Financial Planning In Islam

Financial Planning In Islam – Islamic finance refers to how companies and individuals raise capital in accordance with Sharia or Islamic law. This also applies to investments permitted by this law. Islamic finance can be considered a unique form of socially responsible investment. This field of finance is a growing field. In this article, we provide an overview to provide background information and as a basis for further research.

Although Islamic finance began in the 7th century, it gradually became formalized from the late 1960s. This process was driven by enormous oil wealth, which increased interest and demand for Shariah-compliant products and practices.

Financial Planning In Islam

Financial Planning In Islam

The concept of risk sharing is central to Islamic banking and finance. It is important to understand the role of risk sharing in raising capital. At the same time, Islamic finance insists on avoiding riba (begging) and ghara (uncertainty or fraud).

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Islamic law views a loan with interest as a relationship that favors the lender, who pays the interest at the expense of the borrower. Islamic law treats money as a means of measuring value, not as an asset. Therefore, it requires that one should not earn income only with money. Interest is considered riba and such practices are prohibited in Islamic law. Haram, which means forbidden, because it is considered usury and exploitation. In contrast, Islamic banking exists to further the socio-economic goals of Islamic society.

Thus, according to the Shariah standard, financing (halal, which means permissible) consists of banking activities in which the financial institution shares in the profits and losses of its insurance company. Equally important is the concept of groove. In an economic context, gharar refers to the uncertainty and fraud caused by selling things whose existence is uncertain. Examples of gharar would be forms of insurance. This may involve buying insurance premiums to insure against things that may or may not happen. Derivatives, which are used to hedge against potential outcomes, are another type of hedge.

Equity financing of companies is permitted as long as they do not engage in limited business. Prohibited activities include the production of alcohol, gambling and the production of pornography.

In the Middle Ages, the early Islamic caliphates had better developed market economies than Western European countries.

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An Islamic bank pools investors’ money and makes profits and losses. This process is agreed with depositors. What does the bank invest in? A number of mutual funds have sprung up that have been audited for Shariah compliance. The filter analyzes company balance sheets to determine whether the company has prohibited sources of income. Excluded are companies that have too much debt or are involved in prohibited industries. In addition to actively managed investment funds, there are also passive funds. They are based on indices such as the Dow Jones Islamic Market Index and the FTSE Global Islamic Index.

Reducing the balance of the authorized capital requires that the bank and the investor buy the apartment together. It is usually used to finance the purchase of a home. The bank gradually transfers the equity in the home to the private homeowner, whose payments build up the homeowner’s equity.

This arrangement is similar to the declining balance described above, except that the financial institution pays most, if not all, of the balance on the home and agrees to sell the home to the prospective homeowner at the end of the term. A portion of each payment goes toward the rental agreement and the rest toward the purchase price of the apartment.

Financial Planning In Islam

Installments begin with the broker purchasing the home with free and clear title. The investor, acting as a broker, then agrees the sale price with the potential buyer; This price includes some profit. The purchase can be made directly (in a lump sum) or deferred (in installments). This credit sale is an acceptable form of financing and should not be confused with an interest-bearing loan.

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Leasing means selling the right to use (right to use) an item for a certain period of time. It is a condition that the lessee owns the term of the tenancy. The lease option, ‘ijarah wa’iqtina, provides for a lease in which the lessor agrees to sell the leased object at the end of the lease at a predetermined residual value. This promise is only binding on the lessor. The tenant has no obligation to purchase the item.

These are rare forms of financing used in certain types of businesses. These are exceptions to the Gharar. The price of the products is prepaid and the products will be delivered at a future time. As there are many conditions that must be met for such agreements to be valid, the assistance of an Islamic legal advisor is usually required.

Sharia law permits investments in company shares (common shares) as long as said companies do not engage in prohibited activities. Investments in companies can be shares or direct investments (private equity).

Islamic scholars have made some concessions regarding permissible business, as most use debt either to cover a lack of liquidity (borrowing) or to invest excess cash (interest-bearing instruments). Some may choose to exclude companies that have interest-bearing debt, earn interest or other impure income, or trade their debt at a price above par.

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A further distillation of the above screens excludes companies with debt ratios of 33% or higher. Also excluded are companies with “gross plus non-operating interest income” of at least 5%. Finally, Islamic scholars exclude companies whose accounts receivable/total assets are at least 45 percent.

It is increasingly difficult to invest in public companies that follow Islamic principles. There are index funds that consist of Shariah-compliant components, such as the S&P 500 Shariah.

Retirees who want their investments to be in accordance with Islamic principles face a dilemma because interest-bearing investments involve riba, which is prohibited. Thus, certain types of real estate investments can provide stable retirement income without conflicting with Sharia law. These investments can be direct or securities such as a diversified real estate fund.

Financial Planning In Islam

In a typical ijarah sukuk, the issuer sells financial certificates to a group of investors. The Group holds the certificates until they are returned to the issuer in exchange for a pre-determined return. Like traditional bond interest rates, rental yields can be fixed or variable rates linked to benchmarks such as the London Interbank Offered Rate (LIBOR). The issuer makes a binding condition that he will repay the bonds in the future. Special Purpose Vehicles (SPVs) are often set up as intermediaries in a transaction.

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A sukuk can be a new loan, or it can be a Shariah-compliant replacement for a conventional bond. The issue may have liquidity by listing on local, regional or global stock exchanges. S&P Global also predicts growth in the issuance of social-Islamic financial instruments and ESG-focused green bonds.

Traditional insurance is not permitted in Islamic law as a means of risk management. This is because he is buying something with an uncertain outcome (type of Garrar). Insurers also use fixed income – a type of riba – as part of their portfolio management process to meet liabilities.

A possible Shariah-compliant option is cooperative (mutual) insurance. Subscribers participate in funds that are invested in accordance with Sharia rules. Funds are collected from the pool to cover claims and unused profits are distributed among policyholders. Such a structure rarely exists, so Muslims can take advantage of existing insurance vehicles if necessary.

Islamic finance is the idea of ​​managing money and implementing financial strategies that adhere to the moral practices of the Islamic religion. Islamic finance guides saving, investing and borrowing.

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Islamic finance aims to incorporate the financial services industry. Many Islamic faiths impose restrictions, limitations, or restrictions on financial matters, such as acceptable types of income or business practices. This practice may conflict with non-Islamic financial instruments. A group of Islamic financial managers and financial system entities adhere to Islamic financial practices so as not to exclude a group of individuals because of their religious beliefs.

The Qur’an says that it is unlawful in the eyes of Islam to take loans with interest. Although it is relatively easy for Muslims not to charge others with borrowed capital, Muslims face the challenge of obtaining financing for their debts. There are specific financial institutions that cater to Islamic finance and adhere to this belief.

Islamic finance is a centuries-old practice that is gaining recognition worldwide. The ethical and economic principles of Islamic finance are attracting interest even outside the Muslim community. Given the growing development of Muslim nations, we expect this sector to grow even faster. Islamic finance continues to face the challenges of reconciling Islamic investment policy and modern portfolio theory.

Financial Planning In Islam

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