INTRODUCTION (2%)

CONTENTS (10%)

ETHICAL (2%)

CONCLUSIONS (3%)

REFERENCES (3%)

TOTAL (20%)

IMU553 BUSINESS MATHEMATICS FOR MUAMALAT

GROUP ASSIGNMENT
TITLE : CHAPTER 1 - CHAPTER 4

GROUP 6
PREPARED BY :

FULL NAME ID MATRIC NUMBER

NUR AZIRA BT JAILANI 2022876602

FARRAHIDA NABILLA BT AHIM 2022899892

AIN NURARINA IZZATI BT ABDUL MALEK 2022861678

NUR ARFAH SOFIYAH BT MUSTAFA KAMAL 2022455644

DAYANGKU NURLAILI BT AWANG ABDUL GHANI 2022899558

 PREPARED FOR :
DR. SITI NOR AMIRA MOHAMAD

DATE OF SUBMISSION :
12 JUNE 2024

TABLE OF CONTENTS

NO CONTENTS PAGES

1. Question 1: 2-3
Sequences and Series in Financial Planning

2. Question 2: 4-5
Simple Interest Calculation

3. Question 3: 6-7
Compound Interest and Its Applications

4. Question 4: 8-11
Understanding Annuities in Islamic Finance

5. Question 5: 12-14
Present Value of Annuities for Islamic Home Financing

6. References 15-16

1
Question 1: Sequences and Series in Financial Planning

Explain how arithmetic and geometric sequences can be utilized in financial planning. Provide a
real-world example where an Islamic financial institution might use these sequences to predict
future financial outcomes. Calculate the 10th term and the sum of the first 10 terms of an
arithmetic sequence where the first term (a) is 5000 and the common difference (d) is 150.

Arithmetic sequences are especially useful in financial planning when dealing with situations
involving a consistent, recurring increment or decrement. This type of sequence is distinguished by a
fixed amount being added or subtracted every period. In financial terms, this can be seen in situations
such as regular savings plans, installment payments, or predictable increases in expenses. Consider a
person who decides to save a certain amount of money each month. If they make an initial deposit and
then add a fixed amount every month, the total amount saved can be calculated using an arithmetic
sequence. This approach is useful for budgeting because it allows individuals and organizations to easily
predict future savings or expenditures. The predictability of arithmetic sequences enables straightforward
financial planning and ensures that individuals can achieve their savings goals in a systematic manner.
(Zazkis & Liljedahl, 2002)

Geometric sequences, on the other hand, are used in financial planning to represent growth or
decay at a constant percentage rate. These sequences are distinguished by each term being multiplied by a
constant factor to yield the next term. This makes them suitable for simulating compound interest
investments, population growth, or any other financial scenario in which the growth rate is proportional to
the current value. For example, in an investment account where interest is compounded annually, a
geometric sequence can be used to represent the value of the investment over time. The annual investment
value is a fixed multiple (1 + interest rate) of the previous year's value. This is critical for understanding
long-term growth and making sound investments and retirement plans. The exponential nature of
geometric sequences emphasizes the power of compound interest and can aid in visualizing the effect of
various interest rates and investment periods on the result. (Lin, 2020)

Islamic financial organizations, which follow Sharia law and forbid interest (riba), may employ
these sequences differently, although they are still extremely useful for financial modeling. For example,
in an Islamic savings plan where profit is shared rather than interest is paid, the growth of deposits might
be represented by a geometric sequence if the profit-sharing ratio resulted in compounded growth.
Alternatively, for a microfinance loan in which a client repays a principal amount plus a predetermined
service charge on a regular basis, an arithmetic sequence can be utilized to simulate the repayment
schedule. Following these processes allows the institution to estimate future financial results, manage

2
risks, and guarantee that financial products comply to Islamic principles while satisfying the demands of
its consumers. (Trianto and Masrizal, 2021).

Calculation:

Image 1

3
Question 2: Simple Interest Calculation

A customer deposits RM 10,000 in an Islamic savings account that pays simple interest at an annual
rate of 3%. How much interest will the customer earn in 5 years? Additionally, explain how this
simple interest model complies with the principles of Muamalat.

Calculation:

Image 2

Adherence to the principles of Muamalat in Islamic finance guarantees that transactions are
transparent, equitable, and devoid of riba (usury), which is strictly forbidden. Because simple interest in
conventional banking entails a fixed percentage charge over the principal, it directly conflicts with the ban
on riba. Nonetheless, Sharia-compliant contracts like profit-sharing and cost-plus financing, or murabaha,

4
are how Islamic financial institutions set up their profit-making systems. The principles of equity and
risk-sharing that are fundamental to Islamic finance are aligned with these models, which guarantee
mutual consent and transparency.

For example, a Mudarabah contract conforms to Sharia law by dividing profits from fund
investments between the depositor and the bank, with no guarantees of returns. In contrast, a Murabaha
contract entails the bank buying assets and reselling them to the client at a predetermined, transparent
profit margin. These models comply with Muamalat's ethical guidelines by guaranteeing that profit is
obtained through lawful trade and investment activities, as opposed to interest on loans. In addition to
preventing riba, this arrangement encourages fair risk sharing and openness, all of which are crucial
elements of Islamic finance.

In addition, putting these Sharia-compliant models into practice guarantees that the bank and the
depositor follow moral financial conduct, which promotes collaboration and trust. The tenets of Muamalat
place equal emphasis on social justice and prosperity in addition to discouraging unjust gains. Islamic
banks are able to provide competitive returns on savings without going against Sharia law by using profit-
sharing programs like Mudarabah or cost-plus purchases like Murabaha. Additionally, by promoting the
use of money for profitable endeavors, these strategies support stability and growth in the economy as a
whole. The ethical and social aspects of Islamic finance are strengthened by this all-encompassing
strategy, which guarantees that financial transactions gain the individual as well as the community.

5
Question 3: Compound Interest and Its Applications

Compare the future value of RM 15,000 invested for 5 years in an Islamic fixed deposit account
with an annual compound interest rate of 4% compounded annually versus compounded semi-
annually. Show all calculations and discuss the implications of compounding frequency in Islamic
finance.

Calculation:

Image 3

So, the future value of RM 15,000 invested for 5 years with a 4% annual interest rate compounded semi-
annually is approximately RM 18,285.00, while when compounded annually, it is approximately RM
18,249.80.

6
 The term "compounding frequency" describes the rate at which an investment's returns or profits
are reinvested in the original principal, generating more earnings on both the initial investment and the
prior profits. (Cfp, 2023) Compounding frequency in Islamic finance can have several kinds of significant
effects. Firstly, compounding interest is considered as a sort of riba, as it allows money to expand
enormously over time without any genuine economic activity taking place. (Fadzillah & Fadzillah, 2022)
Therefore, Islamic financial institutions must be careful in how they structure their goods and assets to
guarantee they comply with Sharia standards. Secondly, increasing frequency may affect the overall
profitability of a gamble and the returns generated by investors. (Picardo, 2024) Islamic banking stresses
transparency and justice in all financial transactions, hence it is crucial for financial institutions to
explicitly communicate how compounding frequency may affect the returns on an investment to ensure
that investors are fully informed.

Then, added to rate may also affect the risk profile of an investment. Investments that compound
more regularly may be more volatile and vulnerable to bigger variations in returns. Islamic financial
institutions need to carefully manage these risks to ensure that they are in conformity with Sharia rules
and the ethical objectives of Islamic finance. (Islamic Finance | F9 Financial Management | ACCA
Qualification | Students | ACCA Global, n.d.). The use of repeating frequencies in Islamic finance can
have consequences for the future health of the global financial system. By encouraging investments that
yield sustainable returns over time, Islamic finance can assist foster economic growth and stability in
Muslim-majority nations and abroad. Overall, the consequences of compounding frequency in Islamic
finance emphasize the significance of Sharia compliance, transparency and fairness, effective risk
management, and long-term financial system sustainability

7
Question 4: Understanding Annuities in Islamic Finance

Define an ordinary annuity and explain its relevance in Islamic finance, particularly in the context
of planning for education or retirement. Calculate the future value of an ordinary annuity where
RM 500 is deposited at the end of each month for 10 years in an account that pays an annual
interest rate of 5% compounded monthly. Ensure your solution adheres to the principles of
Muamalat.

An ordinary annuity refers to a sequence of uniform payments that are made at the conclusion of
successive time periods for a certain duration. Although it is possible to make payments in an ordinary
annuity on a weekly basis, in reality, they are typically made on a monthly, quarterly, semi-annual, or
annual basis. An annuity due is the antithesis of a regular annuity, as it involves making payments at the
commencement of each term. Although these two sets of payments are connected, it is important to note
that they are not identical to the financial instrument referred to as an annuity. Instances of regular
annuities include periodic interest payments from bonds, typically occurring twice a year, and quarterly
dividends from a company that has consistently maintained constant payout levels over a long period of
time. The current value of a regular annuity is primarily influenced by the current interest rate. The time
value of money dictates that increasing interest rates decrease the current value of a regular annuity, while
decreasing interest rates enhance its current value. The value of the annuity is determined by the potential
return on investment that your money could generate in alternative options. If an alternative option offers
a superior interest rate, the value of the specified annuity decreases. (Kagan, 2021)

On the other hand, Islamic annuity planning is an essential component of financial strategy for
persons who follow Sharia rules. An annuity, in the context of Islamic finance, is a contractual
arrangement that aims to generate a consistent flow of income for a predetermined duration, guaranteeing
financial stability in retirement and education while adhering to Islamic principles. Islamic annuity
planning involves designing financial arrangements that adhere to Shariah norms. Annuities in Islamic
finance are designed to eliminate interest (riba) and speculation (gharar), guaranteeing that income is
generated from halal sources such as profit-sharing and asset-backed investments. The objective is to
ensure a consistent and reliable source of income after retirement while strictly following ethical and
religious principles. Similar to ordinary annuities, Islamic annuities are classified into two categories
which are deferred and immediate annuities. Therefore, there are some examples of how Islamic annuity
planning is implemented in Muslim daily life including retirement planning, education, placing money
into Waqf-Based annuities, Takaful (Islamic Insurance) riders, Profit-Sharing Models, and Shariah-
Compliant Assets. (islamicwillstrust.com, 2024)

8
 Islam encompasses all aspects of life. Allah the Almighty has bestowed divine guidance upon
mankind. The purpose of regulation is to ensure the well-being and protection of humanity by preventing
harmful actions that could endanger their interests. The Islamic ruling on muamalat states that everything
is legal until explicitly prohibited in the Qur’ān, Sunnah, or other sources of Islamic law. The exclusion
of men from certain transactions is justified due to the inclusion of features such as injustice, unfairness,
riba (usury), gharar (uncertainty), and gambling. The payment of zakat is an important consideration in
discussions about retirement planning. Zakat must be paid on the EPF funds, gratuity, and any other
financial advantages obtained upon retirement. Zakat is a mandatory religious duty that all Muslims,
regardless of age, must fulfill once the necessary requirements are met. In the context of Islamic
retirement planning, it is recommended for Muslims who have not yet completed the pilgrimage to also
make preparations for it, as it is considered a religious duty. Every Muslim is required to conduct the
pilgrimage of ḥajj at least once in their lifetime, if they have the means to do so. (Shariah Financial
Planning – Evening Crest SDN BhD, n.d.)

The process of Islamic retirement planning involves considering the significant differences
between a retired worker's financial condition during retirement and their prior employment, where they
had a defined job and earned a specific income. Therefore, it is crucial for him to engage in retirement
planning in order to be well-prepared for his future. To put it simply, planning for retirement is akin to
preparing for the possibility of dying prematurely. There is a procedure for carrying out the task. He must
take into account the matter of Shariah compliance. He should refrain from engaging in activities that are
forbidden in Islam, such as riba (usury), gambling, gharar (uncertainty), and so on. In addition, he should
make arrangements for fulfilling his religious duties, including undertaking the ḥajj pilgrimage and
fulfilling the obligation of zakat, as well as engaging in voluntary acts of charity, such as assisting the
impoverished and the destitute. Typically, the Islamic retirement planning process has three overarching
steps. The primary step is to evaluate the future financial requirements of an individual. What is the
amount he will require to retire according to his desired lifestyle? If the sole purpose is survival, the
requirements will be minimal. If he desires a more ambitious retirement plan, the amount of cash to be
established will be larger. (Shariah Financial Planning – Evening Crest SDN BhD, n.d.)

9
 This necessitates predicting the financial requirements that will arise once an individual has
retired, taking into account their desired retirement lifestyle. An additional requirement is to determine the
sources that will be accessible to fulfill these requirements. Next, the question arises regarding the method
of amassing the cash as outlined in the initial stage. This necessitates the creation of a strategic blueprint
that will effectively cater to the client's requirements and thereafter execute the strategy with success. The
required amount is the discrepancy between the resources necessary for retirement and the available
resources, such as the EPF. In order to ensure adherence to Islamic principles, he must consider the
matters of Shariah compliance. Failure to do so may result in the inclusion of elements such as riba in his
plan, which is strictly prohibited in Islam. Lastly, we need to determine how the accumulation will be
eaten. What is the preferred method of payment for the retiree? Which is more advantageous, receiving a
lump sum or opting for the annuity payment method? In order to calculate the approach, it is necessary to
have knowledge of the predicted time of benefit payments and the appropriate provision for dependants.
Retirement planning, similar to financial planning, adheres to a planning approach that closely aligns with
the six-step personal planning process implemented by the Malaysian Financial Planning Council.
(Shariah Financial Planning – Evening Crest SDN BhD, n.d.)

Consequently, retirees face two dangers in the absence of Shariah compliant annuities which is
depleting their pension fund at an accelerated rate, resulting in its exhaustion before their demise and
some individuals may use their pension fund at a sluggish rate throughout retirement, resulting in them
depriving themselves of certain expenses and ultimately leaving behind a surplus of money to be inherited
by someone else. Annuities mitigate these risks by offering a secure and assured annual income that
continues for the duration of your lifetime. (The Need for Shariah Compliant Annuities, n.d.). Additional
research has investigated the association between educational attainment and the acquisition of annuity
income. According to a study by Johnson, Burman, and Kobes (2004), the aged in the U.S. who received
annuity payments from sources other than Social Security had a higher level of education. Due to the
higher level of education, persons in the United States have increased opportunities to obtain private
pensions. (Brown, J. R., 2009). As a conclusion, Islamic education provides a holistic view of long-term
financial success. This perspective emphasises saving money, investing, and planning for events while
fulfilling social and spiritual obligations. Long-term planning is congruent with the Islamic principle of
stewardship, which encourages people to properly manage their resources for themselves and society.
(Asari, N. A. M., 2024)

10
Calculation:

Image 4

11
Question 5: Present Value of Annuities for Islamic Home Financing

Discuss how the concept of the present value of an annuity can be applied to Islamic home financing
products such as Ijarah Muntahia Bittamleek. Calculate the present value of an annuity where
monthly payments of RM 1,200 are made for 20 years, with an annual interest rate of 6%
compounded monthly. Explain how this calculation might be adjusted to align with Shariah-
compliant financial practices.

Ijarah Muntahia Bittamleek and other Islamic home finance products rely heavily on the idea of
an annuity's present value. With a particular rate of return or discount rate, this idea is used to calculate
the current value of future annuity payments. The entire value of the home financing contract in Islamic
finance, which includes the initial purchase price and the customer's future payments, is determined by
taking into account the present value of an annuity. (Ahamed Kameel Mydin Meera & Dzuljastri Abdul
Razak, 2011). Ijarah Muntahia Bittamleek involves the bank purchasing a property and leasing it to the
customer over an agreed period. During this period, the customer makes regular lease payments, akin to
rent, which contribute towards acquiring the property. At the end of the lease term, ownership of the
property transfers to the customer, often for a nominal fee. This structure avoids interest by framing the
transaction as a series of rental payments rather than loan repayments. (Islam Kamal, 2021)

In Ijarah Muntahia Bittamleek, the bank buys a property and leases it to the client for a
predetermined amount of time. The consumer contributes to the purchase of the property during this time
by making regular lease payments, which function similarly to rent. The consumer receives ownership of
the property at the conclusion of the lease, frequently in exchange for a small fee. By presenting the
transaction as a series of rental payments rather than loan repayments, this arrangement saves interest.
(Islam Kamal, 2021)

The formula for the present value of an annuity can thus be adapted to calculate the total lease payments:

Image 5

12
Where;

A is the present value (property price plus profit),

R is the monthly lease payment,

i is the expected profit rate divided by 12, and

n is the total number of payments.

The competitiveness and transparency of Islamic house financing through IMB are guaranteed by
the use of annuity present value. This enables the bank to set the lease payments at a reasonable rate that
covers the cost of the property and a decent profit without taking advantage of the tenant. Consumers gain
from regular payments that are designed to progressively increase their ownership stake in the property.
Ijarah Muntahia Bittamleek and other Islamic home financing solutions depend on the idea of an
annuity's present value. It is used to determine the overall contract value for home financing, accounting
for the lease term and the discount rate. The formula is used to compute the present value of an annuity,
which is a critical component in figuring out the overall contract value for home financing. (Ahamed
Kameel Mydin Meera & Dzuljastri Abdul Razak, 2011)

Calculation:

Image 6

13
To align the calculation of the present value of an annuity with Shariah-compliant financial practices,
several adjustments can be made.

Firstly, interest rates are forbidden in financial activities that comply with Sharia. Therefore, a
profit-and-loss sharing system or a return on investment that is not based on interest should be the basis
for the discount rate utilised in the calculation. This method guarantees that the computation is devoid of
any riba components, which are forbidden by Sharia. (Malaysian Accounting Standards Board, 2009).
Secondly, in order to guarantee that the returns are connected to the performance of the underlying assets,
the computation ought to include a risk-reward sharing mechanism. This is consistent with the underlying
idea of Islamic finance—the Shariah principle of equitably sharing risk and reward. (Muhammad Hanif,
2018). Thirdly, to guarantee adherence to Sharia principles, the computation must be examined and
confirmed by a Sharia committee. This guarantees that the computation is devoid of any components, like
gharar or maysir, that can be deemed unlawful under Sharia. (Nor Aini Alia, Suhaili Sarif, Mohd Abd
Wahab Fatoni Mohd Balwi & Nor ‘Azzah Kamri, 2020).

Next, stakeholders should be informed of the computation's transparency, including the

assumptions made and the technique employed. This guarantees that the computation is transparent and
that interested parties are able to make defensible choices. (Muhammad Hanif, 2018). Finally, the
calculation ought to steer clear of any vagueness or doubt that would be deemed forbidden by Shariah.
This entails making certain that the computation is predicated on precise and well-defined parameters and
that the assumptions are logical and substantiated. (Malaysian Accounting Standards Board, 2009). By
incorporating these adjustments, the calculation of the present value of an annuity can be aligned with
Shariah-compliant financial practices, ensuring that it is both Shariah-compliant and financially sound.

14
References

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Islamic Banks in Malaysia. International Journal of Economics, Management and Accounting, 28(2),
431-456.

Asari, N. A. M. (2024). EMPOWERING INDIVIDUALS: ISLAMIC EDUCATION AND PERSONAL

FINANCIAL PLANNING. Available at SSRN 4854923.

Brown, J. R. (2009). Financial education and annuities. OECD Journal: General Papers, 2008(3), 173-
215.

Hanif, M. (2018). Sharīʿah-compliance ratings of the Islamic financial services industry: a quantitative
approach. ISRA International Journal of Islamic Finance, 10(2), 162-184.

Iqbal, Z., & Mirakhor, A. (2011). An introduction to Islamic finance: Theory and practice (Vol. 687).
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islamicwillstrust.com. (2024, May 25). Islamic Annuity Planning: Securing Halal income for Retirement.
https://www.linkedin.com/pulse/islamic-annuity-planning-securing-halal-income-retirement-b69gf/

Kagan, J. (2021, February 28). What are ordinary annuities, and how do they work (With example)?
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Kamal, I. (2021). Rebate in Islamic sale-based financing contracts: Bank Negara Malaysia guidelines on
ibrāʾ versus conventional finance practice. ISRA International Journal of Islamic Finance, 13(3),
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Shariah Financial Planning – Evening Crest SDN BhD. (n.d.).
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