CHAPTER 1

INTRODUCTION TO
FINANCIAL
PLANNING
LEARNING OBJECTIVE

At the end of this chapter, you should be able to:

 Define financial planning

 Describes Islamic worldview of financial planning

 Explain Islamic financial planning proses

 Differentiate Islamic and conventional financial planning

FINANCIAL PLANNING
• Financial planning, in the conventional is a professional field concerned with as-
sessing an individual’s or a firm’s current financial situation and his/her financial
goals, and planning the financial aspects of the strategy to achieve those goals

• It involves the process of resolving the life goals of an individual or business,

gathering relevant financial information, examining current financial status and
thereafter, proposing a plan to realize the goals and implementing it in an objec-
tive manner.

• Financial planning also means analyzing the financial circumstances of another

person and providing a plan to meet that person’s financial needs and objectives,
PERSONAL FINANCIAL PLANNING
• International Organization for Standardization defines personal financial planning
as “Personal financial planning is an interactive process designed to enable a
consumer/client to achieve his personal financial goals.”

• MFPC constitution defines “personal financial planning as “a process or method-

ology of assisting clients in determining their financial goals, objectives and priori-
ties and there sources to meet them in an optimal and practical manner.”

• A Personal Financial Planner - “an individual practitioner who provides financial

planning services to clients and meets all competence, ethics and experience re-
quirements of the profession.”

• A client of a Personal Financial Planner - “an individual who has accepted the
terms of engagement by entering into a contract of services.”

• A financial goal - “a quantifiable outcome aimed to be achieved at some future

point in time or over a period of time”
SHARIAH FINANCIAL PLANNING
• Shariah financial planning going a step further, aims at providing professional ser-
vice to clients assisting them in designing a strategy for achieving their life goals
within the framework of Shariah guidelines, thus ensuring their success in this
world and the hereafter.

• Shariah financial planning - “a process of assisting clients in determining their fi-

nancial goals and priorities and the resources to meet them optimally within the
parameters of the Shariah”

• From the perspective of the individual, - “the process of meeting life goals through
the management of finances in accordance with the Shariah.”
ISLAMIC WORLDVIEW OF FINANCIAL PLANNING
1.ISLAM IS THE WAY OF LIFE

Islam is a comprehensive, integrative and holistic religion that governs all aspects of life
and relates this worldly life to the Hereafter. This means that, as Muslims, we need to
practice Islam in everything we do, including in performing our business and economic
activities.

In the Qurān, Allāh says: “O ye who believe! Enter into Islam whole-heartedly; and follow
not the footsteps of the evil one; for he is to you an avowed enemy; (al-Baqarah: 208).

The need to practice Islam in every aspect of life is also mentioned by Allah which also
emphasizes on the importance of referring to Quran for guidance,
2. MAN AS ALLAH’S VICEGERENT (KHALIFAH) ON EARTH

A principle of Islam is that everything belongs to Allah, and wealth is held by people in trust. Muslims also
have a responsibility to care for the less fortunate.

To Muslims, the Quran is also a way of life dealing with issues that emphasis socio-economic justice. It em -
phasizes the concepts of trusteeship of human beings as Allah’ vicegerent on earth, care for others, moder -
ation in consumption, productive effort as a means of serving Allah, charitable assistance, maintenance of
family, duty to produce more than one’s needs, wealth not as an end and many others.

Hence, the duty of man as khalifatul-Lah is to make use of all the blessings of Allah on earth to his own
benefit. For this, man is given freedom, that is, freedom of choice and action (also within limits).It is be -
cause of man’s special faculties and his freedom that he Becomes the best of Allah’s creatures.
3.ALLAH IS THE SOLE GIVER OF BOUNTY

In Islam, we are confined with the concept of Allah’s bounty or sustenance. This concept
means that Allah is the sole giver of “bounty” to every living creature on this world. Allah
(s.w.t.) blesses His bounty on those who earn and spend it in compliance with His covenants.
He does not bestow His blessing or mercy on those who earn it illegitimately and spend it irresponsibly
(Mohd.Ma’sum Billah, 2005)

Allah affirms in the Quran;

“Indeed,it is Allah who is the [continual] Provider,the firm possessor of strength (al-Dhariyat: 58).

The concept of Allah’s bounty is considered very important in Islam. As a good Muslim is
required to have a proper balanced between the fulfilment of his spiritual and worldly
obligations.
4.FINANCIAL PLANNING IS IBADAH

Muslims are encouraged to plan for their life by working hard, spending moderately and saving for their fu -
ture as there are always uncertainties in life.

Financial Planning is basically a discipline of wealth management that applies to the unique needs and
concerns of each individual respectively. All Muslims, regardless of their economic status is required to
manage their wealth properly as they have responsibility on both their assets and liabilities.

When their assets reach a certain level, they have to pay zakat as a way of purification. On the other hand,
when they have liabilities or debts, they have to repay the debts.

Financial planning will help Muslims manage their wealth wisely and keep alert on their responsibility to pay
Zakat and debt.
 ISLAMIC FINANCIAL PLANNING PROSES

STEP 1 ESTABLISHING AND DEFINING THE CLIENT PLANNER RELATIONSHIP

STEP 2 GATHERING CLENT DATA INDLUDINGS GOALS

STEP 3 ANALYSING AND EVALUATING YOUR FINANCIAL STATUS

STEP 4 DEVELOPING AND PRESENTING FINANCIAL PLANNING REC-

OMMENDATIONS

STEP 5 IMPLEMENTING THE FINANCIAL PLANNING RECOMMENDA-

TIONS

STEP 6 MONITORING THE FINANCIAL PLANNING RECOMMENDA-

TIONS
Establishing and Defining the Client-Planner Relationship
- Clearly explain the services to be provided to the client
- Define both his and his client’s responsibilities.
- The client and the planner should agree on how long the professional relationship
should last and on how decisions will be made.

Gathering Client Data and Determining Goals and Expectations

- Ask for information about the client's financial situation.
- The client and the planner should mutually define the client’s personal and financial
goals, understand the client’s time frame for results
- The financial planner should gather all the necessary documents before giving
advice the client needs.

Analyzing and Evaluating the Client’s Financial Status

- The financial planner should analyze the client’s information to assess the client’s
current situation and determine what the client must do to meet his goals.
Developing and Presenting Financial Planning Recommendations and/or Alternatives
- The financial planner should offer financial planning recommendations that address
the Client’s goals.
- Help the client understand the recommendations so that the client can make
informed decisions.
- The planner should also listen to the client’s concerns and revise the
recommendations as appropriate.

Implementing the Financial Planning Recommendations

- The client and the planner should agree on how the recommendations will be
carried out.
- The planner may carry out the recommendations and coordinating the whole
process with the client

Monitoring the Financial Planning Recommendations

- The client and the planner should agree on who will monitor the client’s progress
towards his goals.
- Review client situation and adjust the recommendations, if needed
KEY DIFFERENCES OF ISLAMIC FINANCIAL
PLANNING TO CONVENTIAL FINANCIAL PLANNING
Time Horizon

• One of the Islamic tenets of faith is the belief in the Hereafter (al-Akhirah).
• This means that a Muslim’s time horizon does not end upon death. He will continue
to live in the Hereafter.
• Muslims, therefore, need to be wary of their deeds in the worldly life as it will
determine their life in the hereafter. The belief in Hereafter not only guarantees
success in the Hereafter but also makes this world full of peace and happiness by
making individuals most responsible and dutiful in their activities.
Method and Objectives

• As Muslims are responsible for their actions in the worldly life everything that the do
must be according to Shariah include their wealth accumulation activities.

• Another area of concern for Muslims is how they utilize their wealth. Muslims are
taught to be reasonable and moderate in spending their wealth.

• Muslims are advised to protect their wealth by participating in Takaful scheme.

• Muslims must be wary of how their wealth is being distributed upon their death,
because it has a bearing on their well-being in the Hereafter - The understanding of
faraid, wasiyah, hibah and waqf

• Wealth purification means Muslim must purify his wealth through payment of zakat
Achieving al-Falah as the Main Objective

• A Muslim should not forego wealth neither should he be avaricious in the pursuit of
wealth - encourages reasonableness and moderation.
• Al-Falah means success. Muslims must strive hard to achieve success in the worldly
life and the Hereafter.
• Having proper financial planning, which is done according to Shariah, will also assist
Muslims in achieving al-Falāh.
• As Muslims, we are not discouraged from acquiring wealth but we must know how
to earn and spend it in accordance with the Islamic principles.
• In Islamic financial planning, an individual must understand the discipline of how to
accumulate,to protect, to purify and to distribute the wealth according to the
Shariah
Subject Islamic Financial Planning Conventional Financial Planning
Time horizon Islamic World View: Dual Polar: It only covers worldly life-secularism.

Covers worldly life and the hereafter. The lifespan of Create strategies to help clients achieve their financial
Muslim do not end upon death, it continues in goals.
hereafter
Objective To achieve state of al-Falah (prosperity that leads a Planners concentrate on winning and servicing the
good life in this world i.e. hayatan tayyibah) and the al clients in orderly manner according to ethical and
Jannah (paradise) in the hereafter. professional standards.

Goal is for personal satisfaction (needs and wants).

Method Provide impartial advisory and at the same time must Provide impartial advisory to act in the best interest of
conform to Shari'ah. In his pursuit of wealth, a Muslim the client instead of being a mere product pusher.
must abide by Shari'ah at all times.

Holistic approach towards a Shari'ah compliant wealth Balance between personal and social obligations.
management i.e. the wealth creation, accumulation,
preservation, protection and distribution are done
within the parameters of Shari'ah.

The planner's function deemed as part of ibadah.

Balance between personal, social obligation and the
hereafter
Achieving Al-Falah Bounties of Allah (s.w.t.) and thus resources are not Scarcity of resources
scarce. Ownership is on an individual basis

Man as a trustee is not the ultimate owner of goods Plan for during one's lifetime only
or properties