assets and risk tolerance, then he may
have to defer his retirement date, accept a
reduced standard of living in retirement, or
increase current savings at the expense of the
current life style.

On the other hand, if the investment portfolio is
large enough to generate a return that exceeds the
investors return objectives, then the investor has
the option:
1)Protect the surplus by assuming less risk than he
is able and willing to accept, or
2)To use the surplus as the basis for assuming
greater risk than needed to meet the original
return goals, in return for a higher expected return

-In order to calculate the required return and to
fully understand the cumulative impacts on the
timing of income, living expenses and various life
style events, a financial planner should incorporate
a cash flow analysis in preparing the investment
policy statement.
-Asset valuation guidelines must be set to allow a
consistent and transparent approach to
determining returns. For this purpose, reporting
policies may be spelled out, amongst others,
adopting cash, mark-to-market, fair value or other
approaches to valuation and income recognition.
-In line with target return objectives, guidelines for
investment management, transaction and other
fees may be specified. To encourage a sense of
ownership amongst its investment managers,
performance-based remuneration may be
adopted.

Risk Objective
-Risk cannot be eliminated.
Financial planner must educate investor how risk
can influence returns and there should be the
consistent and realistic tolerated risk levels.
0There are two primary factors affecting a
persons risk tolerance:
1) financial ability which
depends on available resources and life cycle
considerations
2) willingness to accept return
volatility. Risk tolerance represents a willingness to
take risk and is independent of the ability to take
risks. Some take more risks than they can bear.
Others take too little risk than what they can take.
This is purely an emotional decision.

-For a young individual whose major asset is their
earning power, may not want to take much risk.
They rather take insurance to protect their earning
power.
-As they age, they would be more keen to take
risks and maximize their returns.
-As retirement age draws nearer, and the potential
and time available to recover from setback
reduces, risk tolerance diminishes again and tends
towards risk aversion.

-The percentage of equity held by investors when
plotted against their age, may not turn out to be
curvilinear relationship, with the youngest holding
less equity than those in 30-50 age bracket , but
this proportion may decrease again in higher age
brackets.
-A theoretical foundation why people with longer
investment horizons may be more willing to take
risks is the concept of time diversification

-One type of mutual fund in US is the life cycle
funds which aim to address this investor need.
-The main role of this fund is to meet the
willingness of investors with a longer investment
horizon to accept greater risks.
-If equity represents the asset class with the
highest risk, then investors would reduce their
portion of asset in equity when they are about to
retire. According to Bodie and Crane (1997), the
generally accepted rule of thumb is for investors to
invest a percentage proportion of assets in equity
equal to 100 less their age.

The risk level can be specified as follows:
1)They may be spelled out as relative to some
specified level. Market averages may be spelled
out in terms of the securitys beta. Specifying risks
in terms of beta points take into account the level
of fluctuation of market returns.
2)Some absolute measure such as the mean-
variance (MV) approach which spells out the
dispersion of periodic returns around the mean
3)Minimization of the likelihood of a loss or the
likelihood of level of returns falling below a certain
level such as the inflation rate

Potential Investment Channels and Asset
Allocation
-Asset allocation decision spells out the types of
permissible investment assets, classes, including
sub-asset classes and alternative investments.
-Portfolio composition will depend on the different
rates of return of different asset classes and types
-IPS must spell out guidelines regarding
permissible strategies such as style approaches,
active/passive portfolio management, use of
derivatives, leverage, short selling, currency
hedging policies and the exercise of shareholder
voting rights. The IPS may even spell out targets on
expenses such as brokerage commissions.


Gauging Performance
-Performance in terms of adherence to established
objectives, constraints, guidelines, processes and
valuation approaches
-Performance in terms of investment outcome,
how they are measured in economic terms or on a
risk-adjusted basis.
-Performance in terms of returns will always be
relative to market or some benchmarks

As a guide, some benchmarks must be:
1) Specified in advance in clear terms
2) Must be investable
3) Must be clearly measurable
4) Must be appropriate, e.g. consistent
with managers investment style or biases
5) Must be reflective of current
investment opinions
6) The benchmark must be specified in
advance before an evaluation period commences


Reviewing IPS
Since the responsibility of monitoring
the investment manager lies with the
investor, the investor should be able to
modify the IPS periodically as necessary
to suit new circumstances, such as new
constraints, new financial conditions,
etc. Procedures for modifying the IPS
must be in the IPS.
The investment manager owes a duty
of occasional enquiry to see if material
changes have developed in a clients
financial position but it is also
incumbent upon the investor to be
transparent about material changes
The key feature that differentiates
between the IPS of an institution and
that of individual is the extreme range
of requirements.


























































WEALTH PLANNING AND MANAGEMENT
LECTURE 4/5
Islamic REITS
Structure
Regulatory Regime
General Benefits
Investors
Comparison with Alternative
Investment
Fees and Charges
Performance Indicators

Objective of an Islamic REITS
To provide unit holders with a stable distributions
per unit with the potential for sustainable long-
term growth of such distributions.
How?
By optimizing the performance and enhancing the
overall quality of a large and geographically
diversified portfolio of Shariah-Compliant real
estate assets through various permissible
investments and business strategies.



Islamic REITS
Tripartite agreement between three parties:
The Manager
The Trustee
Unitholders
Tripartite relationship is governed by a Deed
registered with the Regulator (e.g Securities
Commission Malaysia)

DEED
A Deed is a legal instrument used to grant a right.
The trust deed is a legally binding agreement
between the manager, trustee and unit holders.
The agreement usually spells out clearly how the
unit trust scheme is to be administered. The
contents usually include:-
-Valuing and the pricing of units;
-Keeping of proper accounts and records;
-Collection and distribution of income;
-Rights of unit holders;
-Duties and responsibilities of the manager;
-Duties and responsibilities of the trustees; and
- Protection of unit holders interest.


The SC I-REITS Guidelines discussed four matters
for I-REITS, viz.:
- rental of real estate by I-REITS for
business purposes with a permissibility
benchmark of 20%;
- investment, deposit and financing for I-
REITS;
- takaful schemes to insure real estate;
and
- forward sales or purchases of currency
for risk management.

20% Permissibility Benchmark
Benchmarking is based on rental space
rather than volumes of sales the non-
permissible business can generate.
Nature of all non-permissible
businesses is that it is highly profitable.
1. casino & lottery outlets game of chance
always favour the operator
2. liqour stores addiction i.e captured market
4. interest-bearing banks- small cap but
able to raise high volumes of deposits to make
loans.


Islamic Contracts in REITS: WAKALAH Model
-Unitholders and Management Company(MC)
Wakalah Fee-based
Unitholders appoint MC to invest funds
in properties. MC earns fees.
Unitholders and Trustee
Wakalah Fee-Based
Unitholders appoint Trustee to serve as
a custodian for all the assets of the Islamic REIT.
Trustee earns fees.
The Wakalah principles are
incorporated in the Deed of Islamic
Reits.

Nature of work undertaken by Management
Company (Wakil)
Managing the Properties effectively
Maintaining net property income
Maximizing the return and performance
of each Properties and their growth via
enhancement of properties
Raising the profile of Properties
Acquiring property assets with good
yield and growth potential for both
locally and abroad that meet the
Managers investment criteria
Employing optimum capital structure.


Wakalah Fees
Annual Management Fee
Annual Maintenance and Management
Fee
Annual Trustee Fee
Shariah Committee Members Fee
Fund Expenses


Management Expense Ratio (MER)
Management Expense (ME) = Annual
management fee + Annual
management and maintenance fee +
Annual Trustee fee + Shariah fee + Fund
expenses
MER = [(ME + Non-Recoverable
Expenses) / (Average Value of a REIT
calculated on a daily basis)] x 100
Shariah-compliant MER? up to?
To protect investors from high loading
charges by Islamic Reits management
companies.

Wakalah Model.
Management Company (ie Wakil) does
not bear potential of loss (ie. risk) of
investment.
Management Company is entrusted to
invest the REIT Fund in return for a Fee
(ujrah).
Potential loss of investment is borned
by Unitholders.
Management Company receives fee
payment (ie fees) eventhough
Unitholders are suffering capital losses.
Nominal fees (ie absolute amount) may
fall when net asset value of REIT
declined.
Percentage fee remained unchanged.

Risk-Return Principle
Juristic Principle (Al-Qawaid Fiqiah) -
Al-Ghorm Bil Ghonm
No Pain No Gain

RISKS faced by Unitholders
Investment by Unitholders is based on
Risk-Return Principle al-Ghornm bil
Ghonm where:
1. Original investment not guaranteed
2. Income may rise or fall
3. May not receive any income at all.


Types of Risk in Islamic REIT
Organizational and Operational Risk
Risk relating to investment in real
estate
Risk relating to Properties
Shariah non-compliance risk
Risk relating to an investments in the
units

Alternative to REIT Wakalah Model
Unitholders and Management Company
(MC)
Al-Mudarabah
Profit-Sharing
MC fees = portion of rental income.
Unitholders and Trustee
Wakalah
To ensure MC adheres strictly to the
provisions of the Deed.


Typical REIT structure


Al-Aqar KPJ Islamic Reits
Oversubscribed by 4.13 times
Islamic Reits drew 5,115 non-Muslim
and non-Bumiputra investors.
Open up at RM0.99, a premium of
4.2%, or 4 sen, over its retail offer price
of RM0.95
30,810 units done at the opening bell
Closed at 3.5 sen up at RM0.985
Al-Aqar REIT raised RM177.25 million


Al-Aqar KPJ REIT Structure - MALAYSIA

Al-Aqar KPJ REIT
First Islamic Real Estate Investment
Trust (I-REIT)
Comprises of six hospitals building
worth RM461.24m or USD$131.9m
Manager: Damansara REIT Managers
Pte.
Lead adviser: AmMerchant Bank Pte.
Trustee: Amanah Raya Pte.
Units holdings:
KPJ : 160 million units
Institutional investors: 165 million units
Retail investors: 15 million units


Al-Aqar KPJ REIT: Fees and Expenses
Annual management Fee
Maintenance and management fees
Annual trustee fee
Shariah Committee Members fee
Others
Auditors fees
Valuation fees
Relevant professional fees
Profit payments and expenses in
respect of Islamic financing facility
Printing, posting, general and operating
expenses for the administration of the fund.

Al-Aqar KPJ Islamic REIT
Worlds first Islamic REIT IPO
The worlds first Islamic real estate
investment trust (I-REIT) Al Aqar KPJ
REIT IPO was launched with
AmMerchant Bank appointed as the
advisor, managing underwriter and sole
placement agent.
Under the IPO, a total of 340 million
units were issued and of these, KPJ
Healthcare would hold 160 million units
(47%), while 165 million units would be
issued to institutional investors at
US$0.27 (RM1) per unit and 15 million
units to the public at US$0.26 (RM0.95)
each. About US$49 million (RM180
million) was expected to be raised from
the IPO.
Bousted Al-Hadharah Islamic REITS
Vendor sells assets to SPV (Al-Hadarah
REITS).
SPV leases back the assets to the
Vendor.
Vendor pays fixed rentals for 30 years
Rentals passed to Unitholders as
income.
Unitholders no fixed income and
capital protection.


CONTRACTS: SPA & Ijarah
Sale and Purchase Agreement: The sale
and purchase agreements between the
Vendors and the Trustee, on behalf of
Al-Hadharah Bousted REIT, in relation
to the sale and purchase of the
Plantation Assets


CONTRACTS
Ijarah Arrangements: The
arrangements by al-Hadharah Bousted
REITS (AHBR)where the Trustee on
behalf of AHBR as lanlord agrees to let
the Plantation Assets to the Vendors as
tenants for a period of three years
which are renewable four times up to
twelve years and thereafter renewable
for up to an additional fifteen years
comprising five additional terms of not
more than threee years each, save and
except for the tenancy of the Malay
Reserved Land which are not
automatically renewable.

Islamic REITS Structure
The FUND Islamic REITS
The Unit Holder
Manager
The Trustee
Shariah Committee/Shariah Adviser
The Property Assets
Authorized Investments

Securities Commission REITs Guidelines:

a trust investment vehicle that invests or
proposes to invest at least 50% of its total assets in
real estate. An investment in real estate may be by
way of direct ownership or a shareholding in a
single-purpose company whose principle assets
comprise real estate.
REITS DEFINED
Invests at least 50% of its total assets in
real estates
Trusts passive income vehicle
Distributes dividends to unit-holders
Governed by a constitution
Cannot reinvest income as retained
earnings
Dividends are tax deductible
Has a management company
Has a trustee company
Employs a property manager

REITs were formed in 1960 Congress
passed legislation providing small
investors access to income producing
properties (The Real Estate Investment
Trust Act of 1960).
Benefit of REIT structure entity does
not pay corporate taxes as at least 90%
of income distributed to shareholders
annually.
To qualify as REIT status, a company
must meet and maintain certain
provisions.
Publicly traded REITs are SEC-
registrants and subjected various
regulatory requirements.

Provisions to Qualify as REITs
Have a minimum of 100 shareholders
No more than 50% of shares can be held by 5 or
fewer
Minimum 75% of total asset invested in properties
investment*
Minimum 75% of income derived from
properties/mortgages
Not more than 20% of assets can consist of shares
in TRS**


Performance Indicators
Management Expense Ratio (MER)
Total Returns
Average Annual Returns
Distribution Yield
Net Asset Value (NAV)







Authorized Investments
At least 75% of al-aqar KPJ REIT total
assets shall be investment in Shariah-
compliant real estate, single purpose
companies which are Shariah
compliant, real-estate related assets or
liquid assets which are Shariah
compliant;
The remaining 25% of al-aqar KPJ may
be invested in other Shariah-compliant
assets (ie Shariah compliant real estate
related assets, Shariah compliant non-
real estate related assets such as
Islamic asset-backed securities)


Performance Indicators
Management Expense Ratio (MER)
Total Returns
Average Annual Returns
Distribution Yield
Net Asset Value


Investing in REITswhy are REITs attractive to
investors?
Income stability - REITs is typically distribute >90%
of net cash flow
-Income is underpinned by legally enforceable
lease agreements
-Low leverage
-Little or no development risk

Capital stability & growth
REIT unit price is much lower than those of general
equities
-Long-term unit price capital growth potential is
driven by increase in rental earnings and also by
capital appreciation of the underlying properties

Quality real estate
Provide institutional investors with an alternative
to direct real estate investment with increased
flexibility
-Provide retail investors with an opportunity to
invest in high-value institutional quality real
estates assets that would otherwise not be
possible

Liquidity & valuation Packaging
illiquid real estate into liquid listed securities that
offer diversification, transparency, expert
management and regular research coverage
-Institutions receive daily mark to market
value of their investment
-Low transaction costs in buying/selling REIT units
vs trading underlying assets
-Individuals can redeem small investment
quickly by selling the units in the open market and
with little cot
-REITs allow institutional funds to make
incremental investments in lumpy real estate as
and when new investment funds are received

Diversification
Diversification by types of properties,
tenants and locations

Expert Management
Benefit from experienced, professional
real estate managers
Additional scrutiny by the trustee

Defensive
Consistent yield-based investment has
defensive asset class characteristics
Income-generating investment grade
property is a safe haven during
uncertain times

Transparency
Subject to stringent corporate
governance and disclosure
requirements
Government regulates on payout ratios,
gearing, allowable investment, etc.






















WEALTH PLANNING AND MANAGEMENT

LECTURE No. 5
WEALTH ALLOCATION PROCESS

Identifying Risks and Constraints
Introduction to risk tools
Portfolio performance
evaluation
Ways of measuring returns
Ways of adjusting returns for risks
Ways of reporting and presenting performance
Potential Investment Channel
Structured products

Introduction to risk tools:
-One of the key principles in building a portfolio of
investments (stocks, bonds, mutual funds, ETFs,
cash, etc) is managing the amount of risk you're
willing to take. Risk is a difficult thing to measure,
but, a number of tools are available to measure
risks.
-The first modern risk measurement tool was
introduced decades ago, having developed
through the work of Markotwiz and Sharpe.

-The Treynor measure considers the excess return
earned per unit of systematic risk
-The Sharpe measure indicates the excess return
per unit of standard deviation
-Jensen and Information ratio measures evaluate
performance in terms of the systematic risk
involved.
-Value at Risk (VAR) focuses on holdings currently
in the portfolio and has a way of decomposing risk
characteristics of complex securities such as
convertibles and derivatives


Portfolio Performance Evaluation
Portfolio managers are required to meet 3 major
requirements in discharging their duties:
1.Meet objectives spelled out in the clients
investment policy statement
2Earn superior returns for each given risk class
3Achieve portfolio diversification to eliminate
unsystematic (diversifiable) risks

-Historically, the focus in the asset management
industry has been on returns. Performance
evaluation should not focus on returns alone. It
should give due recognition to both returns and
the riskiness of the investments.
- Superior performance can be achieved by either
superior security selection or superior timing.
From the perspective of asset allocation, this can
be thought of in terms of superior asset allocation
strategies, such as tactical asset allocation.

Performance in terms of returns can be thought of
in two ways. First, it can be thought of in absolute
terms i.e., how much money was made or lost.
Second, it can be measured in relative terms i.e.,
compared against a bogey or benchmark, or
against the average returns for similar investment
products, or against a peer group or universe
comparison.

Ways of Measuring Returns
1. Dollar-Weighted Returns
This simple format takes the difference between
the beginning and end values of the portfolio and
divides it by the beginning value. The answer in
decimal form is then converted into percentage
form by multiplying it by 100:Dollar Weighted
Return (%)= (End Value Beginning Value ) x100
Beginning Value

All dividends or other forms of distribution
received in the interim period are included in the
end value of the portfolio.

2. Chain-Linked Returns
This step is necessary to establish the compound
return for an investment held over several
investment periods during which returns for each
period were calculated using the Dollar Weighted
Returns method described above.
Chain-Linked Returns = [ (1+ PR
1
) x (1 + PR
2
) x (1 +
PR
3
) x x (1+PR
n
)] 1
Where PR is the decimal form return for
the respective periods 1, 2, 3,..n
The periods need not be of equal
lengths of time. For example, PR1 may be the
return for a 1-month period and PR2 in respect of
period 2 may be for a period of 6 months.

3. Cumulative Returns
The cumulative return is simply specified by chain-
linking the total returns up to the previous period
to the next periods return

Applying the chain-linked returns concept allows
us to spell out the cumulative returns for an
investment. This information can be relayed to
the investor in 2 ways (Figure 3.13):
Actual growth in absolute
Ringgit terms - use the
returns to show how one
Ringgit in value of the
original investment would
have grown over the period
reviewed
Displaying the cumulative
percentage return over time.
By this means, we can
display the end value return
expressed as a percentage of
the initial investment.



4.Annualised Time-Weighted Returns
The returns for a period shorter than
one year may be expressed in annualized return
form. Also, the absolute return over a number of
years may be averaged over the period to arrive at
annualised returns. Simply averaging the
cumulative returns over the number of years will
yield misleading results. Instead, the best results
are yielded by geometric average returns derived
by taking the n
th
root of the return relative in
decimal form arrived at by dividing the end of
period portfolio value less interim cash inflows by
beginning value of the portfolio, then subtracting
1.00 from it, where n is the number of years the
original portfolio has been invested.

Annualised Return =
1 Return) Dollar Cumulative (1
n
+


Using the preceding numerical example of
cumulative dollar returns for 5 years expressed in
decimal form and computed on the original
investment,
Annualised Return

1 ) 709 . 0 (1
5
+

=11.32%

5.Simple Cash-flow Adjusted Returns
Where there are interim cash-flows, cash- flow
adjusted Dollar weighted returns
(CFADWR) can be calculated
CFADWR = [End Market
Value Beginning Market Value Net Interim
Cash Inflows]
[Beginning Market Value +
Net Interim Cash Inflows]



This method takes no cognisance of the timing of
the cash flows within the period invested. As a
result, it is more accurate only if the interim cash
flows occur in the early part of the investment
period. More accurate formulae incorporating the
timing of interim cash flows are discussed below.

6.Time-Weighted Return Approach
The first form of the time-adjusted cash flow
method we look at is the Daily Valuation Approach
to determining the Time-Weighted Return. In this
approach, the portfolio is valued at the end of the
business day before each interim cash flow occurs
and accrued income is included in the value of the
portfolio. The return for the period between initial
investment and the day before the first interim
cash flow is derived. This process is repeated for
the period between the first interim cash flow and
the day before the second interim cash flow.

Time-Weighted Return
= [(1+R1) (1 + R2) ... (1 + Rn)]
1/n
-1
However, where the interim cash flow is very large
and cannot be immediately invested in the
underlying securities, or if investment of a large
sum without driving up the prices of relatively
illiquid securities is not possible, or if the interim
cash flows or payouts are fixed by contractual
agreements between the investment manager and
the investor (such that the investment manager is
forced to sell securities at the appointed but
inopportune point in time), valuing the portfolio
on business days prior to the interim cash flows
under this approach may be unfair.


The use of the Daily Valuation Method results in
the exact Time Weighted Returns but is extremely
involved, requiring calculating the value of the
portfolio every time a cash flow occurs, whether
due to fresh funds received to be invested or due
to withdrawals. In the example tabulated below in
Table 3.14, beginning with a portfolio carried
forward from 2004 valued at RM7,560.08, the
portfolio receives RM100 approximately once a
month from the investor, who evidently uses the
dollar cost averaging strategy. On 23
rd
March
2005, he makes a withdrawal of RM5, 000. At the
end of the period on 1
st
August 2005, the portfolio
is valued at RM5, 452.93 before the cash inflow of
RM100




The beginning market value (MVB) is always based
on the number of shares immediately prior to the
inflow/outflow of cash in the current period. The
MVE is the number of shares owned at the end of
the previous period (which is the same as the
number at the end of the period before
purchases/sales resulting from cash flows)
multiplied by the price on the date of the valuation
(i.e., the date the fresh cash flows occur). The
cumulative return, derived from the return relative
in the extreme right column, is in this example,
33.3%.


An approximation that allows bypassing involved
computations above is the Modified Dietz
approximation formula described below:
-Modified Dietz = End Market Value Beginning
Market Value Net Inflows

Beginning Market Value + ETime Weighted Cash
flows where each Time Weighted Cash flow
= No. of Days Invested X Cash flow
Total No. of Days in the Period

-In the example above, the returns estimated using
the Modified Dietz formula are calculated as
follows:
End Market Value = 5,552.93
Beginning Market Value= 7,560.08
Total Inflows = 800.00
Total Outflows = 5,000.00


Numerator 5,552.93 7,560.08 + 4,200 =
2,192.85

Denominator 7,560.08 - 1,463.21 = 6,096.87

Modified Dietz Return
= 2,192.85 / 6,096.87
= 35.97%

Modified Dietz Return = 2,192.85 6,096.87 =
35.97%
The result of Modified Dietz Return in Table 3.16 is
reasonably close to the value of 33.33% obtained
using the Daily Valuation Method.
If absolute accuracy is not required, this method
allows a handy rule of thumb computation to be
made and the return estimated.



Ways of Adjusting Returns for Risks
-We use the following Risk Tools
Sharpe ratio
Treynor measure
Jensens alpha
Modiglianis Square and
Treynor Square
Information Ratio or Non-
Systematic Risk ratio
Downside Deviation of Risk
of Loss Measure
The Sortino Ratio
Value at Risk


Sharpe ratio


The Sharpe ratio formula is:
SR = [E (rp) rf]/ p
Where
E (rp) = Expected portfolio return
rf = risk free rate
p = portfolio standard deviation


What Does Sharpe Ratio Mean?
A ratio developed by Nobel laureate William F.
Sharpe to measure risk-adjusted
performance. The Sharpe ratio is calculated by
subtracting the risk-free rate - such as that of
the 10-year U.S. Treasury bond - from the rate of
return for a portfolio and dividing the result by the
standard deviation of the portfolio returns.

The Sharpe ratio tells us whether a portfolio's
returns are due to smart investment decisions or a
result of excess risk. This measurement is very
useful because although one portfolio or fund can
reap higher returns than its peers, it is only a good
investment if those higher returns do not come
with too much additional risk. The greater a
portfolio's Sharpe ratio, the better its risk-adjusted
performance has been. A negative Sharpe ratio
indicates that a risk-less asset would perform
better than the security being analyzed.

A variation of the Sharpe ratio is the Sortino ratio,
which removes the effects of upward price
movements on standard deviation to measure only
return against downward price volatility.

For example, if manager A generates a
return of 15% while manager B
generates a return of 12%, it would
appear that manager A is a better
performer. However, if manager A, who
produced the 15% return, took much
larger risks than manager B, it may
actually be the case that manager B has
a better risk-adjusted return.

To continue with the example, say that
the risk free-rate is 5%, and manager
A's portfolio has a standard deviation of
8%, while manager B's portfolio has a
standard deviation of 5%. The Sharpe
ratio for manager A would be 1.25
while manager B's ratio would be 1.4,
which is better than manager A. Based
on these calculations, manager B was
able to generate a higher return on a
risk-adjusted basis.


To give you some insight, a ratio of 1 or better is
considered good, 2 and better is very good, and 3
and better is considered excellent.

The Sharpe ratio is quite simple, which lends to its
popularity. It's broken down into just three
components: asset return, risk-free return and
standard deviation of return. After calculating the
excess return, it's divided by the standard
deviation of the risky asset to get its Sharpe ratio.
The idea of the ratio is to see how much additional
return you are receiving for the additional volatility
of holding the risky asset over a risk-free asset -
the higher the better.

eg
40 . 1
5
5 12 ) ( (
=

=
p
rf rp E
SRB
o


Treynor Measure
The Treynor ratio (sometimes called the reward-
to-volatility ratio or Treynor measure), named
after Jack L Treynor, is a measurement of the
returns earned in excess of that which could have
been earned on an investment that has no
diversifiable risk (e.g., Treasury Bills or a
completely diversified portfolio), per each unit of
market risk assumed.
-The Treynor ratio relates excess return over the
risk-free rate to the additional risk taken; however,
systematic risk is used instead of total risk. The
higher the Treynor ratio, the better the
performance of the portfolio under analysis.

What Does Treynor Ratio Mean?
A ratio developed by Jack Treynor that measures
returns earned in excess of that which could have
been earned on a riskless investment per each unit
of market risk.

The Treynor ratio is calculated as:

(Average Return of the Portfolio - Average Return
of the Risk-Free Rate) / Beta of the Portfolio

In other words, the Treynor ratio is a
risk-adjusted measure of return based
on systematic risk. It is similar to the
Sharpe ratio, with the difference being
that the Treynor ratio uses beta as the
measurement of volatility.
Also known as the "reward-to-volatility
ratio".

043 . 0
07 .
09 . 12 .
' =

=
B

=
p
Rmf Rp
s Treynor
a

Risk adjusted rate of return of Portfolio
A = .043+ .09 = 13.3%

In other words, the Treynor ratio is a
risk-adjusted measure of return based
on systematic risk. It is similar to the
Sharpe ratio, with the difference being
that the Treynor ratio uses beta as the
measurement of volatility.
Also known as the "reward-to-volatility
ratio".

04 . 0
2 . 1
09 . 14 .
' =

=
B

=
p
Rmf Rp
s Treynor
b

Risk adjusted rate of return of Portfolio
A = .04+ .09 = 13%
It measures the returns earned in
excess of those that could have been
earned on a riskless investment per unit
of market risk assumed.



Beta () of a Stock or Portfolio
-In finance, the Beta ) of a stock or portfolio is a
number describing the relation of its returns with
that of the financial market as a whole.
-An asset has a Beta of zero if its returns change
independently of changes in the market's returns.
A positive beta means that the asset's returns
generally follow the market's returns, in the sense
that they both tend to be above their respective
averages together, or both tend to be below their
respective averages together. A negative beta
means that the asset's returns generally move
opposite the market's returns: one will tend to be
above its average when the other is below its
average.
The beta coefficient is a key parameter
in the capital asset pricing model
(CAPM). It measures the part of the
asset's statistical variance that cannot
be removed by the diversification
provided by the portfolio of many risky
assets, because of the correlation of its
returns with the returns of the other
assets that are in the portfolio. Beta can
be estimated for individual companies
using regression analysis against a stock
market index .

The formula for the beta of an asset within a
portfolio is
a = Cov (ra , rp )/ Var (rp)
where ra measures rate of return
of the asset, rp measures the rate of return of the
portfolio, and cov(ra , rp) is the covariance between
the rates of return.

The portfolio of interest in the CAPM formulation
is the market portfolio that contains all risky
assets, and so the rp terms in the formula are
replaced by rm, the rate of return of the market.
Beta is also referred to as financial
elasticity or correlated relative volatility
and can be referred to as a measure of
the sensitivity of the assets returns to
market returns, its non-diversifiable
risk, its systematic risk, or market risk.
On an individual asset level, measuring
beta can give clues to volatility and
liquidity in the marketplace. In fund
management, measuring beta is
thought to separate a manager's skill
from his or her willingness to take risk.

The beta coefficient was born out of linear
regression analysis. It is linked to a regression
analysis of the returns of a portfolio (such as a
stock index) (x-axis) in a specific period versus the
returns of an individual asset (y-axis) in a specific
year. The regression line is then called the Security
Characteristic Line (SCL)
-a is called the asset's alpha and a is called the
asset's beta coefficient. Both coefficients have an
important role in Modern portfolio theory.

-For an example, in a year where the broad market
or benchmark index returns 25% above the risk
free rate, suppose two managers gain 50% above
the risk free rate. Because this higher return is
theoretically possible merely by taking a leveraged
position in the broad market to double the beta so
it is exactly 2.0, we would expect a skilled portfolio
manager to have built the outperforming portfolio
with a beta somewhat less than 2, such that the
excess return not explained by the beta is positive.
If one of the managers' portfolios has an average
beta of 3.0, and the other's has a beta of only 1.5,
then the CAPM simply states that the extra return
of the first manager is not sufficient to
compensate us for that manager's risk, whereas
the second manager has done more than expected
given the risk. Whether investors can expect the
second manager to duplicate that performance in
future periods is of course a different question.



Jensens Ratio or Alpha
-What Does Jensen's Measure Mean?
A risk-adjusted performance measure
that represents the average return on a portfolio
over and above that predicted by the capital asset
pricing model (CAPM), given the portfolio's beta
and the average market return. This is the
portfolio's alpha. In fact, the concept is
sometimes referred to as "Jensen's alpha."

Jensens measure is calculated as
p= E(rp) - [rf + p {E(rm) rf }]
where
E( rp)= expected total portfolio return
rf= risk free rate = 9%
p= Beta of the portfolio=.7
E( rm) =expected market return = .12 (Rmp)

% 1 01 . 0 11 . 12 . 0 '
11 . ) 09 . 12 (. 7 . 09 . 0 (
or s Jensen
Er Rm
R Rm R Er
p p
f p p f P
= = =
= + = + =
o
|



If the definition above makes your head
spin, don't worry: you aren't alone! This
is a very technical term that has its
roots in financial theory.

The basic idea is that to analyze the
performance of an investment manager
you must look not only at the overall
return of a portfolio, but also at the risk
of that portfolio. For example, if there
are two mutual funds that both have a
12% return, a rational investor will want
the fund that is less risky. Jensen's
measure is one of the ways to help
determine if a portfolio is earning the
proper return for its level of risk. If the
value is positive, then the portfolio is
earning excess returns. In other words,
a positive value for Jensen's alpha
means a fund manager has "beat the
market" with his or her stock picking
skills.



Modigliani-Square or M
2
Measure and the
TreynorSquare or T
2
Measure
-The former measure is named after the authors of
the formula, Nobel laureate Franco Modigliani and
his niece, Leah Modigliani, a Morgan Stanley
strategist. Like the preceding approaches, the M
2

ratio attempts to adjust the returns for risks. The
M
2
approach is to leverage/de-lever the portfolio
until its volatility matches that of its benchmark.
This follows from the CAPM methodology that
assumes that the investor will leverage (borrow or
lend at the risk-free rate). The effect is that the
investor can mix one risky asset with a risk-free
asset to obtain the same standard deviation of
returns as the market portfolio.


Modigliani-Square or M
2
Measure and the
TreynorSquare or T
2
Measure
-Suppose the market rate of return was 15.0%. If
an investor had just one risky asset A, which
offered an expected return of 25.0% and had a
standard deviation of returns of 51% compared to
33% for the market portfolio, the investor must
lower the standard deviation of his portfolio of
risky assets. He can do this by buying riskless
assets offering say for example, returns of 3.0% of
such that a 33/51 or 64.7% proportion is made up
of A and a (1 0.647) or 35.3% is made up of
riskless assets.
-The expected return of the new portfolio is then
(0.647 x 25.0%) + (0.353 x 3.0%) = 17.2%.
-This is higher than the market rate of return of
15.0%, leaving the M
2
measure at (17.2 15.0) =
2.2%.


-A similar operation can be made to adjust the
beta of a portfolio of risky assets to the market
portfolio. This approach is called the T
2
Ratio
calculated as follows:
-Suppose the market rate of return was again,
15.0%. If an investor had the same one risky asset
A, which offered an expected return of 25.0%
(hence an excess return of 22% over the risk-free
rate of 3.0% and had a beta of 1.7 compared (the
beta of the market portfolio is always 1.0), the
investor must lower the beta of his portfolio of
risky assets.

-He can do this by buying riskless assets which
have a beta of 0.0, offering excess returns over the
risk-free rate of 3.0% such that a 1.0/1.7 or 58.8%
proportion is made up of A and a (1 0.588) or
42.2% is made up of riskless assets. The excess
return of the portfolio made up entirely of A,
denoted as RA is 25% - 3% = 22% while the excess
return of the constructed portfolio RP = 22% x
0.588 = 12.94%.
-The T
2
measure of the constructed portfolio
= (RP excess return of market portfolio)
= 12.94% - (15%-3%) = 0.94%.



Information Ratio, also known as Excess Return to
Non-systematic Risk Ratio or Appraisal Ratio

The information ratio measures the investment
managers performance against a benchmark. It
measures the consistency by which a portfolio or
fund beats the benchmark. The ratio is therefore
alpha (measured by the average of a funds excess
monthly return over a benchmark), divided by the
standard deviation of the alpha. The formula is of
the form

Ratio n Informatio =
return monthly excess mean
return monthly excess of deviation standard


-The downside risk measures just one portion of
the area under the normal distribution curve that
is used to define the standard deviation of returns.
In Figure 3.14, it is represented by the portion
under the probability distribution curve shaded in
red lying to the left of the vertical line NN that sets
the frequency distribution or probability of 0%
return. The area measures the cumulative
probability of a loss and measures the Downside
Deviation Risk.




The associated formula is computed as follows:
Downside Deviation Risk =
N
) Return Mean Return (Portfolio
2

where N is the number of observations
where the losses occurred or where the
portfolio underperformed the mean returns.
Where the Downside Deviation Risk
is computed based on periods other than
yearly (i.e., monthly or quarterly) data, an
adjustment is required if annualised results
are to be obtained:
Annualised Downside Deviation Risk
= Downside Deviation Risk x \(No of
periods required to make up one year)
For example, if quarterly data is used, the
Downside Deviation Risk will be
multiplied by a factor of \4 = 2.


The Sortino Ratio
This ratio adopts the downside deviation risk as a
measure of portfolio risk. Unlike the Sharpe Ratio,
the Sortino Ratio measures the excess return not
over the risk free rate but over a target or
expected rate and adjusts the annualised portfolio
excess return over the mean or annualised target
return by a factor represented by the Annualised
Downside Deviation Risk:
Sortino Ratio = Annualised Portfolio
Return Annualised Target Return
Annualised Downside Deviation


A negative value indicates expected
portfolio returns lower than the target
rate of return. Generally, the higher
the value the better the risk-adjusted
return. A large positive value for a
numerator will be negated if the
denominator was large as well, leaving
the risk-adjusted return the same.
The interpretation of this ratio may
lead to conclusions conflicting with
that of the Sharpe Ratio since focusing
just on the standard deviation of
returns may result in the selection of a
portfolio for a client who may in fact
be averse to losses more than outright
volatility of returns, in which event, the
Sortino Ratio may be a useful gauge of
which is the preferred portfolio.


Value At Risk (VAR)
VAR or sometimes (VaR) has been
called the "new science of risk management", but
you do not need to be a scientist to use VAR. Here,
we look at the idea behind VAR and the three basic
methods of calculating it
For investors, risk is about the odds of
losing money, and VAR is based on that common-
sense fact. By assuming investors care about the
odds of a really big loss, VAR answers the question,
"What is my worst-case scenario?" or "How much
could I lose in a really bad month?"

-The most popular and traditional measure of risk
is volatility. The main problem with volatility,
however, is that it does not care about the
direction of an investment's movement: a stock
can be volatile because it suddenly jumps higher.
Of course, investors are not distressed by gains!
-For investors, risk is about the odds of losing
money, and VAR is based on that common-sense
fact. By assuming investors care about the odds of
a really big loss, VAR answers the question, "What
is my worst-case scenario?" or "How much could I
lose in a really bad month?"

Now let's get specific. A VAR statistic
has three components: a time period, a
confidence level and a loss amount (or
loss percentage). Keep these three
parts in mind as we give some examples
of variations of the question that VAR
answers:
What is the most I can - with a 95% or
99% level of confidence - expect to lose
in dollars over the next month?
-What is the maximum percentage I can - with 95%
or 99% confidence - expect to lose over the next
year?
-You can see how the "VAR question" has three
elements: a relatively high level of confidence
(typically either 95% or 99%), a time period (a day,
a month or a year) and an estimate of investment
loss (expressed either in dollar or percentage
terms).

Methods of Calculating VAR
Institutional investors use VAR to evaluate
portfolio risk, but we will use it to evaluate the risk
of a single index that trades like a stock: the
Nasdaq 100 Index, which trades under the ticker
QQQQ. The QQQQ is a very popular index of the
largest non-financial stocks that trade on the
Nasdaq exchange.
There are three methods of calculating VAR:
the historical method,
the variance-covariance
method and
the Monte Carlo simulation

1. Historical Method

The historical method simply re-organizes actual
historical returns, putting them in order from
worst to best. It then assumes that history will
repeat itself, from a risk perspective.

The QQQ started trading in Mar 1999, and if we
calculate each daily return, we produce a rich data
set of almost 1,400 points. Let's put them in a
histogram that compares the frequency of return
"buckets". For example, at the highest point of the
histogram (the highest bar), there were more than
250 days when the daily return was between 0%
and 1%. At the far right, you can barely see a tiny
bar at 13%; it represents the one single day (in Jan
2000) within a period of five-plus years when the
daily return for the QQQ was a stunning 12.4%!













-Notice the red bars that compose the "left tail" of
the histogram. These are the lowest 5% of daily
returns (since the returns are ordered from left to
right, the worst are always the "left tail"). The red
bars run from daily losses of 4% to 8%. Because
these are the worst 5% of all daily returns, we can
say with 95% confidence that the worst daily loss
will not exceed 4%. Put another way, we expect
with 95% confidence that our gain will exceed -4%.
That is VAR in a nutshell. Let's re-phrase the
statistic into both percentage and dollar terms:
-With 95% confidence, we expect that our worst
daily loss will not exceed 4%.
-If we invest $100, we are 95% confident that our
worst daily loss will not exceed $4 ($100 x -4%).

-You can see that VAR indeed allows for an
outcome that is worse than a return of -4%. It does
not express absolute certainty but instead makes a
probabilistic estimate. If we want to increase our
confidence, we need only to "move to the left" on
the same histogram, to where the first two red
bars, at -8% and -7% represent the worst 1% of
daily returns:
-With 99% confidence, we expect that the worst
daily loss will not exceed 7%.
-Or, if we invest $100, we are 99% confident that
our worst daily loss will not exceed $7.

2. The Variance-Covariance Method
This method assumes that stock returns are
normally distributed. In other words, it requires
that we estimate only two factors - an expected
(or average) return and a standard deviation -
which allow us to plot a normal distribution curve.
Here we plot the normal curve against the same
actual return data:





The idea behind the variance-
covariance is similar to the ideas behind the
historical method - except that we use the familiar
normal curve instead of actual data. The
advantage of the normal curve is that we
automatically know where the worst 5% and 1% lie
on the curve. They are a function of our desired
confidence and the standard deviation ( ):



The blue curve above is based on the
actual daily standard deviation of the QQQ, which
is 2.64%. The average daily return happened to be
fairly close to zero, so we will assume an average
return of zero for illustrative purposes. Here are
the results of plugging the actual standard
deviation into the formulas above:




3. Monte Carlo Simulation

The third method involves developing a model for
future stock price returns and running multiple
hypothetical trials through the model. A Monte
Carlo simulation refers to any method that
randomly generates trials, but by itself does not
tell us anything about the underlying
methodology.

For most users, a Monte Carlo simulation amounts
to a "black box" generator of random outcomes.
Without going into further details, we ran a Monte
Carlo simulation on the QQQ based on its historical
trading pattern. In our simulation, 100 trials were
conducted. If we ran it again, we would get a
different result--although it is highly likely that the
differences would be narrow. Here is the result
arranged into a histogram (please note that while
the previous graphs have shown daily returns, this
graph displays monthly returns):







-To summarize, we ran 100 hypothetical trials of
monthly returns for the QQQ. Among them, two
outcomes were between -15% and -20%; and
three were between -20% and 25%. That means
the worst five outcomes (that is, the worst 5%)
were less than -15%. The Monte Carlo simulation
therefore leads to the following VAR-type
conclusion: with 95% confidence, we do not expect
to lose more than 15% during any given month.

Summary
Value at Risk (VAR) calculates the maximum loss
expected (or worst case scenario) on an
investment, over a given time period and given a
specified degree of confidence. We looked at three
methods commonly used to calculate VAR. But
keep in mind that two of our methods calculated a
daily VAR and the third method calculated monthly
VAR



Potential Investment Channel
One of the more unusual developments in
investment in 2004 was the introduction of the
first Shariah compliant fund of hedge funds. The
fund had been in development for more than two
years, tapped four prominent Shariah scholars on
three continents to approve investment strategies
whose methodologies might differ from
conventional short sales, derivatives, and leverage
but whose fiscal result would be similar. The fund
went to market late in the year and reportedly set
a goal of US$200 million on initial close.

An Islamic fund of hedge funds is only the latest
milestone in the development of Islamic
alternative investment, an opportunity lying
somewhere between US$200 billion to US$300
billion, depending on the source. Historically,
alternative investments have been reserved for
wealthier accredited investors. However, we are
now seeing more and more private-client advisers
turning to alternative investments: private markets
(venture capital, leveraged buyouts, private equity,
mezzanine financing, and distressed debt), natural
resources (timberland, water, agriculture, oil, and
gas), real estate, and hedge funds. These
investments are called alternative because,
unlike stock and bond investments, advisers
actively manage them and seek absolute rather
than relative rates of return (unambiguous,
measurable, investable, specified-in-advance
benchmarks are difficult to devise).


- Strictly speaking, hedge funds are really more of
an alternative strategy than an alternative
investment. Though some hedge funds invest in
alternative investments, many invest in the same
readily marketable securities that are available to
ordinary unit trust funds. But unlike unit trust
funds, hedge funds can use myriad investing and
trading strategies that may or may not hedge risk.
-Financial planner should note that the familiar
tools and methods for assessing portfolios of
conventional assets, such as using historical data
and optimizations, may not applicable for
portfolios that combine conventional and
alternative investments.

Financial planner should note that the familiar
tools and methods for assessing portfolios of
conventional assets, such as using historical data
and optimizations, may not applicable for
portfolios that combine conventional and
alternative investments. Therefore, investors will
be better served by eschewing the familiar
approaches for identifying (or defining) return
and risk characteristics that reflect underlying
drivers of performance and replacing them with
simulations that are useful for identifying
appropriate policy mixes combining conventional
and alternative investments.



Structured Products
In the pioneering days of structured
products, customer demand revolved
around two mutually exclusive
objectives of income or growth. Both
objectives were underpinned by a
strong common desire to maintain
capital values or to strictly limit loss.
Today, both practitioners and investors
often misinterpret structured products
as guaranteed or capital protected
vehicles because of this legacy.

-But more worryingly, investor expectation
regarding structured products would seem to be
somewhat misplaced as many look to structures as
a means of achieving multiple objectives from a
single product. It is therefore important for Islamic
financial planners to have a good understanding of
structured products although some of the
investment approaches in these products may not
be Shariah compliant.
-Structured products can be defined as any
investment vehicle designed to fulfill a principal
objective by combining a range of techniques or
elements, which individually could not achieve the
same result.

-Applying this definition helps to demonstrate the
width and depth of this sector. The usual suspects
can be found such as capital protected or
enhanced growth and income vehicles. These are
typically underpinned by a zero coupon with a
derivative overlay and have struck a chord with
private investors. For those who cant afford their
own structure the market is awash with new retail
issues and a secondary market, created by the
product provider, which can also be accessed.
-Other areas of structured a product that is most
commonly talked about is the hedge fund, which
comes in many shapes and sizes from single to
multiple strategies to well-diversified funds of
hedge funds while exchange-traded funds offer
the structured alternative to index tracking unit
trusts.

-Investment and private banks, asset and fund
managers and the life companies are all offering
some form of structured product. They aim to
differentiate their offering through the wrapper in
which the structure is placed or the innovative
concept underpinning the structure.
-In structured products, investors typically seek
returns comparable with equities over the long
term but without the same degree of associated
risk. Structured products can give investors access
to a multi-asset, multi-manager, multi-style, multi-
currency structure, which is, at its heart, a
sophisticated neutral asset allocation model.


The advantages of this structure are
five-fold:
Firstly, the multi-asset approach means
that a clients assets are invested
equally across fixed income, property,
equities and hedge funds, giving them
excellent diversification across a full
range of asset classes. These typically
have different economic cycles ensuring
that two asset classes will always
outperform the remaining two. This will
either act as a driver for growth or a
brake when certain markets fall.


Secondly, the multi-manager approach
allows the selection of a range of
managers who are particularly skilled to
manage the different assets classes.
These managers track records and skill
place the clients assets in the hands of
individuals who are most likely to add
value to the portfolio.
Thirdly, using a multi-style approach
means that within each asset class, the
investment team get to blend
investment styles and approaches. This
adds further diversification and reduces
the possibility of duplicating holdings,
further reducing risk.

Fourthly, the implementation of a
multi-currency approach led to the
development where the underlying
exposure is kept to the base currency of
the fund. This reduces currency risk and
is fundamental for conservative or
medium risk investors.
Finally, a neutral asset allocation means
that the portfolio is rebalanced on a
monthly basis to ensure that investors
exposure to the four asset classes is
virtually equal. This means that
customers are not exposed to a
deliberate over or underweight asset
allocation strategy. This increases risk,
but remains neutral. This neutral
position allows the fund to take profit
from rising asset classes and reinvest
into falling ones. In effect, it is
continuous dollar cost averaging and
profit taking

However, Islamic financial planners
should access structured products with
due care because such products
normally involve short-selling and
securities borrowing and lending,
where many Shariah scholars are still
divided on the legitimacy of such
practices since there are no parallel in
classical Fiqh al-mualamat.

QUESTIONS

1. Discuss two models in two methods of Var at
Risk.

2. Describe the components of an Investment
Policy Statement.

3. Describe the means of how would an advisor
advises his client in the first meeting.

4. what is Treynors measure and Sharpes ratio.

5. Discuss the advantages of structured products


































WEALTH PLANNING AND MANAGEMENT
LECTURE 6
TOPIC 4: INVESTMENT IN REAL ESTATES

Characteristics of Real Estates
Price Determination
Real Estate Cycles
Risk Elements
Law Relating to Real Estates

-Real estate refers to land and all those that are
fixed to it such as building, plant and machinery
-The word real does not mean the opposite of
unreal but it comes from the word royal that is
attached to property
-People invest in real estate to get the flow of
income rather than the space it provides.
-Real estate investment must compete with other
investments. Normally it is more attractive
because it is less volatile and often has higher
returns



CHARACTERISTICS OF THE REAL ESTATES

-Unlike other investments real estate has certain
characteristics that creates its uniqueness:
-Physical Characteristics
Immobility customers go to the goods there is no
special market for them
-Huge in size the size makes it
different from other types of
assets
-Heterogeneous every piece of
real estate has its uniqueness
such as location, design, size, age,
road frontage, etc.

-Durability/perpetuity land is
durable forever; building lasts for
centuries
-Long production time
construction of buildings involves
lengthy process of completion
-Property management owning
properties can be problematic,
time consuming, requires
patience and experience

Economic Characteristics
-Interest and Rights owning a
real estate is more about the
interests and rights on the
property. Possessing the Title --
Deed is necessary as the right to
ownership.
-Decentralised market sale and
purchase of property is normally
done by agents familiar to the
locality. It does not have a special
market like the stock market

-Hedge against inflation from all the different
types of investments real estate provides a better
hedge against inflation. However different
properties have different inflation hedging
characteristics
-Large transaction cost/indivisible there are
various types of costs such as professional fees for
valuation, agency, legal, registration of interest
with relevant authorities etc. Indivisibility of
estates adds on to the cost

-Supply lag takes a lot time to finance, design,
construct and also because of relatively slow rate
of change in demand. This is because the supply of
land is fixed. Hence there is potential for
disequilibrium in the short run. But when there is a
fall in demand the market reacts quickly
-Cyclical values real estate tends to be cyclical in
nature. It reacts to changes in the global as well as
local economy

Legal Characteristics
=Varying legislation and law Real estates are
subjected to various laws which can affect the
price, the usage and the interests
=Complicated transaction procedures since they
are subjected to many different laws the
transaction and even development becomes
cumbersome
=Statutory charges owner has to pay various
charges by law such as quit rent, assessment,
premium etc.

Other Characteristics
=Information about the transaction cost, the value
or price of real estate are not normally known to
public. We have to get them from estate agents.
=For normal goods price is always known


PRICE DETERMINATION
-Price in basic economics is the result of the forces
of demand and supply.
-Supply of real estate (land) is fixed or inelastic due
to the physical nature of the land, the planning
laws and the security of tenure.
-Demand for property is also relatively fixed
because the amount to be invested is not small. It
is the effective demand that is important.

Demand comes in four categories:
=For occupation
=For investment generally long term
=For speculation generally short term
=For development
In all the above motives the purchaser
hopes to receive benefits from his
purchase

Since supply is inelastic it is the demand that
normally determines the price as follows:
=State of general economy whether it is a
recession or a boom
=Changes in economic structure and business
organisation: e.g. change from manufacturing to
services industry may increase demand for office
space
=Productivity of the property the purchaser
would be prepared to pay higher if he expects the
contribution of the land to his expected income is
higher
=Government intervention government wants to
build highway on the land, or build cities like Putra
Jaya

=Change in transport facilities land becomes
more accessible
=Alteration in size and structure of population
increase in population at the location will increase
demand and price
=Most important people who decide on the price
are the purchaser and the vendor (agent for the
seller)

Two types of real estate markets:
=space markets where households and
businesses buy and lease land and buildings to live
and work. Here there is no inflow of income. The
price depends on the functionality of the property
instead of economic reasons
=asset markets- investors buy and sell the rights
to future cash flows that real estate will generate
from the users in the space market


The Open market - Factors determining the price
of property are as listed below:
(a) Economic factors
Regional influenced by fiscal and monetary
policies such as interest rates, regulations on
gearing and supply of money to finance
investment
-International International economic
environment has direct impact on domestic
economy. Through exchange rate the prices of
building materials etc. may rise. Fluctuation in
exchange rate may cause poor investment climate
in the domestic economy

(b) Geographical
-Location- property value depends on its location:
whether it is in the urban or rural areas, whether
there is good access through nice roads or not
-Topography whether it is hilly, undulating, low-
lying or flat would give different value to the
property. For residential properties more people
prefer hilltops or by the beach or lake etc.
-Climate the more pleasant the climate, the
higher the value of the property. e.g.
Mediterranean area
-Communications at this age of ICT more
emphasis is placed on effective communication.
Properties equipped with such facilities would
fetch better value
-Services utilities, security, maintenance,
clubhouse facilities, golf course, swimming pool,
would give better value

(c) Population
-How established the place is; how densely
populated it is would certainly bring value to the
area

d) Physical Aspects
=The design, technology, size, landscape etc.
would certainly add value to the property

(e) Technological/Building method
-Advanced technology might involve foreign
experts and use of sophisticated machineries and
materials

(f) Fashions and Trends
-New fashions and trends in buildings would
attract more demand and hence higher price

(g) Occupancy status
-With high occupancy rate the real estate evolves
into a sellers market

(h) Development approvals
-When approvals for development have been
obtained people are more confident of buying the
properties
-Tenure and Title Conditions/Restrictions
Kinds or tenure or titles are important in
determining price of property. E.g. freehold vs
lease hold
Parties involved
-Valuers
-Real Estate Agents

The controlled Market
-Government policy controlled ceiling price
=This will affect the actual market value of the
property
-Quota for certain group of purchasers (Discount)
=To encourage certain group of have-nots to
own houses will also affect prices

Methods of Evaluation this is how valuers
determine the value of a property after taking into
consideration all the factors influencing the price
as discussed above. There are five methods used
as follows:
The Comparison Method
The Investment Method
The Cost Method
The Profit Method; and
The Residual Method

Comparison Method
-In this valuation method, the similar property
which is recently sold will be used as the basis for
comparison. Since two properties are similar but
not the same, so the price is adjusted according to
the features. Normally, the adjustments are based
on these 3 features:
-Location: Adjustment made to the differences of
location. For example, real estate located nearer
the shopping center will have higher selling price.
-Date of transaction: Adjustment made to the
changes of economy between the date of
transaction for property used in the comparison
and the date of appraisal.


Required Adjustments
Size
Location
Time of sale
Quality and architectural style
Market conditions
Air rights etc.

Characteristics of the seller (is he
desperate)
Characteristics of the buyer (is this part
of a larger parcel)
Financing terms (was there seller
financing, are the properties equally
attractive to lenders)
Redevelopment options
Structure of leases
Tenant quality

Making the adjustments
Gut feel
Additive adjustments
-Appropriate for added square footage and
amenities
-How much is a swimming pool worth?
Multiplicative adjustments
-Appropriate for quality adjustments
Hedonic regression approach
-Regress value per square foot on quality, location
and amenity variables
-Important to correctly specify additive and
multiplicative factors
-Requires a lot of roughly comparable transactions

PRICE DETERMINATION(Comparison Method)

After adjustments:
Property 1 is reduced by 10% and property 2 by 5%
Property 1 becomes RM38.46 RM3.846 = RM35
Property 2 becomes RM43.08 2.1539 = RM41
Average [RM35 + RM41]/2 = RM38 p sq ft
Market value = 650 sq ft x 38 = 24,700 or
RM24,000
Force Sale Value = RM20,000 (about 15%)


PRICE DETERMINATION(Investment Method)

-The Investment Method used to value property
that is income producing. In this case we want to
know based on the capital investment to be made
and the expected income from rental of the
property whether the property is worth buying or
not? It is used in evaluating multiple units when
there is limited comparison prices.
-Example: A piece of property costs RM100,000.
Expected rental income per month is RM500. Is it
worth buying the property? (Assuming that the
rental income is net of tax and depreciation /
maintenance)


INVESTMENT METHOD OR INCOME METHOD
In this valuation method, the value of property is
based on the present value of future income.
Below are some steps in this property valuation
method.
Step 1: Estimate the annual gross income that can
be generated from the real estate.
Step 2: Apply allowance for rent loss and vacancy.
Step 3: Deduct the operating expenses for the
property.
Step 4: Estimate the capitalization rate. For
example, a same property that produces annual
gross income of $10,000 is sold for $100,000
recently. Then, the capitalization rate is 10%
(10,000 / 100,000).
Step 5: Divide annual net income with
capitalization rate.


INVESTMENT OR INCOME APPROACH
Determine the net operating income:
(Property gross income) (all expenses excluding
loan payments
E.g. 4 units of apartment giving a n annual income
of $48,000/year
Expenses per year is expected to be $21,600 (45%
expense ratio)
NOI = $48,000 - $21,600 = $26,400
Assuming expected rate of return in the area or
capitalization rate is about 7%
The underlying property value = NOI/cap rate =
26,400/.07=$377,143
The income approach will then be compared with
the comparison approach giving an approximate
reliable value for the purchase or sale of the unit.


PRICE DETERMINATION(Cost Method)
-The Cost Method: This method is used to
calculate the capital value of non-commercial
properties such as public halls; hospitals; schools;
etc.
-The total cost method is based upon total cost of
land, building, equipment; professional fees and
depreciation. Capital value is the total cost less
depreciation

Cost Method
In this valuation method, the value of property is
valued based on the cost of acquiring the same
property. There are some steps in this property
valuation method.
-Step 1: Estimate the cost of acquiring empty land
which is same with property in valuation.
-Step 2: Estimate the cost of constructing new
building which is same with property in valuation.
-Step 3: Estimate the depreciation of physical
features for property in valuation. For example,
roof for newly built building will last longer than
old property which is in valuation.

PRICE DETERMINATION (Profit Method)
The Profit (Account) Method: This method is used
when comparisons are not available. E.g.
restaurants, hotels theatres.
Total income
Less Expenses/purchases
Gross Income
Less Operating costs
Net Income
Less Tenants capital
Divisible balance
Less Tenants share
Net Profit. Then use investment
method to get the capital value

PRICE DETERMINATION (Residual Method)
-The Residual Method- It is used in valuing
development sites and properties suitable for
redevelopment
-Development value
-Less development cost
-PV for the time taken to develop the land =
Current Value of the land

Real Property Gain Tax
1. Basis of Taxation
.The chargeable gains arising from the disposal of
any land situated in Malaysia or any interest,
option or other right in or over such land or the
disposal of shares in a 'real property company' is
subject to Real Property Gains Tax.
2. Rates of Tax
The above rates apply for disposals on or after 27
October 1995.

An individual who is not a citizen and not a
permanent resident is subject to the following
rates:
Category of Disposal
Disposal within 5 years after the date of
acquisition of the chargeable asset 30%
Disposal in the 6th and subsequent years after the
date of acquisition of the chargeable asset 5%

REAL ESTATE CYCLES
Mechanism of Real Estate Market Cycles
-It starts with population growth and industrial
development, facilitated by public works and other
infrastructure development, causing demand for
housing to increase
-Since supply of houses takes time, there is
temporary shortage of houses that pushes up
prices of land and houses
-The peak of real estate cycle occurs when volume
of transfers increase. By that time supply of new
houses exceed demand. At a later stage of the
peak period, rentals do not match with costs
making purchase of buildings not profitable.
-Soon real estate market slows down and takes a
dip. Prices do not rise as fast. Asking prices stay
high but there are few buyers. Buildings become
empty and sale begins to drop

Intervention by government during peak and low
period of real estate cycles
=Government normally intervenes during the peak
period by raising interest rates and during low
period by reducing interest rates.
=Government may also waive stamp duty or
increase it to dampen market
=Government may abolish tax e.g. the Real
Property Gains Tax in Malaysia was abolished in
April 2007 to stimulate the property market but
was reinstated in 2010

International influence
-Although property value depends on location it is
also true that it is also influenced by international
economies.
-When there is a slow down in USA or Japan it will
affect exchange rate and even inflation. This will
reduce purchasing power and hence affects the
demand for buildings.
FINANCIAL CRISIS
OIL CRISIS

Regional influence
-Regional economic influences are due to political
stability and level of local establishment.
-Local establishment can be viewed from the level
of market maturity. When real estate market is
stable there will be less fluctuation in prices.
-Political stability also influences confidence of
purchases. Political instability will certainly bring
negative effect to the real estate market.


Please read the examples of real estate
cycles that are given on pp 4/34 -4/42

RISK ELEMENTS

Economic investment risks
International
Regional
Cycle of Supply and Demand
Government Policy
Value Depreciation

Building risks
Normal wear and tear
(expected)
Natures Acts
Lack of Maintenance/ Low
Construction quality
Legal
Acquisition
New Zoning Causing Value
to Drop
Government Policy
New Structure Plan
LAW RELATING TO REAL ESTATES
National Land Code 1965
Town and Country Planning Act 1976
Local Government Act 1976
Real Property Gains Tax (RPGT)
Stamp Duty Act 1949
Strata Title Act 1985

QUESTIONS FOR REVISION
Real estate is one investment that seems to
appreciate in value more than depreciate. Explain.
What are the common factors that determine the
value of real estate? Give reasons why.
Why does locality of a real estate play such an
important role in determining the value of a real
estate?
Describe and explain the various methods of
valuation of real estate
Explain the economics of real estate cycle

=A piece of land measuring 30000 square feet was
purchased together with a 5 storey building with
an area of 25, 000 square feet. The land cost is
estimated at $120.00 per square feet and the
building cost is estimated at $200.00 per square
feet. Professional fee cost is about 3%. Building
depreciation cost is 10% on straight line basis.
Determine the value of the property.

=A link house purchased in 2010 for $530, 000.00
was sold for $1,200,000.00 Renovation and
extension cost was estimated at $120,000.00 and
legal fees incurred during the sale was $5,000.00
The stamp duty and legal fees during the
purchased was estimated at $23,000.00. The real
property gain tax is at 10%. Exemption of RM5,000
or 10%of the chargeable gain, whichever is
greater. Determine the chargeable income and the
tax to be paid.



WEALTH PLANNING AND MANAGEMENT
LECTURE 7 / topic 5
Investment in Securities

Types of Securities
Price Determination
Risk Elements
Related Theories
Laws Relating to Securities

-Securities are financial assets that are traded in
the capital markets. Since the fluctuations in
securities prices can be very volatile it is very
attractive for people with surplus funds to buy and
sell them hoping to get dividends and/or capital
gains within a short time
-Issuers of securities on the other hand use their
securities to raise funds for future expansion of
their business. Governments too issue securities to
raise funds for development projects.

There are two main types of securities namely:
Equity instruments
Debt instruments
The third type which is increasingly becoming
popular is
-The hybrids. Hybrids are those that have the
characteristics of both equity and debt.

Difference between debt and equity:
In terms of claims
In terms of time
-Debt or borrowing is fixed in time i.e. it is terminal
or has maturity and therefore is fixed in claim. This
means that debt must be paid in full upon
maturity. Once it matures the firm must pay the
creditors the principle plus interest.

=Equity gives ownership to the holders. The
holders own the firm less the firms obligations. i.e.
equity is residual in claim. Whatever the firm
makes belongs to the equity holders less its
obligations.
=Secondly equity being ownership is not terminal
and does not have a fixed maturity. It is perpetual.

-The most common equity instrument is the
common stock. As long as the stockholder has the
shares he has a residual claim on the firm.
-The most common debt instrument is the bond.
Generally bonds would provide holders a fixed
annual or semi-annual interest payments (coupon
payments) and full repayment of principal at
maturity.

Equity instruments common stocks
-Equity instruments represent ownership in the
company. A public listed company is jointly owned
by its shareholders.
-All public listed companies are limited liability
corporations. The shareholders liability is up to his
investment. Since the corporation is a separate
legal entity the shareholder is responsible for any
losses up to his total investment.

As investors, shareholders have certain rights:
-Right to residual value of the firm
-Right to the portions of dividends if announced
-Right to vote in the AGM.
Since dividend yield is low,
shareholders have the
chance to earn capital gain

Some basic definitions of Common Stocks:
Authorised capital
Issued (paid up) capital
Par Value
Treasury stocks (usually
bought for senior
management)
Book Value per Share =
Common Stockholders
Equity / No. of Shares
Outstanding

-Market Value of Firm = Market Price of Share X
No. of Shares Outstanding
-Rights issue: sale of additional stock to existing
shareholders usually to present shareholders at a
slight discount
-Bonus issue: issue of additional stocks to existing
shareholders for free
-Stock Dividends: where dividends are paid in
terms of stocks rather than cash
-Earnings per share or EPS: is a key indicator used
by shareholders and market participants
-P/E ratio or Price Earnings ratio: price per share
divided by earnings per share


Initial Public Offering (IPO)
Initial Public Offering (IPO) Process is one when
companies intend to sell stocks to the investing
public
=Must get approval from Securities Commission to
become a public listed company and have its
shares listed in the Stock Exchange
=To get the approval the firm must have
Good track
record of
earnings
=Good management
-Fulfil basic statutory requirements

-After getting approval the firm will appoint a
merchant bank to prepare for the IPO
-The initial issue price is determined by merchant
bank based on the companys financial health and
track record, market conditions; investor
sentiments etc.
-Post-listing prices are determined by market
conditions
-IPO market is considered as Primary market but
once listed it is traded in the Secondary market.
This is because the IPO is normally offered to
shareholders, corporations, etc. before it goes
public through the stock market

Halal Stocks and Shariah Index
-Security Commission is responsible for
determining the Shariah compliant stocks and the
Shariah Index through its very own Shariah
Advisory Council (SAC)
-In principle the first level of screening is to focus
on core business. Companies whose core
businesses are Shariah compliant will form the
universe.

Securities excluded are those involved in
-Financial services based on riba;
-Gambling and gaming
-Manufacture or sale of non-halal products or
related products;
-Conventional insurance
-Entertainment activities that are not permissible
by Shariah
-Manufacture or sale of tobacco-based products or
related products;
-Stock broking or share-trading in Shariah non-
compliant securities;
-Other activities deemed non-permissible by
Shariah

The SAC also considers amount of
interest income received by the
company from conventional fixed
deposits or other interest bearing
financial instrument. In Addition
dividends received from investment in
Shariah non-compliant securities are
also considered in the analysis.




For companies with activities comprising both
permissible and non-permissible elements the SAC
uses two other criteria:
-The public perception or image of the company
-The core activities of the company are important
and considered maslahah (beneficial) 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 non-Muslim community which are accepted by
Islam

To determine the tolerable level or benchmark of
mixed contributions from permissible and non-
permissible activities, the SAC came out with four
levels:
-5% benchmark when the non-permissible are
clearly prohibited (riba; gambling; liquor; pork)
-10% benchmark involve element of umum
balwah prohibited element affecting most people
and difficult to avoid e.g. interest income and
tobacco related activities

-20% benchmark mixed rental payment from
Shariah non-compliant activities such as rental
from premises used for gambling; sale of liquor etc
-25% benchmark activities that are generally
permissible and beneficial (maslahah) but contains
elements that may affect the Shariah status of
these activities. Among these activities are hotel
and resort; share trading; stock broking and others

Phase Two: Qualitative Method
The qualitative method is essentially used on a
case-by-case method. Again this is applicable for
situations where the core activity of the company
has importance and maslahah (benefit in general)
to the ummah but includes a small element that
may be haram. The non permissible activity could
also be driven by custom or involve the rights of
non-muslims. In analyzing such companies on a
case-by-case basis, the SAC allows for threshold
levels anywhere from 10% to 25%.

Since businesses are dynamic and conditions
change rapidly, a company that passes the
threshold at a point in time may exceed it at a
future date. For example, a manufacturer of home
appliances may have interest earnings below 5%
currently but could exceed it at a later point. The
opposite situation may also be possible. Thus, the
SAC reviews the list periodically. An updated list is
issued every 6 months. Currently about 85% of the
listed stocks in Malaysia are deemed shariah
compliant, based on the SAC criteria.

Shariah Compliant Listing
For companies with mixed contribution from
Shariah permissible and non-permissible activities,
they are deemed Shariah-compliant should the
following thresholds are complied with:
-Income from activities which are clearly
prohibited (like conventional financial business,
insurance, gambling, pork and alcohol is less than
5% of total turnover (TO) and profit before tax
(PBT);
-Mixed rental income from Shariah non-compliant
activities (like rental payments from premises used
in gambling, sale of liquor) is less than 20% of total
TO and PBT
-Interest income from fixed deposits and income
from tobacco business is less than 10% of total TO
and PBT;
-Income from hotel and resort business, share
trading and stock broking of Shariah non-
compliant stocks is less than 25% of total TO and
PBT.

Stock Screening for the Dow Jones Islamic Index
=The stock screening procedure used by Dow
Jones for its Islamic Index is more elaborate and
tighter than that of Malaysias SAC. As is the case
with the Malaysian criteria, there are two broad
categories, the nature of the business and financial
aspects.
=The Dow Jones criteria involves both financial
statements, especially the Balance Sheet.
=Dow Jones begins with an initial step that
involves eliminating stocks of all companies
involved in an exhaustive list of activities. These
are industries related to alcohol, liquor, pork
related, conventional financial services (banking,
insurance, merchant banking etc), hotels,
entertainment (including cinema, music etc),
tobacco, defense, weapons manufacturing etc.
While this first step is qualitative, the second step
involves the quantitative analysis of the firms
financial ratios.

This numerical analysis is really aimed at two
things,
-identify firms with excessive leverage in the
capital structure and;
-identify firms with unacceptable levels of interest
income. This is generally done by applying the
following three key ratios.
(i) Debt to Trailing Twelve Month Average Market
Capitalization
Debt to TTMAMC

Computed as: =

Total Interest Bearing Debt X 100
12 months Average Market
Threshold: 33%

Thus, any firm with a Debt to TTMAMC exceeding
33% will be excluded. The rationale being that
such a firm is paying a substantial portion of its
earning as interest on its debts.

(ii) Liquid Assets to TTMAMC
computed as: =
Threshold: 33%

Cash deposits + Marketable Securities + Interest
Bearing Instruments X 100

TTMAMC

(iii) Receivables to TTMAMC

computed as : =
Receivables +Trade Notes + Other receivables
TTMAMC X 100
Threshold: 33%

These latter two ratios are intended to capture the
extent of interest earned by the firm from its liquid
assets and its receivables. It is common practice in
developed markets such as the US, for firms to
charge an interest on all trade receivables
outstanding beyond a certain period.


Comparison of Stock Screening Techniques
-Though the philosophy and intended objective is
the same, a comparison of the stock screening
techniques of the Dow Jones Islamic Index (DJII)
with that of the Malaysian SAC pints to obvious
differences. The two key differences are;
The tolerance for mixed
businesses by the SAC.
The more stringent use of
Balance Sheet based
financial ratios by Dow
Jones.
-Malaysias SAC also does not evaluate a firms
Balance Sheet. Thus, the firms capital structure
and the extent of its financial leverage is not a
consideration.

Since the SACs criteria is Malaysia specific, using a
stringent filter will result in a smaller group of
eligible stocks and therefore a much narrower
investible spectrum for Muslim investors in
Malaysia.
-One might ask, what is wrong with having a
smaller but purer group of investible stocks?
-There are several problems with this:
=From a portfolio theory viewpoint, a smaller
investible group of stocks restricts diversification
and limits the benefits of diversification.
=One cannot form efficient portfolios or superior
risk-return portfolios if the group of investible
stocks is restricted.
=By implication one cannot be on the optimal
efficient frontier or get close to such a frontier.
=As with everything else in economics, there is a
trade off. The cost may be less efficient portfolios.


Stock Screening Process
Shariah compliant securities which are
subsequently considered Shariah non-compliant:
-If the price of the securities is more than its cost:
must sell immediately. If not the proceeds should
go to charity
-If the price is lower than cost: then wait until the
price is equal to cost and then sell. If dividends are
declared during the holding period the dividend
may be accepted


Debt Instruments (bonds)
Debt Instruments are normally called
bonds which are promissory notes that
are traded in the market
Bonds are categorised by the issuer;
tenor; coupon type
By issuer: government or corporate

Bonds also differ by coupon type
-Coupon bonds pay periodic interest based on
coupons
-Zero coupon bonds pay no interest on maturity
but only the face value. The purchaser will buy at
discount.
-Interest can be fixed or floating. Floating interests
are determined in reference to say KLIBOR + x%. If
KLIBOR is 10% and x is 2 then for a bond of
RM1000 the interest is RM120

Par Value
Coupon rate
Sinking fund amount paid by issuer
periodically to equal redemption
amount
Coupon yield
Yield-to-maturity total returns of bond
Duration of the bond
Unsecured bond
Collateralized bond
Speculative grade lower quality bond

-Callable bond callable by issuer at a
predetermined price before maturity. Investor is
normally paid higher than straight bonds
-Convertible bond allows holder to redeem at
face value or convert it to a predetermined
number of stocks

Islamic Debt Securities
Islamic Interbank Money markets (IIMM) was
established in 1994. This is to allow Islamic banks
to manage their liquidity and price discovery.
Several new instruments were introduced
-Mudharabah Interbank Investment (MII)
-Islamic Accepted Bills (IABs)
-Negotiable Islamic Debt Certificates (NIDC)
-Bank Negara Negotiable Notes (GII) and
-Other Islamic short term Private Debt Securities

Key Islamic Money Market Instruments
i) Government Investment Issue (GII)
-To meet the need for a liquidity management
instrument that is also shariah compliant, the
Malaysian Parliament passed the Government
Investment Act in 1983. This act, enabled the
Malaysian government to issue a non-interest
bearing money market instrument, known as
Government Investment Certificates (GIC) {now
replaced with Government Investment Issues
(GII)}. The GII was introduced in July 1983 under
the concept of Qard al- Hasan.
-Since a Qard al- Hasan, based instrument would
not have a predetermined fixed face value at
maturity, it would not be suited for secondary
market trading . Thus, beginning with a 15 June
2001, issue, GIIs are now issued under a new
concept of of Bai Al-Inah. This, added depth and
liquidity to the IIMM as the GII is now tradable in
the secondary market via the concept of Bay ad-
Dayn (debt trading).

ii) Bank Negara Negotiable Notes (BNNN)
-Bank Negara Negotiable Notes (BNNN) are a
short-term, money market instrument issued by
BNM. The underlying contract is that of Bai Al
Inah. First introduced to the IIMM on 29
November 2000, It is now popularly traded in the
secondary market. The price of the BNNN is
determined on a discounted basis. Tenor is
typically up to one year. The BNNN is designed as
a liquidity management tool .

ii) Cagamas Mudharabah Bonds (Sukuk
Mudarabah Cagamas)
-The Cagamas Mudharabah Bond, was introduced
in March 1994 by Cagamas Berhad, the National
Mortgage Corporation, to finance the purchase of
Islamic housing debts from financial institutions.
As the name suggests, the bond is structured using
the concept of Mudharabah. Bondholders and
Cagamas will share the profits accrued according
to the predetermined profit-sharing ratios.

iv) Islamic Accepted Bills (IAB)
-The Islamic Accepted Bill (IAB), was introduced in
1991. The objective was to provide a shariah
compliant instrument to conventional BAs,
particularly for trade financing . The IAB is
formulated on the Islamic principles of Al-
Murabahah (deferred lump-sum sale or cost-plus).
The secondary market trading of the instrument is
based on Bai ad-Dayn (debt-trading).
-Murabahah is based on a cost-plus profit margin
or mark up agreed to by both parties. Bai Al-Dayn
refers to the sale of a debt arising from a trade
transaction in the form of a deferred payment
sale.

Islamic Debt Securities (Sukuk)
-Sukuk is a long term IDS whose underlying
contractual framework could be a BBA;
Murabahah; Istisna (purchase of manufactured
products on order) or Ijarah (leasing). BBA is most
popular and known as BAIDS but not popular
among Middle East Shariah scholars
-The ijarah sukuk are more acceptable globally and
currently sukuk issuance are in multiple
combination such Istisna with Ijarah; Salam with
Ijarah

In order to have the required underlying
sale/purchase of Islamic financing modes,
companies issuing sukuks typically have a Special
Purpose Vehicle (SPV). For example, suppose a
company wants to finance the use of an asset, it
can do so by means of issuing a Sukuk Al Ijarah.
The company would first establish a bankruptcy
remote SPV. The SPV issues the sukuks to
investors and uses the proceeds to buy the asset
from the vendor / manufacturer. The SPV then
leases the asset to the company in return for
periodic lease payments. The lease payments
received from the company are passed thru to
investors as their returns on the sukuk.

The are several different sukuk
structures.
As the underlying contract changes, the
structure changes.
In addition to straight forward plain
vanilla structures, there are
increasingly exotic ones.
The need for exotic sukuk structures
arises from the need to;
avoid fixity in income/ cash flows
the need/ desire for specific cash flows
to alter risk profiles

Hybrid Instruments
Hybrids are instruments that have the features of
both debt and equity. We shall consider four types
only:
Preference shares
Warrants / Transferable Subscription
Rights (TSR)
Call Warrants; and
Irredeemable Convertible Unsecured
Loan Stocks

Preferred Stocks or Preference Shares
-Preferred stock is a true hybrid instrument. It has
a par value, fixed dividend amounts and terminal
maturity.
-In US it requires sinking funds which means a
terminal maturity period
-Dividends on preferred stocks may be missed and
are not tax deductible

In Malaysia there are other variants
-Participating Preferred Shares can have higher
dividends if company does well. Non-participating
Preference Shares cannot get dividends
-Further, there are cumulative and non-cumulative
Preference shares.
-For Cumulative Preference Shares, missed
dividends must be made up by cumulating the
dividends
-For Non-cumulative Preference Shares, missed
dividends need not be made up.

Warrants/Transferable Subscription Rights (TSR)
-A warrant or TSR can be thought of as a long
dated call option on the issuing companys stock.
They are typically attached to loan-stocks or bonds
issued by a company. The idea is to make bonds or
stocks more attractive and marketable. The
warrants/TSRs can be detached from the bonds
and traded separately in a secondary market (stock
market)
-A warrant/TSR gives the holder the right but not
obligation to buy the companys stock at a
predetermined market price

-Equity options will not dilute the ownership of the
share holders but warrants when exercised dilutes
the ownership. This is because when the warrant is
exercised the company must issue a new stock to
the warrant holders. This has effect on the price of
warrants.

Call warrants
Call warrants are call options issued
usually by merchant bank
Does not dilute ownership
To be exercised on maturity
Stand alone and shorter period (18
months)
TSR
TSR issued by company
Dilutes ownership
Can be exercised any time until
maturity
Attached to stock and for longer period
(10 years)


Irredeemable Convertible Unsecured Loan Stock
(ICULS)
It is a fixed income debt instrument
until converted into equity at some
date or upon maturity
Irredeemable for cash
Must be converted to underlying stock
Carry fixed interest coupons payable
annually or semi-annually
Unsecured
ICULS result in full dilution

PRICE DETERMINATION
Many factors influence price of stocks
-Firm specific factors
-Industry specific factors
-Macro-economic factors
-Investor psychology
-Sentiments
-Performance of other regional stock markets
-International events etc. (Iraq war), Arab spring,
Euro crisis, Us Crisis






PRICE DETERMINATION
Dividend Discount Model
Zero Growth Model
The Constant Growth Model
The Accelerated Growth Model

DIVIDEND DISCOUNT METHOD (DDM)
DDM is based on the logic that a stocks price
today should equal the present value of future
dividends that one could get by investing in the
stock.
e.g. Suppose we buy stock A that gives dividend
of RM2.00 per year. We plan to hold it for 3 years
and expect the price at end of 3 years to be
Rm60.00.

If the required return is 10%, then
05 . 50 08 . 45 97 . 4 P
) 10 . 1 (
60
) 10 . 1 (
00 . 2
) 10 . 1 (
00 . 2
) 10 . 1 (
00 . 2
P
o
3 3 2 o
= + =
+ + + =

Thus, valuing the stock as present value
of future cash flows:
n
n
n
1 t
t o
) 1 (
P
K) (1
dt
P
K +
+
+
=

=


difficult. very
is which n) (or 3 year in price expected
the assume to us requires example This
asset on return required or
rate discount e appropriat the is K
n year in price expected the is P
year t in dividend is d where
n
t


growth d Accelerate 3.
growth Constant 2.
growth Zero 1.
: forms in three comes which dividends i.e.
stock, the from earnings on es concentrat DDM
, assumption this make to having avoid To



that so flow cash equal with perpetuity
a fact in is model growth zero the maturity,
no have shares Since year. year to from same
the are dividends that assumes model This
model growth Zero . 1

rate discount the is
K and t at time received dividend is d where
20 RM
) 10 . 0 (
00 . 2
K
d
P
t
n
1 t t
t
o
= =

=


2. The Constant Growth Model
This model takes into consideration only the
dividends again,
but allows constant (same) rate of dividend
growth. So in terms
of cash flows the cash flow pattern is as follows:

Model Gordon ...
g - K
d
P becomes which
) K 1 (
g) 1 ( d
...
K) (1
g) 1 ( d
P Hence
g) 1 ( d d
g) 1 ( d d
) g 1 ( d d that so g that
means This constant. is g growth of rate The
1
o
3
3
o
1
1
o
o
10
o 10
2
o 2
1
o 1
=
+
+
+ +
+
+
=
+ =
+ =
+ = = A


So for a share with next years expected dividend
of RM2.00, g = 5 % and K = 10%
00 . 40
05 . 0
00 . 2
5% - 10%
2.00
is dividend the
= =


Here because the dividend is growing each year
the price will also increase each year at a steady
rate equal to the dividend growth rate

10 . 44
05 . 10 .
2050 . 2
g - K
d
P
00 . 42
05 . 10 .
10 . 2
g - K
d
P
00 . 40
05 . 10 .
00 . 2
g - K
d
P
: is price in increase expected the So,
3
2
2
1
1
o
=

= =
=

= =
=

= =


Note that if K does not change over time the value
of the share increases at the same rate as the
dividend
growth. Since price increases gradually over time
would the
Investment return depend on how long you hold
the stock?
the answer is no. Please read page 211.
For accelerated growth model please read 213
216.

RISK ELEMENTS
Business risk
Financial risk
Liquidity risk
Currency risk
Country risk
Bond risks and rating
Default risk
Interest rate risk
Inflation risk


LAWS RELATING TO SECURITIES
Banking AND financial Institutions Act
1989 (BAFIA)
Securities Commission Act 1993
Securities Industry Act 1983
Securities Industries (Central
Depositories) Act 1991
Futures Industry Act 1993

REVISION QUESTIONS
Compare and contrast the debt and
equity instruments
What makes securities so attractive
that shareholders are willing to part
with their ownership when they go
public?
Identify risk elements inherent in the
investment in securities
Explain the stock screening process
adopted by the Shariah Advisory
Council of the Securities Commission
Explain how an ijarah sukuk is
structured

What are the main differences in the
nature of real estate and securities?
What are the differences between
investing in real estate and investing in
stock market?
Discuss the differences between
DJ/FTSE and SC stock screening.
Identify the options available to
investors when a shariah compliant
stock now deems non shariah
compliant.







































LECTURE 8/ topic 6
Insurance and Takaful Schemes
Role of Insurance and Takaful in Wealth
Planning
Factors affecting the need for Insurance
and Takaful
Mechanisms of Insurance and Takaful
Types of Insurance and Takaful
Products Related to Insurance and
Takaful
Laws and Governing Bodies of
Insurance and Takaful

-One of the important areas of wealth planning is
the distribution of the estates. Insurance and
takaful are instruments that create instant estates
and hence they are very important in the
distribution of such estates
-We should not forget to protect our ability to earn
or generate wealth. This can be done through
insurance and takaful
-We may save money for the future but such
savings need preservation

ROLE OF INSURANCE AND TAKAFUL IN WEALTH
PLANNING
-Insurance and takaful creates instant estates with
a small premium or contribution. It provides
financial security against premature death and
disability in the context of wealth preservation and
wealth distribution.
-Death or accidents can happen any time.
Insurance and takaful can to some extent
guarantee our loved ones will have something to
depend on when we are gone or become
incapacitated.
-Insurance and Takaful, helps to settle debt , as
well as fund for education

FACTORS AFFECTING THE NEED FOR INSURANCE
AND TAKAFUL
Existing insurance and assets
Income-replacement needs
Funeral-expense needs
Readjustment-period needs
Debt-repayment needs
College-expense needs
Government benefits






MECHANISMS OF INSURANCE AND TAKAFUL
-The contract mechanism
---Insurance contract is one of indemnity. It
indemnifies the client from having to bear the
costs of some mishap just because the client has
paid a premium to the insurance company.
---On the other hand takaful contract is not just
between the company and the participant but it is
a group of participants who have come together to
donate (tabarru) a portion of the contribution to
the takaful fund which will be used to compensate
any of the unfortunate participants who face a
mishap or hazard.

-According to the working committee for the
establishment of Islamic Insurance in Malaysia the
important aspects of takaful operation are as
follows:
---The company does not assume the risk but it is
the various participants who mutually cover each
other
---The co. acts as trustee on behalf of participants
to manage the operation of the takaful business.
As such the co. does not have any right to the
takaful benefits

----All contributions (premiums) paid by the
participants will be accumulated in the Takaful
Fund
----All payment of the takaful benefits (i.e. claims)
will be paid by the Takaful Fund. At the same time
money credited to the said fund can be invested in
areas approved by the Shariah.
---Should there be a surplus from the operation
the co. will share the surplus with the participants
according to the principles of mudharabah.
----According to the principles of mudharabah the
co. which acts as the mudharrib is entitled to part
of the surplus according to a pre-agreed ratio. At
the same time the co. is eligible to earn profits
from the investment of the shareholders fund



MODIFIED MUDHARABAH




MECHANISMS OF INSURANC AND TAKAFUL
-The relationship between the company and the
participants can also be based on wakalah (agency)
contract.
-The wakalah contract is more popular now. The
co. takes the fee of managing the business upfront
and will not share the underwriting surplus.

WAKALA MODEL
-Under this model risk sharing is done on a co-
operative basis amongst the participants while
Takaful operator acts as a wakeel or Agent and is
entitled to charge a fee for managing the
operations and a performance incentive for better
performance but is not entitled to any share in
underwriting profits which exclusively belongs to
the participants. However, if the underwriting
results show a loss the same is made good through
Qard-Hasan raised from shareholders fund.
However, surplus distribution among the
participants will give rise to the problem of
inheritance in the event of demise of a participant.


WAKALA WAQF MODEL
-Under this model a Waqf is created by the
shareholders who make the initial donation of a
reasonable amount. The donation or cede money
towards Wakala Waqf fund cannot be utilized for
operational expenses but is intended to provide
relief to the participants against defined losses as
per Waqf rules and the participants membership
document (PMD)
-The Wakala Waqf Fund is held invested in Shariah
compliant instruments. Underwriting profit or loss
belongs to the fund and if needed can be utilized
to pay losses. This fund will not be used for any
other purpose than to pay claims.





Family Takaful Model
Company will charge a performance fee
Participants
Contribution
Company
Personal Risk
Investment
Account (PRIA)
Personal
Investment
Account (PIA)
Taawuni Account
Pool (TAP)
Surplus
(if any)
Investment
Funds
Investment
Funds
Profits
(if any)
Profits
(if any)
Front-end Front-end
Balance Balance
Company will charge a
surplus admin. fee
Risk & Investment Only Products Risk Only Products
Company will charge a performance fee
THE RISK MANAGEMENT MECHANISM
-Risk control mechanism
------When client is known to have a serious illness
such as diabetes. Steps need to be taken to
minimise claims by suggesting participant to take
medical insurance or takaful
-Risk retention mechanism
-----Insurance or takaful co. takes up all claims and
has no recourse to claim from any third party


-Risk transfer mechanism
------The insurance or takaful company would
transfer part of risk to reinsurance or retakaful co.
The contract is between the client and the takaful
operator and the client has now recourse to the
reinsurer or retakaful operator if they do not
honour the contract
-Risk sharing mechanism
------They share the risk with another insurance or
takaful company under a co-insurance or co-
takaful arrangement.



TYPES OF INSURANCE AND TAKAFUL PRODUCTS
-Basically there are two types of products: the life
and general for insurance and family and general
for takaful.
-Four major types of life insurance: term; whole
life; endowment and investment-linked
Term insurance pays only when death occurs
during coverage and no payment at the end of the
term. The term is for 1; 5; 10; 15 or 20 or even 30
yrs. This is the cheapest and can be renewed at a
higher premium. Instead of specifying the number
of years the policy is stated in terms of age such as
up to age 65 or 80 etc. and normally there is no
renewal guarantee.

-The disadvantage is when there is no renewal
guarantee especially for those who are ill. In most
cases there is renewal guarantee or flexibility of
changing to other policies such as for permanent
coverage so that the person is covered throughout
his life.
-Whole life insurance covers the insureds entire
life or very long terms such as up to age 88 or 100.
It also has variants

-A straight life contract is one where premiums are
payable as long as the insured lives
-In a limited-pay life policy premiums are paid for a
specified period of time such as 20 years or until
age 65. No further payment is required but the
insured is covered until death
-Instead of paying in instalments the premium can
be paid in one lump sum and is called single-
premium life.

-If insurers terminate their whole life policy before
death they will get refund which is called cash
value that is normally less than what you pay.
-Endowment is another type of permanent
insurance similar to whole life. The only difference
is that it provides death benefits for a specified
period of time. It has cash values and the policy
holder is paid the contracts face value at the end
of the protection period.

-Investment-life insurance contract divides the
premium into two parts: the investment account
and the risk account. The risk account takes care of
the insurance benefits but the investment account
belongs to the policy holder.

-Family takaful products are similar to investment-
linked insurance. The difference is in the contract
either wakalah or mudharabah. It has two
separate accounts: the Participants Accounts (PA)
and Participants Special Account (PSA) which is
based on Tabarru. If participant dies before
maturity date he or she will receive whatever he or
she has contributed up to the date of death plus
his portion in the PSA including the profits from
investment.






Mortgage Reducing Term Assurance
(MRTA) or Mortgage Takaful
Fire
Marine
Etc.

AGENCY & AGENTS
BASED ON COMMISSIONS
TOTAL AGENTS ABOUT 88,895 (FAMILY 55,898;
GENERAL 32,997)
DIRECT MARKETING
PRACTICES BY COMPANIES

CHANNEL OF DISTRIBUTION
BANCATAKAFUL
-CHALLENGES
----POTENTIAL CONFLICTS OF INTEREST BETWEEN
THE SHARIAH-COMPLIANT TECHNICIANS WITHIN
THE BANK INTERMS OF PRODUCT DESIGN AND
DEVELOPMENT WITH RETAIL NETWORK
--NO STAND ALONE WORKFORCE
----SHELF SPACE MANAGEMENT
=JOSTLE BETWEEN TAKAFUL PRODUCTS WITH
CONVENTIONAL INSURANCE AND BANKIGN
PRODUCTS. WHICH GETS THE PRIORITY?
=TO STAND OUT FROM CREDIT CARDS, PERSONAL
FINANCE AND OTHER RETAIL BANKING PRODUCTS

BANCATAKAFUL
-OVERCOMING CHALLENGES
=LEVEL PLAYING FIELD WITH SIMILAR SALES
INCENTIVES
=DEDICATED INVESTMENT TEAM FOR THE SALE OF
PRODCUTS WITH LONGER SHELF LIVES e.g.
MUTUAL FUNDS, INVESTMENT LINK TAKAFUL
=WHITE LABELING GIVE OWN NAME TO THE
PRODUCTS BY INTEGRATING WITH THEIR OWN
MUTUAL FUNDS TO THE MIX
-------REDUCE INVESTMENT IN RESEARCH AND
DEVELOPMENT
------CONSTANT TRAINING OF THEIR STAFF
---GENERALIST PLAYERS ON ALL ASPECT OF
TAKAFUL KNOWLEDGE THROUGH DEDICATED ON-
LINE TRAINING


LAWS AND GOVERNING BODIES OF INSURANCE
AND TAKAFUL
The Insurance Act 1996
The Takaful Act 1984
Differences between the two
-The requirement of Shariah Advisory Council
under Takaful Act
-Provision of Insurable interest in the Insurance
Act to abolish gambling elements. Takaful Act is
silent on this.
-Takaful Act does not require any letters of
administration to make payment to claimants.

Describe the roles of insurance and
takaful in wealth planning
Explain the differences between the
underlying principles of insurance and
takaful contracts
Briefly compare the differences in the
takaful models
Explain the main differences in the life
insurance contracts
Describe diagrammaticaly a general
takaful model or family takaful model








































General Takaful Model
Participants
Contributions
Takaful Fund
Commission Risk Fund
Management
Expenses
Investment
Participant Shareholders
50% 50%
Surplus

LECTURE 9/ topic 7
Inheritance/Faraid

-Used to refer to accumulation, conservation and
distribution of an estate;
-Purpose of estate planning process is to boost and
preserve the financial welfare of individuals and
their families;
-Estate planning includes not only the provisions
that are made for the devolution of a clients
property at death, but also those steps that should
be taken to augment general family wealth and
security while the client is still living.

II)PLANNING FUNDAMENTALS
Before an estate planning can be constructed the
client must first decide :
-What types of assets to leave behind and to
whom;
-When he wants the beneficiary to receive the
assets;
-Needs to compile the assets and estimate the
approximate value;
-Needs to decide who he wants to manage the
assets;
-Needs to consider whom he wants to be the
guardian of his minor children if he becomes
incapacitated or dies;
-Who should become his representative in making
decisions on his behalf concerning his care and
welfare if he cannot take care of himself;

Under an estate plan, the client usually
needs to write a will and prepare a
trust, appoint power of attorney and
appoint a health care proxy; he may
also need to name an executor to
manage the estate from the time of his
death until the time his assets are
distributed;
From time to time, the client should
review his estate plan;

III) WILLS AND TRUST

(a)Wills : Definition
A will is the declaration in a prescribed manner of
the intention of the person making it with regards
to matter which he wishes to take effect upon or
after his death
(Halsburys law of England);
-Wills Act 1959 of Malaysia : a declaration
intended to have legal effects of the intentions of a
testator with respect to his property or other
matters which he desires to be carried into effect
after his death and includes a testament, a codicil
and appointment by will or by writing in the nature
of a will in exercise of a power and also a
disposition by will or testament of the
guardianship, custody and tuition of any child.
-Written document that forces a person to
recognize the person he wishes to provide for i.e.
his beneficiaries, whether they are people or
organizations;
-Describes list of assets and liabilities and their
detailed description
-The executor and administrator to effect his
wishes as aforementioned in the will;

(i)Purpose of a will :
The making of depositions of property to take
effect on or after testators death; appoint
executors to manage or assist in managing his
estate;
(ii)Appointment of executor or administrator
A person is said to die testate or intestate ; if
intestate the distribution of his estate will fall
under the ambit of the Distribution Act 1958.
-A person will be considered intestate if he leaves
a will but fail to name an executor;
-The appointment of an executor is one of the
essential clauses in a will;
- Section 3 of the Probate and Administration Act
1959 provides that the appointment of an
executor may be expressed or implied

(iii)Legal Terms
-Administration
-Probate
-Personal Representative

iv)Formalities in Drawing a will
-Wills Act 1959; Sections 3, 4, 5 of the Act require
that the will shall comply with the requirements
specified; legally binding in Malaysia;
-Testator has reached the majority age of 18 and
21 (in Sabah and Sarawak) of sound mind, and
written in Bahasa Malaysia or English; other
languages allowed but with a translation;
-Requires two witness other than the lawful
beneficiaries or spouse of the testator;
-The Wills Act does not apply to Muslims;

v)Application and Grant for Probate
-Probate and Administration Act 1959; applicable
to Muslims and non-Muslims;
-Lays down procedural rules with regards to the
obtaining of Grant of Probate for the deceaseds
estate;
-Such a Grant of Probate may be applied by way of
a petition filed at the high court by the lawful
beneficiaries or named executors; the petition
shall comply with procedures laid down in the
Rules of High Court 1980;

vi)Contentious and Non Contentious Probate
-Petition is non contentious when the deceased
has left a Will and named an executor; Order 71 of
the High Court will apply;
-Contentious proceedings occur when the
deceased has not left a Will and not named an
executor; here Order 72 of the High Court will
apply; also a third parties (creditors) can file a
caveat vide Form C to register their interest; can
remain unresolved for many years; a redress may
be available by referring the matter to Amanah
Raya Berhad to be the Trustee and carry out the
duties of an executor;

vii) Small Estate
-Immovable properties not exceeding
RM2,000,000 (effective 1
st
September 2009)( Prior
to 1
st
September 2009 the amount was
RM600,000.00); the authority that has power and
jurisdiction to hear such cases is the Land Office
under the Small Estates (Distribution) Act, 1955;
applicable to both Muslims and Non Muslims;
-The Collector of Land Revenue where the
property is located shall have exclusive
jurisdiction;
-When a person has died intestate leaving a small
estate, any parties claiming an interest can lodge a
petition to the Collector for the distribution of the
estate; when distribution order is final then the
Registrar of Titles or Land Administrator will effect
the registration of the documents;


(b) Trusts
There are several definitions of trust:
-Halsburys Laws of Malaysia;
-The Hague Convention on the Recognition of
Trusts;
-A trusts has the following characteristics:
-the assets constitute a separate fund and are not
a part of the trustees own estate;
-title to the trust assets stands in the name of the
trustee or in the name of another person on
behalf of the trustee;
-the trustee has the power to manage, employ or
dispose of the assets in accordance with the terms
and the special duties imposed upon him by law;
-In the context of estate planning, trust are usually
created for education, maintenance of children,
maintenance of loved ones especially aged
parents, disabled dependents and also for the
benefit of charities;
-These can be either in the form of testamentary
trust or as living trust under the concept of hibah
(intervivos gift)

i)Elements of Trust
-when will a trust relationship come into being;
-what are the duties connected with the office of
trusteeship and;
-what are the remedies, if any, available to the
beneficiaries if the trustee acts in a manner
inconsistent with that relationship;

ii) Classification of a trust
-Statutory trust are those which arises under the
Trustee Act 1949, the Distribution Act 1958;
-Public trusts and private trusts-public trusts are
also charitable trusts;
-Private trusts are divisible into fixed trusts and
discretionary thrust; the purpose of a private trust
is to benefit fixed persons in a particular class;
-Trusts may be classified into simple or bare trust
and special or ministerial trusts;
-Trusts may also be classified according to
intention of the settler; this may be referred to as
resulting trust, arising from the presumed
intention of the settler.
-Trusts which arise by operation of law are called
constructive trust. It is imposed by equity to satisfy
the needs of justice and good conscience.

Common Estate Planning tools to fulfill different
needs of the client:
Non Muslim
Will
Trust Testatmentary trust,
declaration of trust and living trust
Buy-sell agreement
Assignment
Power of attorney
Lifetime transfer
Nomination
Muslim
Faraid
Wasiat (wills)
Trust Testamentary trust, and living
trust
Buy-sell agreement
Wakaf
Hibah
Power of attorney
Lifetime transfer
Harta sepencarian (communal
properties)
Nazar
Guardianship

Types of Trust
Living trust
Testamentary trust
Declaration of trust

iii)Types of Trust
-Express trust arises from the express intention
of the settler. 1st. Express trusts are those which
are created in express terms in the deed, writing
or will. The terms to create an express trust will be
sufficient, if it can be fairly collected upon the face
of the instrument that a trust was intended.
Express trusts are usually found in preliminary
sealed agreements, such as marriage articles, or
articles for the purchase of land; in formal
conveyances, such as marriage settlements, terms
for years, mortgages, assignments for the payment
of debts, raising portions or other purposes; and in
wills and testaments, when the bequests involve
fiduciary interests for private benefit or public
charity, they may be created even by parol.

Type of Express Trust
a) Living Trust
The revocable Inter vivos (or living trust or family
trust) used primarily to avoid probate, reduce
estate taxes, preserve privacy and manage
financial affairs.
-It is a trust established while alive
-It is revocable, so changes can be make whenever
we want, as well as reclaim the property
transferred into it
-It describe how the property to be managed while
we are alive and how it is to be distributed when
we dies.
-No probate process as the owner of the property
(the trust) did not die; just the person in the role of
the guarantor and most likely the trustee
-A Trust deed can be considered it is the
deceaseds asset, if the deceased is a trustee then
is it not part of the deceaseds estate

Living Trust (Inter Vivos Trust)
Settlor
1. He creates the trust
2. At least of 18 years old
3. Sound mind and not a bankrupt.
4. Transfer assets during his life time
and sign the Trust Deeds.


Trustee
1. New legal owner and custodian of
the Trust asset
2. Uses the Trust assets for the
beneficiaries according to the Trust
Deeds

Beneficiary
1. Equitable Owner
2. Enjoys the income and capital of the
Trust
3. Can be any person or organization

Type of Express Trust
b) Testamentary Trust. A trust created by the
terms of a will. Example: "The residue of my estate
shall form the corpus (body) of a trust, with the
executor as trustee, for my children's health and
education, which shall terminate when the last
child attains the age of 25, when the remaining
corpus and any accumulated profits shall be
divided among my then living children." A
testamentary trust differs from an "intervivos" or
"living" trust which comes into being during the
lifetime of the creator of the trust (called trustor,
settlor or donor), usually from the time the
Declaration of Trust is signed


Testamentary Trust
Testator
1. He writes a will and create a
Testamentary Trust
2. At least of 18 years old
3. Sound mind and not a bankrupt.
4. Wills and Testamentary Trust
effective upon his death

Trustee
1. New legal owner and custodian of
the Trust asset
2. Uses the Trust assets for the
beneficiaries according to the will

Beneficiary
1. Equitable Owner
2. Enjoys the income and capital of the
Trust
3. Can be any person or organization

Type of Express Trust
c) Declaration of Trust. The act by
which an individual acknowledges that a property,
the title of which he holds, does in fact belong to
another, for whose use he holds the same. The
instrument in which the acknowledgment is made,
is also called a declaration of trust; but such a
declaration is not always in writing, though it is
highly proper it should be so. The document signed
by a trustor (settlor) creating a trust into which
assets are placed, a trustee is appointed to
manage the trust (who may be the party who
created the trust), the powers and duties of
management of the principal and profits of the
trust are stated, and distribution of profits and
principal is spelled out

Declaration of Trust

Settlor Main Trustee
1. Declares himself as Trustee and does
not transfer to Substitute Trustee until
later
2. Holds the asset for the beneficiaries
3. Can be one of the beneficiaries

Substitute Trustee
1. Takes over from Settlor-Trustee and
acts as the new legal owner upon the
Settlors death, suffers major illness,
serious physical disability or suffers
from mental disability (trigger events
2. Uses the Trust assets for the
beneficiaries according to the Trust
Deeds

Beneficiary
1. Equitable Owner
2. Enjoys the income and capital of the
Trust
3. Can be any person or organization

iii) Types of Trust

Implied trust the intention of the
settler is important is gathered from
the circumstances of the case. Implied
trusts are those which without being
expressed, are deducible from the
nature of the transaction, as matters of
intent; or which are super-induced
upon the transaction by operation of
law, as matters of equity,
independently of the particular
intention of the parties.
The most common form of an implied
trust is where property or money is delivered by
one person to another, to be by the latter
delivered to a third person. These implied trusts
greatly extend over the business and pursuits of
men: a few examples will be given:-
When land is purchased by one man in
the name of another, and the former
pays the consideration money, the land
will in general be held by the grantee in
Trust for the person who so paid the
consideration money. When real
property is purchased out of
partnership funds, and the title is taken
in the name of one of the partners, he
will hold it in trust for all the partners.
When a contract is made for the sale of
land, in equity the vendor is
immediately deemed a trustee for the
vendee of the estate; and the vendee, a
trustee for the vendor of the purchase
money; and by this means there is an
equitable conversion of the property.

iii)Types of Trust
-Resulting trust similarly arises from the
intention of the settler gathered from the
circumstances either inferred or presumed. An
arrangement whereby one person holds property
for the benefit of another, which is implied by a
court in certain cases where a person transfers
property to another and gives him or her legal title
to it but does not intend him or her to have an
equitable or beneficial interest in the property.
-Since this beneficial interest is not given to
anyone else, it is said to "result" to the person who
transferred the property.
-A resulting trust arises when an express trust fails.
A settlor, one who creates a trust, transfers his
property to a trustee, one appointed, or required
by law, to execute a trust, to hold in trust for a
beneficiary, one who profits from the act of
another. If, without the settlor's knowledge, the
beneficiary died before the trust was created, the
express trust would fail for want of a beneficiary.
The trustee holds the property in resulting trust for
the settlor.
-When an express trust does not use or exhaust all
the trust property, a resulting trust arises. For
example, the settlor transfers $200,000 in trust to
pay the beneficiary during her lifetime $2,000 a
month from principal, trust property, as opposed
to income generated by investment of the
principal. No other disposition is specified. The
beneficiary dies after having received $20,000. The
trustee holds the unexpended funds in a resulting
trust for the settlor.



iii) Types of Trust
-Resulting trust similarly arises from the
intention of the settler gathered from the
circumstances either inferred or presumed. An
arrangement whereby one person holds property
for the benefit of another, which is implied by a
court in certain cases where a person transfers
property to another and gives him or her legal title
to it but does not intend him or her to have an
equitable or beneficial interest in the property.
-Since this beneficial interest is not given to
anyone else, it is said to "result" to the person who
transferred the property.
-A resulting trust arises when an express trust fails.
A settlor, one who creates a trust, transfers his
property to a trustee, one appointed, or required
by law, to execute a trust, to hold in trust for a
beneficiary, one who profits from the act of
another. If, without the settlor's knowledge, the
beneficiary died before the trust was created, the
express trust would fail for want of a beneficiary.
The trustee holds the property in resulting trust for
the settlor.
-When an express trust does not use or exhaust all
the trust property, a resulting trust arises. For
example, the settlor transfers $200,000 in trust to
pay the beneficiary during her lifetime $2,000 a
month from principal, trust property, as opposed
to income generated by investment of the
principal. No other disposition is specified. The
beneficiary dies after having received $20,000. The
trustee holds the unexpended funds in a resulting
trust for the settlor.

iii)Types of Trust
Constructive trust does not require formalities
for its creation, or intention for it arises by
operation of law. A relationship by which a person
who has obtained title to property has an equitable
duty to transfer it to another, to whom it rightfully
belongs, on the basis that the acquisition or
retention of it is wrongful and would unjustly
enrich the person if he or she were allowed to
retain it.
-A constructive trust does not arise because of the
expressed intent of a settlor, one who establishes
a trust. It is created by a court whenever title to
property is held by a person who, in fairness,
should not be permitted to retain it. It is frequently
based on disloyalty or other breach of trust by an
express trustee (the person appointed or required
by law to execute a trust), and it is also created
where no express trust is created but property is
obtained or retained by other Unconscionable
conduct. The court employs the constructive trust
as a remedial device to compel the defendant to
convey title to the property to the plaintiff. It
treats the defendant as if he or she had been an
express trustee from the date of the unlawful
holding of the property in question. A constructive
trust is not a trust, in the true meaning of the
word, in which the trustee is to have duties of
administration enduring for a substantial period of
time, but rather it is a passive, temporary
arrangement, in which the trustee's sole duty is to
transfer the title and possession to the beneficiary.
-The right to a constructive trust is generally an
alternative remedy. The aggrieved party can
choose between a trust and other relief at law,
such as recovery of money wrongfully taken, but
cannot obtain both types of relief.
-A constructive trust, as with an express trust,
must cover specific property. It cannot be
predicated on mere possession of property, or on
a breach of contract where no ownership of
property is involved.
Trust funds in the higher sense covers
government obligations which are not
justifiable in the court of law and
against which the courts have no
remedy.

IV) POWERS OF ATTORNEY

(a) Definition
. an instrument purporting to create a power of
attorney duly executed and authenticated in
accordance with this section shall be deemed to be
properly and validity executed and attested for all
or any of the purposes for which a power of
attorney may be used under any such written
law;
-in compliance with the Power of Attorney Act
1949;
-Probate

(b)Purpose of Power of Attorney
-to grant the Donee with the authority to
represent the Donor in certain transactions with
regards to the Donors affairs as if the Donor
himself is carrying out all the acts the Donor
intends to effect;
(c) Nature of Power of Attorneys
-may be general or specific in nature;
-most power of attorneys are specific; a specific
power of attorney is restrictive;
(d) Tenor of the Power of Attorney
-restricted by a time period;
-the instrument may be revocable or
irrevocable; such situations are outlined in
Section 5 of the Power of Attorney Act;


(V) DUTIES AND POWERS OF
REPRESENTATIVE
(a) Definition
-Representatives are persons named and
appointed to act on behalf of the other person
who so nominates and appoints such persons
A legal representative has been vested with the
authority to represent the person who nominates
him; the authority is legal and binding; may be
known as personal representatives, executors,
or administrators.

(VI) RIGHTS OF BENEFICIARIES
(a) Definition
-According to Selangor wills Enactment 1999, a
beneficiary means a person or body of persons,
corporate or unincorporated that benefits as a
result of a will and, in relation to the proceeds of a
will, includes a religious or charitable purpose.
-A beneficiary essentially is a person who receives
a gift or property from a will, and as their rights
are entrenched in the will, they are deemed to be
lawful beneficiaries in the eyes of the law.
(b)Non Contested Beneficiaries
-Named by the deceased in the his will to benefit
from his will and appoint an executor or
administrator to ensure the interests of the
beneficiaries are protected and the disposal of the
assets are effected in the manner the deceased
wishes;

-Bankrupt beneficiaries would not be able to
receive property under a will as all his property
would be vested in the hands of the official
Assignee; it is possible for the bankrupt beneficiary
to benefit from the will by creating a Protective
Trust ;
-The testator may leave a will requiring the
executor to take care of his pet animals;
-A will may be for the benefit of an organization
such as clubs, societies, schools; the testator may
decide to donate his body organs by making
relevant provisions in his will;

(VIII) FARAID AS A FOUNDATION OF ESTATE
PLANNING
-Faraid is the plural form of faridah meaning
mafrudah -the share that has been determined
-From verse An-Nisa (4:7), from what is left by
parents and those nearest related there is a share
for men and a share for women , whether the
property be small or large a determinate share ;
-The Prophet (pbuh) encouraged us to study faraid
because it is very important especially for financial
planners in assisting Muslim clients in the overall
wealth planning program;
(a) Sources of Islamic Law of Estate Distribution
-According to a classical interpreter of the Quran
Imam Ibnu Kathir, there are three main verses that
explain the laws of distribution, more popularly
known as faraid or the law of inheritance;
-The verses in question are verses 11, 12 and 176
of the fourth chapter of the Quran;
-The verses explain in detail the portions inherited
by the mother, father, wife or husband, brother
and sister.

Identify any dues in relation to the
demands in Islam
Incomplete fasting
Haj
Zakat
Funeral expenses
Dues to Man
Debts
Wills/ wasiyyah
Distribution to beneficiaries

(b) Identification of Eligible Heirs
According to Muslim
scholars, the eligible heirs
are as follows :-
On the male side :
-Son
-Sons son and agnatic descendants
-Father
-Fathers father and agnatic ancestors
-Brother
-Brothers son except in the case of a son of a
uterine brother
-Fathers full brother and fathers half brother on
the fathers side
-Son of above
-Surviving husband, not divorced, who has not
repudiated the deceased
On the female side :
-Daughter
-Sons daughter and other female descendants of a
son
-Mother
-Grandmother
-Sister
-Surviving wife, not divorced nor repudiated


-If the eligible heirs are present only the
husband/wife, father, mother, sons and daughters
are eligible, while the rest are excluded from the
inheritance;
-The heirs can be divided into three : Quranic heirs,
agnates, and kindred of the wombs;
-Quranic heirs consist of : spouse, parents, true
grandparents, daughters, daughters of sons, full
sister, consanguine sister, uterine brother, uterine
sister;
-Agnates consist of : (i) independent agnate all
male agnates;(ii) co-dependent agnate daughter;
sons daughter; full sister and consanguine sister;
(iii) dependent agnate full sister and consanguine
sister;
-Kindred of the wombs uterine heirs;

(cTenets, conditions, Impediments and exclusions
-There are three tenets of inheritance the
deceased, the heir and the estate;
-Death of the deceased must either be certain or
pronounced by the court;
-Heir must be alive at the time of death of the
deceased and relationship is known;
-Two types of relationship are recognized by
marriage or blood relations;
-The Baitul Mal may inherit the estate whenever
there is a balance after distribution to the various
eligible heirs;
-Two situations that could impede inheritance; the
first impediment is murder and the second is
difference of religion;
-Two other types of exclusions are : mahrum-
(disqualified from inheriting) and mahjub (veiled-
nearer in relationship);
-In terms of determining the nearness of the
different types of heirs to the deceased, the
doctrine of exclusion uses what is called Jabaris
rule. Jabaris rule says that preference is given in
the following manner :
(1) first to the order
(2) next to the degree
3) Lastly to the strength of the blood tie

Under the Shafii School, the priorities are :

(1) Descendants
(2) Father
(3) Grandfather
(4) Descendants of brothers
(5) Descendants of remote
ancestors
(d)The Shares in Estate Distribution
Based on verse 11 and 12 of
Surah An- Nisa, the following
can be described :



(IX) HIBAH TRUST
-HIBAH means a gift or giving without expecting
any returns by the Donor with his/her own free
will
-TRUST is a contract which allows giving of assets
to someone in the lifetime of the Donor with
his/her own assets free will and the assets is
entrusted to a trustee for a certain time frame
according to the Trust Deed.
-Asset which can be placed under Hibah Trust are
moveable and immoveable assets with value and
must be in the Donor possession.
-The termination of the Hibah Trust is allowed
except for contracts involves a gift from a husband
or wife.
-After the asset has been given to the beneficiary,
the Donor does not have any authority over the
asset except with conditions which enable to
donor to enjoy certain benefits from the assets
with beneficiary consent.
-Hibah Trust is done during the lifetime of the
Donor and the transfer of ownership of the asset
will only takes place after the demise/death of the
Donor. Other beneficiaries cannot challenge the
Hibah Trust


Trust
Islamic Trust: The Origin
Quran
Those who faithfully observe their trusts
and their covenants covenants
(Al Muminun (23:8)
Allah commands you to render back your
Trusts to those to whom they are due; and when
you judge between man and man, that you judge
with justice: verily how excellent is the
teaching which He gives you! For Allah is He Who
hears and sees all things. things.
Al Nisa Nisa (4:58)

Trust:
Conveys to the grass root of what is
termed as amanah, i.e. for instance a
thing , deposited in the safekeeping of
another party for specific purposes;
Also in Arabic known as wadiah,
where , many banks providing Islamic
Banking services offer saving account
under the principle of wadiah



Types
Hibah
Gift
Waqf
Revocation
-Irrevocable Trust Created During Lifetime is not
subjected to Faraid distribution
Revocable Trust is subjected
to Faraid distribution
Faraid is a predetermined distribution
solution provided in the Quran

Hibah
Gift or transfer of ownership or conveyance of
the asset from the Donor/ Settlor to the
Donee/Beneficiary,
made voluntary,
without valuable consideration, without
condition
during the lifetime of both the Settlor and
Beneficiary.
2 separate portions:
Sighah(Declaration)
Trust Deed (Umra & Ruqba)


2 Portions:
1. Sighah (declaration)
It needs offer and acceptance (
sighah) and delivery by the Settlor to Beneficiary
The Beneficiary with consent of the
Settlor must take possession of the asset
immediately or else the hibah fails.
2. Trust Deed ( Umra and Ruqba)
Extended to include Trustee; both
Beneficiary and Settlor would have to
agree via Trust Deed to appoint the
Trustee to take possession of the
assets until such time arrives

Umra
-Asset is to be transferred to Beneficiary after
demise of the Settlor. During the period, the asset
will be held by the Trustee.
(Hibah umra is A temporary gift
referring to the life of either the giver or the
recipient of the hibah. If the recipient of the hibah
dies, the hibah property shall be returned to the
hibah giver. Conversely, if the hibah giver dies,
hibah property shall be returned to the next-of-kin
of the hibah giver.
(Please refer to: Wizarah al-Awqaf wa al-Syuun al-
Islamiah, al-Mawsu`ah al-Fiqhiyyah, vol. 30, p.
311.)

Ruqba
-Only by the choice and agreement of both Settlor
and Beneficiary
-Depends on events, if the Settlor dies first, the
Beneficiary will get the asset, vise versa.
-Introduced to overcome Faraidh Complication
arising when Beneficiary predeceases the Settlor,
the asset , will be reverted back to the Settlor by
Trustee to be reHibah
(Hibah ruqba is a conditional gift determined by
the hibah giver whereby the hibah property will be
owned by the hibah recipient in case the hibah
giver dies. But if the hibah recipient dies before the
hibah giver, the hibah shall be returned to the
hibah giver.

Revocation of Hibah Trust
Only in the following circumstances:
-By order of court
-By consent of the Beneficiary/Donee
-From parents to children/grandchildren
====A son or daughter must not be a slave
====ii. The hibah property must be in a form of
ayn or a corporeal property, and
=not in a form of debt
iii. The hibah property must be under the control
of the son or daughter
iv. The son or daughter must be free from any
impediment that is due to mismanagement of
property
v. The hibah property must not be a kind of
perishable item
Hibah is irrevocable:
=When a Hibah is made to a person in a family
circle that if the parties is differed in gender, a
marriage between them would be unlawful. This
includes biological siblings.
= By a wife to the husband and vice versa
=When the Settlor or Beneficiary dies
=When the Hibah asset is lost or destroyed
=When the Hibah asset has been transferred by
the Beneficiary by hibah, sale or otherwise,
=When the Hibah asset has increased in value,
whatever be the cause of such increase

Requirements of Object to be Hibah
1. The object must exist during the give give-away
2. The object must be Halal (according to
Islamic principles)
3. The object must be able to be owned
4. The Settlor must own the object
5. The object must be distinctive
6. The object must be able to be differentiated
from others
7. The object must be able to be received and
transferred to Donee
8. Must obtain agreement from the settlor

Principles of Hibah Trust
1. The Settlor
2. The Beneficiary
3. Object of Transfer
4. Declaration
5. Delivery of Asset
6. Beneficiary Taking Possession

Gift
Wider term than Hibah
-Irrevocable
- Applicable to all transfer without consideration
-Voluntary, without condition and without
valuable consideration.
-Inter vivos (During the life time of the Settlor and
Beneficiary
-, must be accepted by Beneficiary or on behalf of
Trustee)


Donor creates an Irrevocable Trust
under the principle of Gifton the
sum mentioned.
Donor is now appointing the Trustee
to be the trustee for the Deposit Sum
to be held in trust for the benefits of
the Beneficiary
Donor hereby agreed that upon
effecting and execution of this Deed,
he will no longer has any access to the
Deposit Sum or any income generated
there from.



Sadaqah
Giving something to the needy with the object
of acquiring religious merit from Allah.
- Dont need inter vivos (living trust-A revocable
trust created while the donor is still alive, to hold
property for the benefit of another. also called
living trust.,)
Voluntary, without condition and
without valuable consideration
Irrevocable


Testamentary Trust
=Created from Will, only up to 1/3 of asset
For Non-heir(s)
Waqf or charitable purpose
Undergo estate
administration process
=Islamic Will (Wasiah/Wasiat)
Effective only upon death
Up to 1/3 to Non heirs
Balance or 2/3 to Actual Heir(s)
Faraid or Distribution
Common Understanding of
all heirs

Structuring Islamic Trust


(IX) Review Questions
-Discuss the factors to be considered in Islamic
estate planning
-What are the limitations of a will from the Islamic
perspective
-What is the difference between wasiat(wasiyah)
and a hibah in the context of estate planning
-List the main features of the Islamic law of
inheritance (faraid).
Distributed based on
responsibilities, need and
nearness or closeness to the
deceased


A lady leaves her husband, her father and two
daughters. What proportions of her property will
each get?

husband gets 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.


The Islamic law of inheritance is derived
mainly from the Quran. List down the
main principles of the law
See the previous answer


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?



A woman dies and leaves behind five sons, four
daughters and a brother from the same parent as
well as her mother and father . She has no debt,
and zakat payable of 2.5% and her estate is worth
USD2, 100,000 how much will each of the
beneficiaries get?
.


A woman dies and leaves behind two sons, two
daughters and a brother from the same parent as
well as her mother and father?
-A woman dies and leaves behind two sons, one
daughter, a husband as well as her mother and
father?





-A man dies and leaves behind two wives, three
sons, 2 daughters, 4 brothers and two sisters from
the same parents as well as her mother and
father?
-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?

A woman dies and leaves behind a husband, 3
sons, two daughters and a brother from the same
parent as well as her mother and father. Suppose
her total estate is worth USD1, 250, 000. She has
the following debts: a house financing with RHB
Islamic of USD250, 000, and Zakat of 2.5% on the
estate. How much will each of the beneficiaries
get?
A woman dies and leaves behind a
husband, 3 sons, two daughters and a
brother from the same parent as well
as her mother and father. Suppose her
total estate is worth USD960, 000net..
How much will each of the beneficiaries
get?













































LECTURE11/ topic 9
Tax planning

Tax Systems
Laws Related to Personal and Business
Tax
Taxable Income
Deductible Expenses
Tax Planning Strategies

Tax administrators aim to maximise revenue
collection by implementing tax system that has
lowest cost and improving tax compliance among
taxpayers
Malaysian government introduced self assessment
for companies in 2001.
In 2004 it introduced self assessment to all other
taxpayers.
Since 2004 tax officials have more time to look at
tax audit, investigation and other services

-The basic principles or cannons of taxation
originally expounded by Adam Smith and still stays
till this day

Principles
(1) Certainty - All tax liabilities should be certain
and not arbitrary
(2) Fair - All transactions should be treated fairly
for tax purposes
(3) Efficiency - The tax system should be able to
generate the amount of revenue required by the
Government
(4) Low Compliance cost - Tax laws should be
simple so that compliance costs can be small
(5) Flexibility - Aspects of the tax system can be
varied quickly to have an immediate impact and to
achieve other economic objectives

Certainty
-Certainty requires that all tax liabilities are
definite and can be anticipated. Arbitrariness
would lead to a system being challenged by
taxpayers
-inland Revenue Board issues public rulings to
explain grey areas in tax laws for the benefit of
taxpayers and practitioners

Fairness
-Fairness or equity means that the burden of tax
should correspond to benefits received by
taxpayer from Government expenditure. There
should be horizontal and vertical equity.
-Tax burden on transaction whether done
physically or electronically should be the same
An unfair system will most likely invite
widespread non-compliance

Efficiency
-Efficiency assumes that tax law will not influence
or have an impact on economic decisions.
-Alternatively economic efficiency implies that the
tax should not distort the choices that taxpayers
would ake in the absence of such tax
-A tax system is not efficient if it induces changes
in behaviour of taxpayers such that there is a
change in resource allocation in order to avoid
being taxed or avoid taxation entirely

Simplicity
-A tax system should permit fair and non-arbitrary
administration and it should be understandable to
taxpayrs
-Compliance cost should be kept to a minimum
-Costs to administer system must be low

Flexibility
- A flexible tax system can be changed easily so
as to have an immediate impact in achieving
economic objectives

Criteria to Evaluate a Good Tax System
A good tax system must have the following
characteristics:
-Inexpensive to administer (administrative
simplicity);
-Responds easily to changes in economic
conditions (flexibility);
-Tax burden easily ascertainable (transparent); and
-Efficient allocation of resources (economic
efficiency)

Comparative Tax Rates in Asia-Pacific Countries
Note 1: Japan has the highest tax rate. Its
companies pay 28% if the paid-up capital is Y100
million or less and 37.5% if the paid-up capital is
>Y100 million
Note 2: New Zealand has introduced an efficient
Goods and Services Tax (GST) System
Note 3: Corporate tax is 30%. For smaller
companies whose net profit does not exceed Baht
3 million they pay between 20% and 25%
corporate tax on profits


Note 4: Corporate tax in Singapore is
22% unless they qualify for tax exemption or a
concessionary rate (usually 10%). In addition,
w.e.f. 2002, partial tax exemption is given on
chargeable incomes: 75% of first S$10,000 and
50% of next S$90,000
Note 5: Corporate tax has increased
from 16 to 17.5% and for individual is 16%

Malaysian corporate Tax Rate
-It is one of the lowest in the region.
-Should not just look at the Corporate tax rate.
Should also look at fiscal incentives such as tax
exemptions, pioneer status, investment tax
allowances and imposition of indirect taxes

In Malaysia SME with paid-up capital of less than
RM2.5 millions
-First RM500,000 chargeable income the tax rate is
20%
-More than RM500,000 chargeable income the tax
rate is 25%
-Dividend is taxed at 25%

Income Tax
-Law governing income tax is the Income Tax Act
1967
-The taxable income for a company is the same as
that of individuals
-There is no relief for companies; relief is only for
individuals
-Company pays a single rate tax of 25%
-Individuals pay a graduated scale

Petroleum Income Tax
-The law governing Petroleum tax is Petroleum
Income Tax Act (PITA) 1967
-The single tax rate is 38%

Real Property Gains Tax (RPGT)
-RPGT Act 1976
-It is a tax on capital gains arising from sale of any
interest or right over land in Malaysia
-It is a graduated scale.
-Abolished in April 2007 but was reinstated in
2010.
-currently under Minister of Finance Executive
order the rate is at 10% for the 1
st
2 years and 5%
from 3
rd
year onwards

Stamp Duty
-Stamp Act 1949
-Instrument includes every written document
E.g. rate RM5.00 per RM1000.00

Scope of Income Tax
-There is no definition of income. All receipts that
are ordinarily considered as income will be
subjected to income tax.
-All income derived from within Malaysia or
received in Malaysia from abroad are subject to
tax.
-With effect from 2004 all income remitted into
Malaysia from abroad are not taxed

Residence Status:
-A person is considered a resident if he spends at
least 90 days in Malaysia
-A person with resident status is entitled to
RM9,000 personal relief; RM3,000 for wife (if not
assessed separately) and RM1,000 for each
unmarried child below 18 years;
-His remittances of income from abroad are not
taxed

Classes of Income
-Income is categorised into various classes such as
business, employment, dividend, interest, rent,
discount, premium, pension, annuities, royalties
and other gains. This list is not exhaustive.
-There is catch-all category which includes all
incomes not classified elsewhere

Exemptions:
-Tax exemption is provided on a range of incomes
including salaries paid to the royal families,
allowances to members of parliament,
compensation for loss of office due to ill-health
and emoluments of any member of the armed
forces of a Commonwealth country
-Retirement gratuities are fully exempted if the
retirement:
-Is due to ill-health or
-Takes place on or after the age of 55/60 or on
reaching compulsory retirement age. In any case
one must have worked for at least 10 years with
the same employer.

Determination of Chargeable Income
Chargeable income is the taxable
income. It is derived by computing the
gross income less the tax relief on the
person his dependents and other
expenses that is allowed tax deduction

Tax Rates
The tax rates are normally of two kinds
Fixed rate
Graduated rates
Fixed rate of 25% is charged on
A company
A trust body
An executor of an estate of a
deceased individual who
was domiciled outside
Malaysia
A receiver appointed by a
court
A non-resident


Tax Rates
Companies engaged in petroleum
operations are taxed at 38%
Resident individuals are taxed at
graduated rates from 0% to 26%

Self Assessment
-Self assessment is an approach where tax payers
are required by law to determine their taxable
incomes, compute their tax liability and submit
their tax returns based on existing tax laws
-This approach frees the tax officials to perform
other more important functions such as checking
and verifying tax returns on a post-assessment
basis through tax audits and implementation of
penalty system

Impact of Self Assessment System on Taxpayers
-Taxpayers have to maintain a good record for at
least 7 years
-Tax liabilities must be computed rather accurately
otherwise they can be penalised
-Any excess of tax liability against prepayment
must be made good within a specified period


Filing Procedure
With effect from 2004 every person other than a
company trust body or co-operative society will be
required to furnish to the Director General of
Inland Revenue a return in a prescribed form not
later than 30 April. This ruling applies to:
-A person who has a taxable income for that year;
-A person who has taxable income or has furnished
a return for previous year

Filing tax returns by companies
-Every company trust body and co-operative
society is required to furnish to the DG of IR a tax
return on prescribed form within seven (7) months
from the date following the close of the
accounting period
-Self Assessment involving other ta-payers
--------Individuals, partnerships, trust bodies, unit
trusts, co-operative societies and other non-
corporate taxpayers have to submit tax returns by
30 April

LAWS RELATED TO PERSONAL AND BUSINESS TAX
Two major types of income: Business
income and Employment Income.
Business Income is taxed under Section
4(a) of ITA
Employment Income is taxed under
Section 4 (b) of ITA
Employment income comprises wages ,
salary, remuneration, leave pay, fee,
commission, bonus, gratuity, perquisite
or allowance (in money or in kind) in
respect of having employment

Benefits Convertible To Cash
-Employers may issue shares or grant options to
purchase shares. If these shares are offered free
then the employees will have to pay tax on the
market value of shares on the date it was offered
-Share options: Some companies offer Share
Option Scheme (ESOS) at a concessionary price.
The employees will be charged tax when the
option is exercised but is related back to the year
of assessment when the option is granted

Benefits in Kind
The following benefits are exempted
-Medical or dental benefits or child care
- Leave passage within Malaysia not more than
three times a year
-Leave passage outside the country only once and
not more than RM3,000
-Free transport or telephone for work purposes
-New computer provided for the employee

The following are taxed:
-Accommodation provided by employer
(guidelines provided to compute)
-However the following expenses can be deducted:
public rates payable such as quit rent or
assessment
-Fire insurance premium payable
-Repairs and maintenance
-Normal rent payable by the employee

Receipts from unapproved pension and Provident
Funds
-When employee withdraws he will have to pay tax
only on the employers contribution
-Employees contribution is treated as capital
receipt and hence are not taxed
-For approved Provident fund both employers and
employees contribution are treated as capital
receipt



Compensation for loss of employment
-If he is terminated due to ill health he is exempted
from tax
-If he is terminated for any other reason he can
only get tax deduction for RM6,000 for every year
of employment prior to 1/7/2008
-After 1/7/2008, the amount is RM10,000 for every
year of employment


Chargeable Income, Tax Rates and Rebates
-Chargeable income is the gross income less the
relief and deductible expenses
-Rebates are given
for those with low income
(less than RM35,000)
For zakat, fitrah and other
religious dues
Rebate for personal
computers
Rebate for fees for
employment and visit passes


Separate and Combined Assessments
-Under the provisions of the ITA the incomes of
husband and wife are assessed separately unless
an election is made by either of them for
combined assessment.
-Where the wife elects for combined assessment
the zakat paid by the wife will not be allowed for
rebate and vice versa


Non-business Income

Dividends
-Corporate profits are taxed at 26% so is dividend
distributed to shareholders. Gross dividend = Net
Dividend/[1-tax rate(%)]
-Suppose Net Dividend is RM14800. Then Gross
Dividend is 14800/[1-0.26] = 20000.
Set off from taxable income
is 20000 14800 = 5200


Exempt Dividends
-Dividends paid by co-operative societies are tax
exempt.
-Dividends paid out of tax exempt account under
pioneer status etc
-W.e.f. 2004 resident individual, trust body,
cooperative society and Hindu joint family will be
exempted on income remitted to Malaysia



Interest
Interest earned is taxable
Only those interest accruing
from the list of exempted
interest will not be taxable
Rents
Rental income is taxable
Deductions from chargeable
income are allowed on
expenses incurred to
generate the rental

Royalties
-Sum paid as consideration for use of copyright,
artistic or scientific works, patents, designs or
models, plans, secret processes or formulae,
trademarks or tapes for radio or television
broadcasting or other like property or rights
-Royalties are taxed on a calendar year basis
-Expenses incurred on production of royalties are
deductible from taxable income

Non-Business Income
Income of Researches from
Commercialisation of Research findings
Researchers would be given 50% tax exempt on
income of above

Pensions
-Pensions are exempted if termination is due to ill-
health or on attaining compulsory retirement age
-Those having multiple pensions only the pension
with the highest value is exempted


TAXABLE INCOME
-No clear definition is given on income in ITA. We
have to use ordinary meaning of income
-Only income accruing in or derived from Malaysia
or received in Malaysia is subject to Malaysian Tax
Law. Otherwise no.









Sole-proprietor Business
Treatment of Losses
-Losses incurred in carrying out the business for a
particular year of assessment can be deducted
from all sources of income in the current year of
assessment.
-If the current year losses cannot be fully offset
due to insufficient income the unabsorbed potion
will be carried forward indefinitely to be utilised
only against statutory income from all business
sources

Capital Allowances
-Depreciation is not deductible but capital
allowance is. The list is provided in Schedule 3 of
ITA
-If the capital allowance cannot be fully deductible
because of shortfall in statutory income then it can
be brought forward to the future years
-the cost of vans and cars, machines, scaffolding,
ladders, tools, equipment, furniture, computers
and similar items you use in your business
-Expenditure on plant and machinery
-Items you used privately before using them in
your business You cannot claim for things you buy
or sell as your trade - these are claimed as business
expenses.
-If you buy on hire purchase, you can claim a
capital allowance on the original cost of the item
but the interest and other charges count as
business expenses.

Partnership Business
-Unlike corporations partnership is not taxed as an
entity but individual partners are taxed accordingly
-Divisible Income
=The divisible income of the partnership is the
provisional adjusted income less:
=Wages or salaries of the partners
=Interest payable to a partner
=Private expenses of the partners charged to the
partnership account

Partners Adjusted Income
-Adjusted income for individual partner is
-Share of divisible income/loss; and
-Remuneration, interest and private expenses
from the partnership

Allocation of Capital Allowance
-Partnership income is assessed as a business
source but the claim of capital allowances is
attributed to the individual partners respectively
according to their profit ratios. Capital allowance
can be brought forward


DEDUCTIBLE EXPENSES
In general the ITA contains one Section
(33) allowing deductions based on
actual expenses incurred in generating
the income for the business
It also contains a special Section (39)
prohibiting deductions


Principles of Deduction
-Revenue vs capital expenditure
-----Capital receipts are not taxable. By the same
token capital expenditure are not deductible
-Expenditure incurred by the taxpayer carrying on
a business
------Only expenditure related to business are
deductible. Expenditure incurred before
commencement of business or after cessation of
business are not deductible. Exceptions are given
where expenditure before start of business are
deductible as pre-operating expenses

Qualifying deductions under the ITA
Section 34 of ITA provides
special deduction under
specific situations
Timing of the expenditure
Expenditure must be
incurred during the period
when the income is brought
to charge
Expenditure wholly and exclusively
incurred in production of gross income
This is the cardinal
requirement of Section 33
ITA.

Deductions Prohibited Under the Act
Domestic and private expenses
Expenditure not wholly incurred in
production
Capital withdrawn and any sums
employed as capital
Contribution to non-approved scheme
Interest or royalties paid to non-
resident
Entertainment
Leave passage cost
Rent



Double Deductions
Employment of disabled employees
Insurance premium for import of cargo
Training of handicapped persons
Export credit insurance premium
Freight charges
Research expenditure
Contributions to approved research
institutes
Overseas expenses for promotion of
tourism
Expenditure for approved training
Expenses incurred in international trade
fairs
Fees incurred in packaging design
Expenditure on advertising Malaysian
branded products
Expenses on promoting brand names
Contributions to low cost housing fund
Expenses to promote export of services
Interest on loans to small business

Zakat and Labuan Offshore Company
With effect from year of assessment
2004 a tax rebate is allowed to Labuan
offshore company for any zakat
payment subject to a maximum of tax
charged

TAX PLANNING STRATEGIES
The Inland Revenue Boards policy is to
encourage voluntary compliance of the
ITA by a firm enforcement of the law
The Directors and those in charge of the
business should try to minimise the tax
payment by legal means i.e. through tax
avoidance

What is prohibited is tax evasion
which is to evade from paying tax
Tax planning under self Assessment
The onus to compute,
submit returns and pay tax
is on the taxpayer
Taxpayers need to maintain
proper documentation
Avoid artificial contrivance
which might fall foul of the
law
Corporate Tax Planning Strategies
Treatment of available losses
Treatment of Capital allowances
Trade debts taken over in a merger or
restructuring exercise
-Reasonable provisions for trade debts taken over
in a restructuring exercise should be made to
reduce tax. Once debts have been taken over, they
will be capital assets to the acquirer and any
subsequent bad debts arising from these trade
debts would not be deductible to the acquirer.
Any recoveries would not be
chargeable to tax
Valuation of stocks on transfer of stocks
on cessation
-Stock in trade of a company that is closing down
can be sold or transferred to another company for
valuable consideration to absorb losses

Cross charging for services rendered
-A loosing company can offer services that would
provide income to it so that the tax can be reduced
Transfer of profitable business into
companies with business losses
Interest restrictions on restructuring,
mergers
-Inter-company debts should be eliminated.
Sufficient dividend income must be payable by the
investee company to set off the interest expense.
A company in the group can be made the treasury
management company so that its interest income
is a business source

Transfer of section 108 balances.
-Credit available under sect.108 cannot be used by
another company to pay dividends.
-Available dividends balance can be transferred to
the successor company by way of dividend
payments where there are adequate distributable
reserves. This is know as dividend stripping
-Reserves and cash of companies with excess
sect.108 credits can be moved in a corporate
reorganization, restructuring or mergers to
companies which require the sect.108 credit.

1. What are the criteria used to evaluate a tax
system?
2. Define the following terms
Chargeable income
Scope of taxation
Tax rebates
Tax exemptions
3. Explain the following terms
Deductible expenses
Tax avoidance
Tax evasion
Capital allowance
4. Explain the advantages of tax planning.
5. What are some of tax planning strategies of
companies under self assessment?
6. Explain some of the non-business income.
LECTURE 12
ZAKAT
What does zakat entail?
Law concerning zakat
Zakat and its significance
Benefits of zakat
-Conditions under which zakat becomes obligatory
-Payer of zakat
-Conditions for zakat to be obligatory
-Recipients of zakat
-Those who cannot receive zakat
Types of zakat
Zakatul-Fitr
Zakat on wealth
Gold & silver
Livestock
Fruit and cereal
Merchandise

Zakat is the third pillar of Islam
The first being to bear witness that there is no
other God but Allah and Muhammad is His Prophet
and Messenger
The second is to perform the five daily prayers
The fourth is to fast in the Holy month of
Ramadhan
The fifth and last is to perform the pilgrimage to
Makkah, at least once in a life time, if one is
financially and health-wise able to do so.

WHAT DOES ZAKAT ENTAIL?
-From language perspective, zakat comes from the
word zaka which means blessing, growing,
pure, and good.
-Something is zaka means that something is
growing whilst when we apply it to a person, it
means the person is good.
-From Lisan al-Arab, the basic meaning of the word
zakat is pure, growing, blessing and
praiseworthy.
-All these meanings are used in the Quran and
Hadith
-However, the most commonly used meaning of
the word zakat is increase or growing.

From the perspective of the Islamic law, zakat
means a specified amount of wealth which has
been ordained by Allah to be given to the rightful
beneficiaries
-The amount of wealth that is taken from the
wealth is called zakat because what is taken out
will increase, will make it more significant and will
protect the wealth from destruction.
-And establish regular prayers and give the Zakat
and obey the Messenger so that you may receive
mercy (Surah AnNur 24:56)

-Allah says in the holy Quran, Of their goods take
alms, that so thou mightiest purify and sanctify
them, and pray on their behalf, verily thy prayers
are a source of security for them: And Allah is one
who hears and knows Surah At-Taubah (9) verse
104
-This verse specifically refers to the significance of
zakat to the person who pays.
-The first refers to the purification of the person,
the second refers to the sanctification of the
person and the third refers to the source of
security that the person will get from the prayers
made on them after the payment of zakat

-Purification of a person mainly refers to the
purification or cleansing of the heart
-It is by no means an exaggeration to say that
every man has some shade of wickedness in some
form in him or more appropriately in his heart.
-This is especially true with regard to wealth that
he has accumulated. In order to part with the
wealth that he loves and protects so much is not
an easy thing.
-Suppose we find someone in difficulty and in need
of assistance. We certainly would like to help him
as much as we can. But when the time comes to
take action, we tend to be calculative and in the
end may give away only a fraction of what we
intended to give at the beginning.

-The zakat that we have to pay is something that is
not easy unless we feel strongly that it is an
obligation and we have no choice but to do it
-However, when we fulfill the obligation Allah the
Almighty would generously compensate us even
though it is a compulsory duty
-The first compensation is in the form of purifying
or cleansing our heart. By parting with a fraction of
our wealth that we passionately love, Allah will
purify our heart from vices that are associated
with the love of wealth. These are greed,
miserliness, ostentation, pride, conceit, love of
influence, love of the world, envy, jealousy and
even rancor.

1. He/she must be a Muslim
2. The giver is free and not a slave
3. The wealth has reached the nisaab.
Nisaab is the minimum amount upon which the
zakat is due and is obligatory.
4. A minimum duration of one lunar year
(hawl) has passed since ownership of the wealth
concerned.
5. The owner of the wealth is known.
6. The wealth is fully owned (milkut
taamm).
7. When a person dies, his zakat due must
be paid from the inheritance before distribution. In
Islamic law, when a person dies, four payments are
made before his wealth is distributed to his
beneficiaries.
Debts which include zakat
that is due and owed
Wasiyyah the will
Expenses incurred for his
burial
Inheritance.

The eight (8) categories of people who can receive
zakat are:
1. Needy Muslims (faqeer/Fakir): the
needy are people who do not own
properties/wealth and they do not have any
means of income or an income less than half of
their daily needs.
2. Poor Muslims (miskin): they are people
who do have some means of income in that they
have a little land or some kind of employment but
is insufficient to meet their needs.
3. Aamil: they are people who are
appointed by the Religious authorities to collect
and administer the distribution of zakat.
4. Mu-allafatu quloobuhum (new converts
to Islam): they are people whose hearts are
recently inclined to embrace Islam, whose
knowledge of Islam is not enough as yet and still
learning the basic fundamentals of Islam.
5. Fir-riqaab: they are 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 due amount slowly in installments.
Helping to free captives of war.
The eight (8) categories of people who
can receive zakat are: (Contd)
6. Al-ghaarimeen: those who are in debt.
There are three categories of people in debt
namely:
-A person who is in debt because he tried to solve
a dispute between two people. This person can
receive zakat even if he is rich and able to pay.
-A person who is in debt because of self-interest
due to a permissible or impermissible need, he is
repentant and he wants to but unable to pay off
his debt. This person can receive zakat only when
he is unable to pay.
-A person who is in debt because he stood as a
guarantor for anothers debt whereas both he and
the debtor cannot pay off the debt concerned. He
can receive zakat if he is unable to pay the debt.
7. Fisabillah: they are those who strive in
the cause of Allah to ensure that injustice against
Muslims is stopped.
8. Ibnus-sabil: they are travelers
(musafirs) who are travelling for a pious or
permissible purpose. They are unable to continue
on their journey or to return to their respective
countries except with a little help by way of
money.


Those Who Cannot Receive Zakat
1. Non-Muslims
2. Rich people: rich people can however
receive zakat if they come under the ghaarim or
the amil or the fisabillah category.
3. The dependants of those who give the
zakat: since these people would have received
nafaqah (nafkah or maintenance) from the person
who is giving the zakat. A parent can give zakat to
his married or working son or daughter if they are
poor as they are no longer considered as
dependants.
4. The families of the Prophet (peace and
blessings be upon him).
5. Slaves cannot receive zakat because
they are already receiving maintenance from their
masters. Slaves in the mukaatab category can,
however receive zakat


TYPES OF ZAKAT
Zakat can be classified into two main
categories:
1. Zakatul-fitr which is
compulsory on every individual Muslim.
2. Zakatul-mal which is zakat
on wealth
Zakat al-Fitr is obligatory on every
individual Muslim except the poor and the needy.
Ibn `Umar said: "The Holy Prophet (peace and
blessings of Allah be upon him) enjoined the
payment of one Sa'a of dates or one Sa'a of barley
as Zakat al-Fitr on every Muslim, young and old,
male and female, free and slave." (Related by al-
Bukhari and Muslim)


TYPES OF ZAKAT (Contd): Zakat al-Fitr
This includes every Muslim alive from
the evening of the Eid al-Fitr until the
Eid prayer the next morning. In other
words if a child is born at any time
during that period or someone died at
any time during that period will be
obligatory to pay the Zakat al-Fitr. It
excludes a child born after the Eid
prayer or someone died before the
evening of the Eid.

As the above hadith indicated, the amount of
Zakat al-Fitr is one Sa'a of dates or barley. Sa'a is a
volume measure corresponding approximately to
the volume of 5 lb of good wheat
-The material of the Zakat can be dates, barley,
wheat, rice, corn or similar items considered as
basic foods. Abu Saeed said: "We used to give for
Zakat al-Fitr on behalf of every child, aged person,
free man or slave during the lifetime of the
Messenger of Allah (peace and blessing of Allah be
upon him) one Sa'a of food, or one Sa'a of dried
yogurt, or one Sa'a of barley, or one Sa'a of dates,
or one Sa'a of raisins." (al-Bukhari and Muslim.)
As is practiced today in most Muslim
countries, the amount is equivalent to the money
value of a full meal.

-Zakat al-Fitr has to be paid by the end of
Ramadhan. There are two times to pay Zakat al-
Fitr: either one or two days before Eid as 'Umar
used to do, or the day of Eid before the Eid prayer.
-Ibn `Umar reported that the Prophet (peace and
blessing of Allah be upon him) ordered them to
pay Zakat al-Fitr before they go out to perform the
Eid prayer.
-If Zakat al-Fitr is paid after the Eid prayer, it will
only be considered as regular charity.
-The Prophet (peace and blessing of Allah be upon
him) said: "If one pays Zakat al-Fitr before the
Salat (the Eid Prayer) it is considered an accepted
Zakat, if he pays it after the Salat, it is considered
an ordinary charity." (Abu Dawood.)

-The purpose of Zakat al-Fitr is to purify the one
who has fasted from any type of indecent act or
speech he might have committed while fasting. It
also helps the poor and the needy. Ibn Abbas said:
"The Messenger of Allah (peace and blessings of
Allah be upon him) enjoined Zakat al-Fitr on the
one who fasts to shield him from any indecent act
or speech and for the purpose of providing food
for the needy." (Abu Dawud and Ibn Majah.)

Zakat al-Fitr is to be given to the same eight
categories or people as in the other types of Zakat.
Some scholars say that the poor and the needy are
the most deserving ones since the Prophet (peace
and blessings of Allah be upon him) said as in the
above hadith that it had "...the purpose of
providing food for the needy."
Zakatul-fitr can be paid in the form of
cash equivalents as stipulated by
individual governing authorities.


TYPES OF ZAKAT: Zakat on Wealth
The following types of wealth come under the
zakat laws:
1. Gold and silver, which are inclusive of
currencies, paper money like stocks and
shares etc.
2. Gold and silver minerals retrieved from
the ground and buried treasure. Zakat
need not be paid for minerals and
buried treasure other than gold and
silver
3. Stocks-in-trade or business
merchandise
4. Livestock (al-anaam) which are camel,
cow, and the sheep only. Zakat need
not be paid for animals other than
these
5. Cereal or agricultural produce that are
nourishing and filing like wheat, rice
etc. i.e. the staple food of the people.
6. Fruit like the dates and the dried grapes
(sultanas, raisins or currants) only.
Zakat need not be paid for all other
types of fruit.

Gold And Silver
-Gold and silver that is mined
-Gold and silver that is found to be buried treasure
belonging to non-Muslims during the time of the
pagan Arabs.
-Gold and silver that is kept
-Jewelry
-Diamonds and precious stones
-Platinum and white gold
-Gold and silver utensils
-Gold and silver used for corrective or medicinal
purposes
-Gold bar account
-The commodity and futures market
-Stocks and shares
-Shares in a private company
-Money loaned to others
-Money in the bank
-Money in Central Provident fund or Employees
Provident Fund (Malaysia)


Nisaab for gold and silver
The nisaab for gold is twenty
(20) mithqaals or 85 grams
while in Malaysia it is also 85
grams.
The nisaab for silver is 200
dirham or 595 grams.
If the weight has just reached its nisaab or is just a
little over the nisaab, zakat of 2.5 percent becomes
obligatory. If it is just a little below the nisaab, the
zakat is not obligatory

-Calculation of general nisaab for currency
-The general nisaab for paper money, currency,
investments follows the nisaab for gold and silver.
-Identify the value of one gram of gold from the
goldsmith store.
-If the value of 1 gm of gold is USD30.00, the
nisaab would be:
USD30.00 x 85 = USD2, 550.00
If a person has USD4, 000 in the bank as savings
for the whole of lunar year and the USD4,000 had
been untouched, zakat is payable at 2.5% of
USD4,000 = USD100

Zakat rate for various categories:
-Gold and silver that is mined, 2.5 percent of zakat
is obligatory
-Gold and silver from buried treasure that belong
to non-Muslim during Pagan Arab times, or even
now, zakat is 20 percent is payable as soon as it is
retrieved
-Gold and silver that is kept,zakat of 2.5 percent is
obligatory
-Jewelry. Imam Shafiee and other scholars are of
the view that zakat is not payable on jewelry that
is being worn by women and children. It is payable
only on jewelry that is kept. Imam Abu Haniffah
(Haneefah) is of the opinion that zakat must be
paid for all jewelry either being kept or worn.

-When determining zakat on jewelry, it is based on
the weight and not the value.

Example 1
A gold bracelet weighs 900 grams. The current
value of gold being USD30.00 per gram, the value
of the weight of the gold itself is USD27, 000. Due
to its intricate design, it may be valued more at the
open market at USD30, 000. Zakat payable will be
on USD27, 000 only.




Example 2
A diamond-studded gold pendant
weighing 1000 gram and the market value of the
pendant may be USD40, 000. The weight of the
gold alone as determined by the goldsmith may be
750gram. If the current value of gold is USD30.00
per gram, the value of the weight of gold is USD22,
500 and zakat payable is on USD22,500.

-Diamond and precious stones. Zakat is not
payable on diamond and precious stones. If the
diamonds and precious stones are set on gold or
silver, then zakat is obligatory on the weight of
gold and silver.
-Platinum or white gold. Zakat is not obligatory
on platinum or white gold although it may be
more expensive then gold. The reason being
platinum is not gold.
-Gold and silver utensils. It is haram for men and
women to use gold or silver utensils. When there
are gold and silver utensils in the home as part of
an inheritance or as an item of decoration, zakat is
obligatory on it.

-Gold and silver used for corrective or medicinal
purposes. It is permissible for both men and
women to use gold or silver for medicinal or
corrective purposes like using gold to cap teeth.
Zakat is not payable for gold and silver used for
medicinal or corrective purposes.
-Gold Bar account. Banks do offer Gold Bar
Accounts. A customer who is interested in
investing in Gold Bar Account can buy gold bars of
1 kg or less through the bank at a price
predetermined by the bank. These investors buy
when the price is low and sells when the price is
high thus making a profit. Zakat is payable on the
transactions at the current market price since he
can get the value immediately.

-Stock and shares. Most scholars allow trading of
stock and shares. The money used to trade should
not be borrowed unless he can repay the loan
from other sources of income. Stock and shares
are considered paper money. Zakat is paid for
stock and shares after one lunar year of trading
should the value reach the nisaab. Zakat is paid on
the current value of the shares because its value
can be determined. Manipulation is haram.

Loan (ad-dayn). Zakat must be given
on money that is loaned out. Four categories are
being considered:
-Money is loaned to debtors who are trustworthy,
who acknowledge the debt and who are able to
pay off the debt when asked to. Zakat is obligatory
(wajib) and payable after a lunar year should the
loan reach the nisaab.
-Money is loaned to debtors who acknowledge the
debt but are poor and unable to pay off the debt
immediately when it is asked for. Zakat is payable
provided it has reached the hawl (one year) and
exceeds the nisaab. If he cannot pay immediately,
then the loan is payable upon him receiving the
repayment and he has to pay for all the past years.

-Money is loaned to a debtor who acknowledges
the debt but delay in paying the debt or pay in
small installments over a period of time. Zakat is
payable immediately. If payment is in installments,
zakat is payable immediately on the outstanding
loan.
-Money is loaned to a debtor who denies the debt
altogether. Zakat is not payable as long as the loan
is not paid. Once the loan is paid zakat is payable.
-Landed properties. Zakat is not paid on landed
properties.
-The central provident fund or employees
provident fund or pension fund. Zakat is payable
upon withdrawal.

Livestock
Livestock that comes under the zakat
are sheep (including goats), cows
(including buffalo) and camels.
Conditions for the zakat:
Its feed is through grazing in the open
field. Zakat is not obligatory (wajib) if
the owner has to purchase the feed or
brought to it since the owner has to
incur cost in buying the feed and hiring
people to bring the feed.
It is not used as a working animal. If it is
used as a working animal, zakat is not
obligatory

Payee is a Muslim
Payee is a free man
Livestock owned has reached the
nisaab
Reached the hawl of one lunar year
Owner is known
The livestock is completely owned
(milkut taam)







Fruit and Cereal (Agriculture)
Zakat is paid only on dates and dried
grapes which may be currants, raisins or sultanas.
All other fruits are exempted.
As for Cereal, zakat is paid only on
cereal that is the staple food of a country that can
be stored for a long time like paddy and wheat.
Zakat is not payable on vegetables and other fruit.

There are 4 conditions for zakat to be
payable on fruits and cereals:
1. It is the staple food that which
nourishes and is filling when eaten by
itself during normal times
2. It is already ripe, harvested and stored
3. It is in the form of seeds
4. It was cultivated that is it does not grow
naturally or in the wild.

Other conditions:
1. The payee is a Muslim
2. The payee is a free man
3. The fruit or cereal has reached the
nisaab
4. A minimum duration of one lunar year
has passed since ownership of the fruit
and cereal
5. Its owner is known
6. The fruit or cereal are fully or
completely owned (milkut taam)
The Nisaab for fruit and cereals without
husk is 5 wasaq or 300 saa or 930 litres or 645
kilos.

-Zakat for fruit and cereal is 10 percent, if the
cultivation was watered with rainwater or with
water that is channeled from rivers or lakes.etc.
however if the crops were watered by means of
using animals or by employing human labour to
carry the water, then zakat is only 5 percent.
-Zakat for cereal with husk according to the
National Religious Council of Malaysia is 10 wasaqs
or 1300 kilograms.

Zakat on Business
Merchandise or business stocks are
goods owned by an individual for the purpose of
trade that are yet to be sold. Stocktaking are
normally carried out at the end of lunar year of the
business since its commencement. If the value of
the merchandise reached the nisaab at the end of
lunar year, then zakat is payable even though the
merchandise had not reached the nisaab at the
beginning of the year or in the middle of the year.
If the merchandise reach nisaab at the beginning
of the year and later at the end of the year it did
not reach the nisaab, zakat is not payable
(obligatory or wajib). It can conclude that for
merchandise the value of the stock at the end of
the lunar year that will determine whether the
nisaab is reached or not.

Conditions for obligatory (wajib) zakat for
business merchandise.
1. There was intention to do business with
the merchandise or goods from the
capital employed by the firm
2. There was an exchange through buying
with cash or credit. (e.g. money for
goods)
3. There was no intention to keep the
stock for personal use or non business
activities
4. The business does not deal in the
buying of gold and silver as gold and
silver have their own zakat laws.
5. One lunar year has passed since the
business commenced
6. The value of stock had reached the
nisaab.

Nisaab for business merchandise
If the merchandise or goods were
purchased with gold or silver (gold and silver are
considered money), their nisaab will be 20
mithqaals or 85 grams of gold or its equivalent.
Therefore zakat is 2.5 percent. The year-end value
of the merchandise should be based on the
purchased price of the merchandise or the
historical cost of the stock. The reason why zakat
on merchandise is obligatory is because the stocks
can be turned to cash and is therefore considered
as wealth that the individual owns. Since the
stocks are purchased at numerous intervals, a
reasonable estimate of the value of the stock will
be used to determine the nisaab and the zakat
payable. Zakat is payable even though the goods
were purchased on credit.

ZAKAT ON OTHER FORMS OF WEALTH
-It is interesting to note that the Holy Prophet
(peace and blessings of Allah be upon him) did not
charge zakat on horses and mules or asses. The
main reason is that both these animals were the
means of transport. Horses were also used in wars.
They were not traded freely as other articles.
-However, during the time of the Second Caliph,
Umar ibn al-Khattab (may Allah be pleased with
him) he ordered the people to pay zakat on horses.
The main reason was that horses became a more
common article of trade and hence are paid as a
wealth on business or trade and not as livestock.
Although there was no apparent rule made by
Umar on mules or asses, but if such animals are
common articles of trade, then one should pay
zakat on the business of it and not as livestock.

-We know also that there is zakat on honey as an
agricultural product. The reason is honey is
harvested any time and does not require any effort
to produce it except the effort to locate it. Like
agricultural produce which does not need any
irrigation by the farmer, zakat is paid out at
harvest time as long as there is sufficient minimum
amount which is the nisab. The rate for such
agricultural product is 10%. Hence, the rate for
zakat on honey used to be 10% as well. However,
these days, honey is being farmed, which requires
a place to keep the bees and expenses to feed
them. Upon harvesting, zakat needs to be paid out
of the total amount of honey, if it fulfills the
amount of nisaab. But the rate of zakat on such
honey should be reduced to 5% just like
agricultural produce that needs irrigation.

-We also note that as far as agricultural produce is
concerned zakat is only liable on food grains but
not on cash crops like rubber, palm oil, cocoa,
coffee, tea, etc. we also know that such cash crops
produce more wealth than food grains. It would
not be fair for farmers of food grains to pay zakat
whilst the wealthier corporations of huge estates
do not have to pay any zakat on the trading of
their estate produce. These agricultural products
are liable for zakat as articles of trade at the rate of
2.5%.



THE ZAKAT FRAMEWORK
From the examples of zakat on horses,
leather products, other cash crops,
chicken and ducks, and even honey, we
can discern that there is a framework
by which all items of value are liable for
zakat. This framework is based on the
five main types of zakat namely
1. Zakat on Business or Commerce
2. Zakat on Cash and Savings
3. Zakat on Agricultural Produce
4. Zakat on Mining; and
5. Zakat on Livestock



-There are no other independent classifications of
zakat, except these five. Hence, there are no other
types of zakat that can be introduced. However, to
stick to only those items that have been stipulated
and practiced by the Holy Prophet (may peace be
upon him) would not be fair when practices
changed. Hence, the Second Caliph, Umar Ibn
Khattab (May Allah be pleased with him) reasoned
that as long as the item of value corresponds in
character or nature as any of the five
classifications of zakat, then that item is liable for
zakat in accordance with that classification. This
has been the practice of Umar Ibn Khattab (may
Allah be pleased with him) and considered as a
valid precedent which has been unanimously
followed by all jurists. The three famous examples
are when he introduced zakat on horses and
leather as articles of trade and honey as an
agricultural product.

Finally, zakat which is compulsory for
every financially able Muslim to pay out
of his or her wealth in accordance with
the Shariah injunctions is certainly a
form of purifying not just ones wealth
but indeed oneself from any misdeeds
that he may have knowingly or
unknowingly committed in the course
of the year.
Purifying wealth is not just the giving
away part of the wealth that may not
have been generated or obtained in a
purely Shariah-compliant way.





















WEALTH PLANNING AND MANAGEMENT
LECTURE 13
WAQF
waqf and its implications
Waqf and its attributes
Definition of waqf
Evidence from the Quran &
Sunnah on the legitimacy of
waqf
Characteristics of waqf
The beneficiaries
Waqf khairy
Waqf ahli
Waqf mushtarak


Waqf and its attributes (Contd)
Five conditions for the
validity of waqf
Three types of waqf assets
Restrictions to waqf
Ten stipulations for the
creation of waqf
Mode of financing for the
immovable waqf
Movable waqf

CONCEPT OF WAQF AND ITS IMPLICATIONS
-Waqf is basically an endowment where an asset
(preferably immovable such as land, building) is
given to charity on condition, it should not be sold,
transferred to another owner, given away, but
invested with the principal amount in tact and only
the proceeds are being used for some specified
beneficiaries.
-The property will remain in perpetuity so that
only the proceeds are being used for the
beneficiaries

-The moment the owner of an asset pronounces
even verbally that he is giving away a part of his
property as waqf, it is valid and he has no more
authority over that piece of property. Its
ownership immediately is transferred to Allah. He
cannot claim it back.
-He then must appoint a trustee which can be an
individual or a group of people and specify who
are the beneficiaries.

-The implication is that the principal or the
property should remain for charity in perpetuity so
that the proceeds will perpetually be used to
benefit the beneficiaries.
-This makes waqf an important institution that
could generate economic activities and earnings to
assist the beneficiaries. As more properties are
being given as waqf, the amount of asset will grow,
so will the proceeds and the beneficiaries.
Examples:
University of Al-Azhar in
Cairo is the best example
Land for religious schools,
mosques, cemmetry etc

WAQF AND ITS ATTRIBUTES
All waqf properties must have the following three
important attributes or features:
-Irrevocability: once a property has been
pronounced to be given as waqf, it cannot be
revoked. The owner has given up his property
rights over the property. The property immediately
belongs to Allah.
-Perpetuity: it must be continuous forever. It
cannot change status, cannot be sold, mortgaged,
transferred, etc.
-Inalienability: cannot change ownership in
whatever way

The term waqf (plural awqaf and habs (plural
ahbas) or vakif (Turkey) or wakaf (Malaysia)
means holding and preserving a certain
philanthrophy sadaqah (charity) with the
intention of prohibiting any use or disposition of
the property outside the specific purposes to
which the property is dedicated, in such a way that
it cannot be bequeathed, or sold.

There is a consensus among the fuqaha (Muslim
jurists) regarding the definition which means the
confinement of the ayn (property) from the
ownership and the dedication of its usufruct to
charitable purposes. There are some disagreement
especially on the permissibility and revocability of
the waqf.

Evidence from Quran and Sunnah on the
Legitimacy of Waqf
-There is no direct injunction of the Quran
regarding waqf, but there is a hadith about
Sayyidina Umar Ibn Al-Khattab (May Allah be
pleased with him) who received a property from
his participation in the battle of Khyber and he
wanted to know how to use the property such that
he would be close to Allah. The Prophet (pbuh)
said, stop the principle and distribute the
proceeds. Sayyidina Umar then declared that the
property will neither be sold, transferred,
mortgaged or given away but it will remain in
perpetuity, to generate proceeds that will be used
for charity.

TYPES OF WAQF
Types of waqf are defined by the kind of
beneficiaries it is intended to benefit. Essentially
there are three types of waqf:
1. Waqf Khairy: for good of the
public. It is meant for
general good. No particular
beneficiary or activity has
been identified. The
proceeds can be used for
anything that is good.
2. Al-Waqf al-Dhurri, Al-waqf al-ahli and waqf al-
awlad : This type of waqf has a definite purpose.
Either the beneficiaries have been specified or the
activity of use has been specified. The proceeds
cannot be used for any purpose except for what
has been intended by the giver. The beneficiaries
are normally members of the family or the heirs of
the donor. Hence it is also know as family waqf.

Five Conditions for the Validity of Waqf
1. Founder must of age, in full control of
himself mentally and physically. He
must decide to be the donor oh his own
freewill
2. The property must be movable or
immovable
3. The founder must appoint the trustee
who could be an individual or a group
of individuals
4. The beneficiaries must be specified by
the founder
5. Creation of waqf can be verbal or
reduced to writing

Restrictions to Waqf
Waqf must have the three attributes
mentioned earlier. These three
attributes define the restrictions to
waqf. They are:
Irrevocability
Perpetuity
Inalineability

Ten Stipulations for the Creation of Waqf
1. Ziyadah (increase) and Nuqsan
(decrease)
The founder can increase or decrease
the share of a beneficiary under certain
circumstances. E.g. to increase the share of one
beneficiary (hospital) and decrease the share of
another beneficiary (school)
2. Ikdal (addition) and ikhraj (removal):
The founder or trustee may add a new
beneficiary or remove another. It allows
flexibility
3. Ita (granting) and Hirman
(Dispossession): it allows the founder or
trustee to grant all or of a portion of
the property to whoever he chooses for
some period and to dispiossess
whoever he chooses.

4. Taghir (replacement) and Tabdil
(conversion): Taghyir gives the founder
the right to replace use of the waqf
revenue. the revenue can be channeled
to purchase hospital equipment instead
of maintenance for the waqf property
whereas Tabdil gives the founder the
right to change the waqf property itself.
In this situation whereby the waqf
property an agricultural land becomes
unproductive, the founder can change
its function and construct a house
which can give revenue.
5. Istibdal (substitution) and Ibdal
(exchange): Ibdal is the actual selling of
non-profitable waqf property while
Istibdal is the purchase of another
property to replace the former waqf
property.

Mode of Financing for Immovable Waqf
1. Hikr (long term lease)
2. Al-ijaratain : (lease with dual payment)
3. al-istibdal (substitution): This method
emerged from the fact Abu Bakr
Ahmad b. Omru al-Shaibani al-Khassaf,
(d. 261A.H.), Ahkam al-Awqaf, Beirut:
Dar al-Kutob alIlmiah, n.d. 21
4. al-mursad mode: in which an advanced
lump sum is paid by the lessee to be
credited by the waqf department
toward the agreed upon periodical rent
applicable after reconstruction.

Movable Waqf
-As for investing ladies jewelry which is created as
waqf, this was clearly explained by the action of
one of the wives of the Prophet (peace and
blessings of Allah be upon him) who donated her
jewelry as waqf.


-She used to rent her jewelry and gives its rent to
her relatives, al-Khattabs family, i.e. she
appointed herself to be the trustee of her jewelry.
Moreover, she did not pay zakah on it. This also
shows that no zakah should be paid from the waqf
property.

-In case the waqf property is not in a liquid form,


according to the views of Imam al-Shafii, Imam
Malik and Imam Ahmad b. Hanbal, everything
whose sale is valid and which can be renewed from
time to time by its usufruct, or otherwise, can be
validly dedicated.

Moreover, according to the view
of Muhammad b. Abdellah al-Ansari, who was a
disciple of Imam Zufar, measurable and weighable
waqf property could be sold and its proceeds can
be invested in mudarabah, i.e. changing its status
from crops to cash waqf.

-Another view based on the authority of the above
assumes that if a person says this measure of
wheat is waqf on condition that the same should
be lent to such of the poor who have no seed grain
with them, so that they may cultivate the same for
themselves and then the quantity lent should be
taken back from them after the crops ripen and
the same should be lent to others, and so on in
this way the principle of the perpetuity of the waqf
will be clear.
-In the case of this measure of wheat the
identical wheat cannot be preserved for ever; but
this absence of perpetuity is no objection against
the waqf of wheat.

-In the case of liquid form (cash waqf), the
mudarabah partnership has been recommended
by Muslim jurists. According to the view of Imam
Zufar, who approved the validity of darahim
(money) to be dedicated as waqf as already stated,
he clarified that the money deposited as a waqf
can be invested in mudarabah and the return to be
used for a pious purpose. Abu al-Suud wrote a
treatise defending the cash-waqf on the basis of
istihsan and taamul and taaruf (accepted and
practice). He also issued a fatwa that cash waqf
can be invested through mudarabah, and its
revenue is to be devoted for pious purposes.

-From the above, we realize that most of the
Muslim jurists discussed the ways of investing in
and financing waqf properties only with one aim,
that of ensuring its perpetuity.

HISTORY OF CASH WAQF
-The cash waqf was a Trust Fund established with
money to promote services to mankind in the
name of Allah. According to Muslim jurist such as
Imam Zufar who had approved this type of waqf
had showed how cash waqf can be invested in
mudharabah activity and the revenue generated
from this money can be invested in the different
charitable purposes.
-This approval was followed by the other schools
of law who also permitted this type of waqf
-The Ottoman courts approved these endowments
as early as the beginning of the 15
th
century.
According to Cizakca (2000), by the end of the 16
th

century, the use of cash waqf had become
extremely popular all over Anatolia and the
European provinces of the empire, which
controlled much of Southeastern Europe, the
Middle East and North Africa.
-By minimizing the problems of red tape and
bureaucracy, schools, libraries, water conduits,
bridges, roads, ports, lighthouses, and pavements
were built. The health sector also benefited from
this new waqf system, which is based on movable
assets (manqul), and was not excluded from
reaping the benefits of cash waqf funds.

-The available funds were used to build hospitals
and cover the administrative and management
expenses of the said health centres, including the
payment of salaries, and repairs and maintenance.
For example, the Shishli Children Hospital in
Istanbul which was founded in 1898, was built
using endowed money.
-As with other jurisdictions, during the
introductory stages of cash waqf, most if not all
cash waqf funds in the Ottoman Empire were
established by wealthy individuals, interested to
express their piety through the endowment of
money that was later used to provide various
facilities and infrastructure.

-According to Toraman and Tuncsiper, cash waqf
funds were also leveraged upon as a vehicle to
provide social security. For example, many cash
waqf funds were established under the name of
Orta Sand (middle fund) among the members of
Yeniceri Ocagi (Janissary Barrack) and it executed
mutual aid and social security services among
those members. Other examples of such solidarity
associations are:
------Eytam sandiklari (fund for orphans) This
foundation is used to reserve the rights of orphans
on inherited properties until they reach the legal
age;
-----Menafi Sandiklari This foundation, which was
founded by farmers, worked in a similar manner to
money foundations;

-Memleket The function of this foundation is
similar to Menafi Sandiklari;

-Other foundations The money collected was
used for a variety of purposes, such as burial
services, supplying funds for educational activities,
supplying food, fuel and clothes for unemployed
members and emergency assistance to victims of
natural disasters.

Thus, the modus operandi of a cash waqf fund
during the Ottoman Empire can be summarized as
follows:
-The cash waqf capital was lent to borrowers. In
the agreement, a guarantor (usually a family
member or a close relative) is identified;
-After a certain period of time (usually a year), the
borrowed amount is returned to the cash waqf
fund plus an extra amount (return from the
financing activity). In the event of default, the
guarantor is liable to pay the debt;

-The return from the financing activity is used for
religious and social purposes; and
-If the return exceeded the expenses (including
deductions for expenses incurred by the mutawalli
or nazir and any taxes, the remainder was carried
forward and added to the original capital.
From the above, we can conclude that the capital
of cash waqf funds would be increased when the
return from the financing activities (ROF) exceeded
the expenditure. The profit from operations, i.e.
ROF less expenses is added to the original capital.


Contributions of Cash Waqf in society
According to Toraman, cash waqf had a very
important role in the Ottoman market economy in
the following ways:
----Using the money allocated to the foundation to
supply a continous income, to purchase real estate
properties like houses, land, shops schools,
hospitals, etc;
----Revenue generated from cash waqf used to
finance education, public works, health and
religious services;
---To give aid to widows and debtors;
---To feed and clothe students;
---To supply ink for the ink holders;

-----To pay for the cost of goods such as glasses
and bowls that are accidentally broken by
servants;
----Avarz Awqaf: This cash waqf fund provided
financial aid to citizens of a certain district or
village that could not afford to pay their taxes,
providing for common expenses of a village or a
district, providing sustenance for people who were
not able to work, and construction, maintenance
and repairing of village and district roads; and
------Poverty alleviation: During the Ottoman
Empire period, cash waqf funds were established
in order to cover the expenditures of poor people
and in this manner, fight poverty. Money was also
endowed to finance necessary services like feeding
and clothing, and providing fuel for the
incarcerated poor and their families.

Modern Applications of Cash waqf in Malaysia
-In Malaysia, each state is governed by its own
Islamic enactment that governs amongst others
regarding the implementation and the application
of all types of waqf: movable, immovable, public
or specific.
-Most waqf in Malaysia is dominated by
immovable waqf as instruments to express piety
and providing various social services to the society.
-However, in the early 1990s, waqf based on
movable asset, specifically cash, was beginning to
gain popularity and acceptance by the community,
as a tool to source for funds that will later be
invested. The returns from the investments would
then be leveraged upon to finance charity projects.

In Malaysia four types of cash waqf
models are followed:
waqf shares model;
waqf takaful model;
direct and mobile model;
and
corporate cash waqf model.

As stated by the State Islamic Religious Councils,
the main objectives of the waqf shares scheme are
as follows:
-To inculcate the culture of performing waqf;
-To provide an alternative and platform for
Muslims to be involved in waqf;
-To encourage the Muslim society to recognize
waqf as a viable tool to enhance the economic
position of the ummah; and
-To encourage Muslims to co-operate under the
concept of taawun.

Since its implementation in the early 1990s, the
waqf shares scheme has been able to play its role
in garnering the needed funds to engage in
projects that benefit the community, such as:
-Development of existing waqf land;
-Construction of mosques, religious schools,
physical amenities for the Muslim community and
maintenance of religious infrastructure;



-Social development, such as the establishment of
education funds, human capital development and
financing medical facilities;
-Commercial development, such as real estate
development and the purchase of land parcels
with the potential to be used for agricultural or
residential projects;
-Purchase of a vehicle used for dawah;
-Financing the operations of tahfiz schools (schools
for memorizing the Holy Quran); and
-Financing the operations of fardhu ain classes.

As at October 2007, the states that
have implemented the cash waqf
schemes based on the waqf shares
model are listed below:
Selangor;
Johor;
Melaka;
Pulau Pinang;
Pahang;
Terengganu; and
Negeri Sembilan

Waqf Shares Model for Non-Profit Organisations
YADIM
YADIM is a missionary
organisation. The waqf
shares issued at RM1.00
each was for a specific
purpose, which is to build
YADIMs training centre that
is expected to cost RM14
millions.
YPEIM
YPEIM is a charitable
organisation, meant to help
the social development of
the Muslim populace.
Various forms cash waqf
(including waqf shares) were
developed to collect funds
that are to be distributed for
various purposes

Issued by Syarikat Takaful Malaysia
where the donors participate by
contributing RM1.00 a month over the
takaful plan period. Upon maturity, the
donors or participants will sign a
declaration to agree to give away the
takaful fund as waqf for various
purposes


Corporate Cash Waqf Model
Issued by Johor Corporation in the form
of dividends from shares of three public
listed companies. The dividends are
distributed into two parts: 70% to Johor
Corporation for various human
development projects, and the other
30% for various socio-economic
development purposes.

Waqf has regained a prominent place
once again in the Islamic world as more
and more countries are looking at Waqf
as avenue for economic development
by unlocking ideal waqf assets for
development and income generation
possibilities. Other countries such as
Turkey, Sudan, Singapore, Indonesia,
Bahrain, Kuwait, Pakistan, Bangladesh,
United Arab Emirates to name a few
have cash waqf models in place. Cash
waqf models were also used by Islamic
Development Bank (IDB waqf fund) as
well as Opec (Opec fund for
International Development). Therefore
the cash waqf model directly drives the
economic development of the Muslim
societies.



























Lecture 14
Issues Related to Wealth Planning and
Management

Users and Providers of wealth Planning
Services
Organisations and Governing Bodies
Regulatory Control
Ethics and code of Conduct
Professional Responsibility

USERS AND PROVIDERS OF WEALTH PLANNING
SERVICES
Wealth planning and management as a
comprehensive programme is still relatively new.
-People do plan and manage their wealth in a small
and ad hoc way but not in a comprehensive way.
It used to be the High Net Worth Individuals
(HNWI) who find it useful

Users of wealth planning services are
normally individuals (HNWI)
Corporations usually do it on behalf of
individuals or for their clients
Providers of wealth planning services
are usually firms who can be sole
proprietorships or a group of
individuals or large corporations

Wealth planning and management services cover
different needs at various stages of life. Among
those needs are:
Buying of shares and stocks
Purchasing of Real Estate or
cars
Income Tax
Banking services
Insurance or Takaful
Trustee services

Technically everyone requires some form of
wealth planning and management
-When someone starts to work and earn a salary
he needs to plan how to spend it so that he would
have enough till the next pay day or even have
something to save
-When he gets married he will need to figure out
how to spend on various needs
-When he gets a child he may have to look deeper
into his plans

-When one have a bigger family or when he will be
due for retirement naturally he should have
planned to have enough for his retirement such
that he need not change much of his lifestyle.
-For Islamic wealth planning and management the
considerations are similar but the tools must be
Shariah compliant. This includes wealth generation
instruments as well as well protection and
distribution. It should also include wealth cleansing
(zakat)

Providers of Wealth Planning
and Management Services
The providers of Islamic wealth planning and
management services include:
Islamic Banks
Conventional Banks with
Islamic windows
Insurance /Takaful Agents
Unit Trust Agents
Trustee Agents
Others


ORGANISATIONS ANDGOVERNING BODIES
Financial Planning Association with 17
countries offering Certified Financial
Planner (CFP) awarded by Financial
Planning Standards Board (FPSB)
FPSB founded in 1990, has 17 affiliate
members who have the right to award
the CFP. Malaysia is included in the 17
members.

-Wealth Management is relatively new and most
governing bodies are in USA
-International Association of Financial Planning
(IAFP) was formed in 1969 to promote wealth
management, conduct educational and training
programs for members and to promote ethical
conduct among practitioners
- In 1998 Society of Financial Services Professional
(SFSP) was formed and in 1999 the National
Association of Insurance and Financial Advisers
(NAIFA) was formed

-On the education side, College of Financial
Planning was formed in 1972 to provide the
Certified Financial Planner (CFP) program
-The CFP award was later transferred to Certified
Financial Planner Board of Standards.
-In 1973 the Institute of Certified Financial
Planners was formed and later the American
College created the Master of Science in Financial
Services (MSFS) which later awarded the
Chartered Financial Consultant (ChFC)

-In UK the Personal Finance Society is the main
organisation responsible for the financial planning
industry. Together with the Chartered Insurance
Institute (CII) it has decided to adopt the Chartered
Financial Planner (CFP) designation as the
benchmark for its members

-In Malaysia the proper training was started in
1990s when Malaysian Insurance Institute (MII)
brought Life Underwriter Training Council (LUTC)
Fellowship program to conduct a module called
Fundamentals of Financial Services.
-Later MII brought American Colleges Chartered
Financial Consultant (ChFC) program into Malaysia

-The Malaysian Financial Planning Council (MFPC)
was later formed which confers the Registered
Fianncial Planners (RFP) designation. The initial
memebrs are the Life Insurance Association of
Malaysia (LIAM), the National Association of
Malaysian Life Insurance and Financial Advisors
(NAMLIFA) and the Malaysian Insurance Institute
(MII). Since then the MII no longer provides
education and certification of the ChFC
designation

REGULATORY CONTROL
Public confidence in wealth management depends
on the soundness of financial infrastructure
-For this purpose the following are the key
regulations affecting wealth planning and
management industry:
----Banking and Financial Institutions Act (1989)
-Securities Commission Act 1993
-Securities Industry (Central Depository) Act 1983;
and to some extent the Insurance Act 1996 and
the Takaful Act 1984




REGULATORY CONTROL (Malaysia)
BAFIA under Bank Negara Malaysia provides
regulation for the banking and financial services
industry
BNM objectives are:
-To issue currency and keep reserves to safeguard
value of currency
-To act as a banker and financial advisor to the
government
-To promote monetary stability and sound
financial structure
-To influence credit situation to the benefit of the
country

With regards to the wealth planning and
management industry, BNM also announced the
regulatory framework for the licensing of Financial
Advisors after the enactment of the Insurance
(Amendment) Act 2005 (IA) and the Insurance
(Amendment) Regulations 2005.

REGULATORY CONTROL (Malaysia)
The Licensing Requirements for Financial Advisors
(FA) are:
-FA will be licensed under the Insurance Act as a
new category of intermediaries. In addition to
insurance products, they can advise and market
other financial products
-FA must be a body corporate with minimum paid-
up capital unimpaired by losses of RM100,000 and
majority Malaysian-controlled
-FA must have minimum professional indemnity
insurance of RM200,000
-Licence will be renewed annually subject to
compliance with licensing requirements
-The FA is also subject to other requirements such
as changes in shareholding, approval for
appointment of CEO and Directors, opening of
branches and submission of annual returns
-Representatives of FA must be approved by BNM
and have specific qualifications as required by
BNM
-The use of Financial Advisor is restricted only to
those awarded the licence


REGULATORY CONTROL (Singapore)
In Singapore, the sole governing bodyregulating
the wealth planning and management industry is
the Monetary Authority of Singapore (MAS)
Established in 1971 under the Monetary Authority
of Singapore Act 1970, it is the sole authority to
regulate all elements of monetary, banking and
financial aspects in Singapore.

-MAS is given powers to act as banker to and
financial agent of the Government. It is to promote
monetary stability and formulate credit and
exchange policies conducive to Singapores
economic growth
-In April 1977 it took over the regulation of the
insurance industry and in 1984 the Securities
Industry Act (1973)
-MAS now administers the various statutes relating
to money, banking, insurance, securities and the
financial sector in general. Following the merger
with Board of Commissioners of Currency on 1
st

October 2002 it now assumes the function of
currency issuance.
-Financial Advisors Act provides for the regulation
of the wealth planning and management industry
in Singapore

Basically MASs objectives are:
-To conduct monetary policy and issue currency,
and to manage the official foreign reserves and the
issuance of government securities;
-To supervise the banking, insurance, securities
and futures industries, and develop strategies in
partnership with the private sector to promote
Singapore as an international financial centre; and
-To build a cohesive and integrated organisation of
excellence


REGULATORY CONTROl(United Kingdom)
-In UK, the Financial Services and Markets Act 2000
provides for the regulation of the wealth planning
and management industry through the Financial
Services Authority (FSA).The FSA is an independent
non-governmental body, a company limited by
guarantee and financed by the financial services
industry.
The Treasury appoints the FSA Board

The four main objectives of FSA are:
-Maintaining confidence in the financial system;
-Promoting public understanding of the financial
system;
-Securing the appropriate degree of protection for
consumers; and
-Reducing the extent to which it is possible for a
business to be used for a purpose conneced with
financial crime.

ETHICS AND CODE OF CONDUCT

In order to ensure that the wealth
planning and management industry is
professionally run, it was decided to
adopt a code of conduct
Two of the most comprehensive codes
of conduct are the ones adopted by
Financial Planning Association of
Malaysia (FPAM) [CFP Code of Ethics
and Professional Responsibility] and
Society of Financial Services
Professionals (SFSP) [Code of
Professional Responsibility]


CFP Code of Ethics and
Professional Responsibility
There are 7 principles contained in the
CFP Cod of Ethics, namely:
1. Integrity
2. Objectivity
3. Competence
4. Fairness
5. Confidentiality
6. Professionalism
7. Diligence

SFSP code of Professional Responsibility
consists of:
1. Fairness
2. Competence
3. Confidentiality
4. Integrity
5. Diligence
6. Professionalism







Islamic Ethics and Code of Conduct

These are from the two main sources of
Islamic teachings: the Quran and the
Prophetic Traditions
Knowledgeable
Sincerity
Truthfulness
Trustworthiness


PROFESSIONAL RESPONSIBILITY
The word professional has been used
in many different ways
Professional athlete, golfer,
wrestler may denote one
who is skilled and get paid
for what he is doing
A professional makes a living
out of playing golf for
example
Some occupations are
considered as professions:
doctors, engineers, lawyers,
architects, etc

What the professionals have in
common are
Job skills and devotion
Reliability
Dedication
Thoroughness
Dependability
A commitment to providing
good service as well as the
awareness that his quality of
service affects the
reputation of others in the
same profession

A wealth planning and management
professional, Burke Christenses, JD,
CLU, a former vice president of the SFSP
suggested that A professional is a
person engaged in a field that requires:
1. Specialized knowledge not
generally understood by the
public
2. A threshold entrance
requirement
3. A Sense of altruism, and
4. A code of ethics




1. Describe the users and providers of wealth
planning services
2. What in your opinion is the most
important function of governing bodies in the
wealth management industry?
3. Is there really a need for regulatory
control when you find that the banking and other
financial sector has gone into deregulation
instead?

4. Why do you think ethics and the code
of conduct is considered essential in the wealth
planning and management industry?
5. Do you agree with Burke Christensens
suggestion on Professionalism and
why?