Islamic Investment Planning

MBFB 3083 (ISLAMIC FINANCIAL PLANNING AND WEALTH MANAGEMENT)
1. ISLAMIC INVESTMENT PLANNING

Islamic investment does not offer interest or riba. It is based on profit and loss. But
it does not keep you in dark and tell you all the probabilities of both the outcomes of
your business. It neither guarantees profit nor does it assure you would not lose your
money. But, mostly it brings profit because it is managed by expert fund managers.
They have vast experience of dealing with Islamic investment products and have perfect
command over minimizing risk and maximizing returns. Islamic investments are
investments that fall in line with the principles of Islamic banking. Islamic banking, in
turn, is banking that follows the rules of Shariah--the sacred law of Islam.
The rules of Islamic banking prohibited most of the financial practices that led to
the collapse of the housing bubble and the subsequent financial crisis. As the result,
Islamic investments fared better than other investments. Investors throughout the world
are looking at this form of investing with new interest. Making Islamic investments has
its own, unique challenges, but so long as investors understand what they are, they
should be able to manage just fine. One of the most notable differences between Islamic
investments and other forms of investment is the existence of the Shariah Board. This
is comprised of a group of independent Islamic scholars that must check whether
potential investments comply with Islamic law. They also make periodic reviews to
make sure that the investments remain Shariah-compliant every step of the way. No
Islamic investment can be made without their approval. Under Islamic law, investors
can't invest in any businesses that deal with alcohol, tobacco, pork, gambling,
entertainment media, financial services (such as banks) or pornography or in anything
else that is deemed Haraam (unlawful).
The Shariah boards evaluate whether an investment is Haraam according to the
following criteria, first is Gharar (uncertainty).This includes any investment whose
outcome is uncertain and in which risk is significant. It also includes any investments
with uncertain or unclear characteristics. To put it another way, if the investment does
not involve any tangible objects, odds are pretty good that it will be
considered Haraam. Second is , Maysir (gambling) Somewhat overlapping with the
above, this includes "games of chance involving money." Aside from the kind of
gambling one would find in casinos, the term includes things like insurance products
and any investments that generate derivatives. Lastly ,Riba (interest) Simply put, this
covers any investments that generate any and all forms of interest. Investment is usually
explained as the choice by the individual to risk his saving with the hope of gain. The
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term “investment” is used differently in economics and in finance. Economists refer to

a real investment while finacial economist refer to financial asset such as money that is
put into a bank or market which may then be used to buy a real asset. Financial
investments are usually made through banks, intermediaries, stock brokers in case of
investing in company shares, mutual funds, pension funds and insurance company.
2. IMPORTANCE OF INVESTMENT
People invest to get money in the future. Investment will help to provide capital
and income at some future time, either to meet a future obligation or need, or to transfer
to the next generation. Investment is necessary because it increased value of the product
purchased at present where there are some things that lose their charms and values as
and when the time passes. On the other hand, there are certain things that gain value
and increased rates along with the passing days. For an instance, gold, silver and other
such precious metals have increased values. Their rates fluctuate and an intelligent mind
knows when to sell them, if he ever invested in these metals. Whenever the rate is at its
highest and the investor thinks that this is the time to earn profits from the same, he
sells that precious metal and enjoys higher profit rates.
Next, investment can act as Security for the future where if we are totally bankrupt
yet still have a few assets and investments left, we can easily opt for those investments
and get money out of them to enjoy your life once again. we don’t have to beg in front
of others to give shelter during bad times. Investment not only lets we earn good amount
of profits, but also gives enough strength to feel secured for our future. Moreover, we
can make our family proud as it knows that no matter what happens, we still have
invested enough to feed them even if there are no sources of incomes left for you and
them. This is why the retired people enjoy the amounts they receive from the
investments they once make. To achieve financial goals, one need to start investing as
early as we can. The power of compounding will help the investment to grow at
snowballed rate. The earlier someone start to invest, the better potential for them to
achieve their financial goals.
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3. SHARIAH OVERVIEW OF INVESTMENT
Shariah is divine guidance from Allah. Shariah usually is understood as Islamic

Law. Shariah is comprehensive, immutable and eternal. It covers all aspects of human
life, on the individual as well as collective levels in matter of faith, worship, and human
relations in personal and public rights. As Muslims, we need to ensure that we earn that
which is wholesome and pure. Thus, we are required to acquire Halal and pure income,
as impure income that is consumed by us produces ill-flesh and keeps us devoid of
spirituality. Insha-Allah a body sustained and nourished with that which is Halal
becomes a body whose supplications are accepted by Almighty Allah. One of the key
elements of Islamic investing is lawful activities and avoidance of interest (Riba).The
literal definition of interest or Al-Riba as it is used in the Arabic language means excess
or increase.
In the Islamic terminology interest means profit derived free from compensation.
Riba has been described as a loan with the condition that the borrower will return to the
lender more than and / or better than the quantity borrowed. Riba also has other
connotations not mentioned here.As Muslims, when it comes to financial transactions,
our main concern is to avoid Riba in any and all of its forms despite the fact that the
basic foundation of economics and finance today globally is based on Riba and dealing
in usury.The Prophet (SAW) has foretold of a time when Riba would be so
overwhelming that it would be extremely difficult for Muslims to avoid it. This
situation calls for Muslims to be extra cautious before deciding on investment
opportunities.
Before get involved into an investment, there are some guide or principle that all
muslims should be aware with it which called “Islamic Investment Principles”. The
general qualitative and quantitative Islamic Investment Principles are, the investment
must comply with Shar'iah principles that govern Islamic Investment Funds and that
prohibit investment in companies whose primary business is not consistent with
Shari'ah principles. Stocks that do not meet specified financial parameters are
excluded. This would include limits on interest bearing debt, interest earning assets,
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net liquid assets and interest or other forms of non-permissible income. The fund
manager conducts a purification process on the impermissible income generated. The
impure income is distributed to charity.
4. Shariah Concept Relevant To Investment
4.1 Time Value Of Money

The time value of money is a basic investment concept and a basic element in the
conventional theory of finance. Once the money is deposited into the banking system,
the money will earn interest. The Shariah does not rule out this consideration, for it
does not prohibit any increment in a loan given to cover the price of a commodity in
any sale contract to be paid at a future date. What is prohibited, however, is making
money’s time value an element of any lending relationship that considers it to have a
predetermined value.
In Islam, the practice of charging interest on loan is condemned due to its injustice
to the borrower. The same goes to saving deposits whereby, stipulating interest upfront
is considered injustice to both parties, i.e. the bank and the depositor. Distribution of
profit is only allowed at maturity. This is due to the fact that Islam accepts the earning
capacity of the money provided that the money is put into good use. Muslims should
spend the money wisely and invest them in productive business. In the Quran, Allah
have said; “consider the flight of time! Verily, man is bound to lose himself. Unless he
be of those who attain to faith, and do works, and enjoin upon one another the keeping
to truth, and enjoin upon one another patience in adversity”(al-asr:1-3).In credit-based
sale contracts, where a commodity’s price is allowed to differ from the spot price being
time element is involved in the process of exchange, can be considered a sort of
recognition of money’s time value in Islamic finance.
Besides, as far as rents and wages are concerned, when they include a fixed and
predetermined element as a compensation for time, the Islamic prohibition of riba
denies any recognition for the money’s time value. In case time’s monetary valuation
is not recognized by Islam, as it may be assumed, there would be no need for money’s
time value in project evaluations and feasibility studies.The preferred course is derived
from the Quran and the Sunnah of Prophet Muhammad SAW. The guiding principle in
contracts, terms, and conditions is permissibility when there is no explicit prohibition.
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Given this, any modern type of contract not mentioned in the Shariah is allowed if it
does not conflict with the Quran or the Sunnah and is based on ijma (consensus) and
qiyas (reasoning by analogy) and maslahah mursalah (considerations of the public
good), and also is free of any evil.
Islam acknowledges an increment in a commodity’s price in any sale contract to
be paid at a future date, as long as money’s time value is not claimed as a predetermined
value. In other words, any conditional increase in the loan’s principal in return for a
deferred repayment due to an expected depreciation in the value of the money, asset, or
other factors (e.g., inflation and commercial losses) is prohibited.
The key characteristics of Islamic economics is that economic and financial
activities are linked to real economic sector activities and there is encouragement to
equity based structures backed by tangible assets instead of debt based ones in
investment where in the conventional world the transactions may not necessarily have
to be backed by any real asset.
4.2 Liquidity Planning

The liquidity planning is part of the near-term finance planning with the task of
the exact, daily coordination between in- and out-payments.In the Quran, Allah says;
“those of you who die and leave widows should bequeath for their widows a year’s
maintenance and residence; but if they leave (the residence), there is no blame on you
for what they do with themselves, provided it is reasonable. And Allah is exalted in
Power, Wise”. (al-baqarah: 240).
This verse serve as a guideline that Muslims must have a saving of atleast one
year income for liquidity and emergency purposes. This fund must be invested in a
highly liquid and low risk product to ensure that in emergency situation, that money
could be retrieved. Thus, financial planners must advise the client to establish
emergency fund before planning to invest in relatively higher risk investment product
for other financial goals.
4.3 Risk Management

Risk is part of all our lives. As a society, we need to take risks to grow and develop.
From energy to infrastructure, supply chains to airport security, hospitals to housing,
effectively managed risks help societies achieve. In our fast paced world, the risks we
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have to manage evolve quickly. We need to make sure we manage risks so that we
minimise their threats and maximise their potential.Risk management involves
understanding, analysing and addressing risk to make sure organisations achieve their
objectives. So it must be proportionate to the complexity and type of organisation
involved.Because risk is inherent in everything we do, the type of roles undertaken by
risk professionals are incredibly diverse.
They include roles in insurance, business continuity, health and safety, corporate
governance, engineering, planning and financial services. Islams always encourages
Muslims to do risk management. In Islamic history, there are various examples on risk
management practices applied by Prophet Muhammad SAW and the companions. In
the history of Prophet Muhammad SAW migration from Mecca to Madinah, Prophet
Muhammad SAW applied various types of risk management methods to avoid
enemies. For that process of migrating, Prophet Muhammad SAW asked the muslims
to move in small groups to avoid being detected and ambushed by the enemies. The
movement was also tricky, where Prophet Muhammad SAW asked the muslims to
move to the opposite direction before moving towards Madinah. Prophet Muhammad
SAW also hide in a cave for a few days before continuing the journey when he sensed
enemies were approaching his group.
This shows that risk management technique is permissible in Islam, contrary to
the old belief by certain quarters that muslims have to accept everything as qada’ and
qadar, without having to put effort to avoid misfortune. Indeed, risk management is
highly encouraged as it is in line with Maqasid al-Shariah.
4.4 Risk Return Tradeoff

The risk-return trade-off is the concept that the level of return to be earned
from an investment should increase as the level of risk increases. Conversely, this
means that investors will be less likely to pay a high price for investments that have
a low risk level, such as high-grade corporate or government bonds. Different
investors will have different tolerances for the level of risk they are willing to
accept, so that some will readily invest in low-return investments because there is
a low risk of losing the investment. Others have a higher risk tolerance and so will
buy riskier investments in pursuit of a higher return, despite the risk of losing their
investments.
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Some investors develop a portfolio of low-risk investment, low-return

investments and higher-risk, higher-return investments in hopes of achieving a
more balanced risk-return trade-off. Higher risk is associated with greater probability
of higher return and lower risk with a greater probability of smaller return.
This tradeoff which an investor faces between risk and return while considering
investment decisions is called the risk return tradeoff . In Islam, to get a return, the
requirement of counter value or compensation (‘iwad) is critical as it is one of the
cornerstones in Islamic principles of profit in the muamalah contract. This is revealed
by the legal maxim “al-ghunmu bil-ghurmi” (no reward without risk) and “al-kharaj
bil-daman” (in any benefits lies a liability).
4.5 Risk return and risk

Investment means putting down some money today to get more of it later.
Investment is enable the money to work for the owner. In investment, it is important to
be noted that investing is not a “get rich quick” scheme. Investing need a knowledge
about the investment products and the risk return profile of those product. Return are
the gains or losses from a security in a particular period and are usually quoted as a
percentage. What kind of returns can investors expect from the capital markets? A
number of influence returns.
Risk is the chance that an investment actual return will be different than expected.
Risk means you have the possibility of losing some, or even all, of your original
investment. low level of uncertainty ( low risk) are associated with low potential
returns. high level of uncertainty (high risk) are associated with high potential of
returns. Investment risk can be divided into two which is systematic risk and
unsystematic risk.
4.6 Investment diversification

Diversification is a technique that reduces risk by allocating investment among various
financial instruments. It aims to maximize return by investing in different areas that
would each react differently to the same event. Most investment professionals agree
that, although it does not guarantee against lost, diversification is the most important
components of reaching long-range financials goals while minimizing risk.
Diversification means spreading risks, which is accomplished with the act of spreading
the money into various type of investment. Technically risk diversification refer to the
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process if combining many securities that do not move together in a portfolio to reduce
overall risk.
4.7 Modern portfolio theory

One of the most important and influential economic theories dealing with finance
and investment, MPT was developed by Harry Markowitz and published under the title
"Portfolio Selection" in the Journal of Finance in 1952. The theory is based on
Markowitz's hypothesis that it is possible for investors to design an optimal portfolio to
maximize returns by taking on a quantifiable amount of risk. Essentially, investors can
reduce risk through diversification using a quantitative method.
Modern portfolio theory says that it is not enough to look at the expected risk and
return of one particular stock. By investing in more than one stock, an investor can reap
the benefits of diversification – chief among them, a reduction in the riskiness of the
portfolio. MPT quantifies the benefits of diversification, or not putting all of your eggs
in one basket.
For most investors, the risk they take when they buy a stock is that the return will
be lower than expected. In other words, it is the deviation from the average return. Each
stock has its own standard deviation from the mean, which modern portfolio
theory calls "risk." The risk in a portfolio of diverse individual stocks will be less than
the risk inherent in holding any one of the individual stocks, provided the risks of the
various stocks are not directly related. Consider a portfolio that holds two risky stocks:
one that pays off when it rains and another that pays off when it doesn't rain. A portfolio
that contains both assets will always pay off, regardless of whether it rains or shines.
Adding one risky asset to another can reduce the overall risk of an all-weather portfolio.
In other words, Markowitz showed that investment is not just about picking stocks, but
about choosing the right combination of stocks among which to distribute one's nest
egg.
Modern portfolio theory states that the risk for individual stock returns has two
components: Systematic Risk – These are market risks that cannot be diversified away.
Interest rates, recessions and wars are examples of systematic risks. Unsystematic
Risk – Also known as "specific risk," this risk is specific to individual stocks, such as
a change in management or a decline in operations. This kind of risk can be diversified
away as you increase the number of stocks in your portfolio (see Figure 1). It represents
the component of a stock's return that is not correlated with general market moves.
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For a well-diversified portfolio, the risk – or average deviation from the mean – of
each stock contributes little to portfolio risk. Instead, it is the difference _
or covariance – between individual stock's levels of risk that determines overall
portfolio risk. As a result, investors benefit from holding diversified portfolios instead
of individual stocks.
Figure 1
 What MPT Means for You
Modern portfolio theory has had a marked impact on how investors perceive risk,
return and portfolio management. The theory demonstrates that portfolio diversification
can reduce investment risk. In fact, modern money managers routinely follow its
precepts. Passive investing also incorporates MPT as investors choose index funds that
are low cost and well-diversified. Losses in any individual stock are not material
enough to damage performance due to the diversification, and the success and
prevalence of passive investing is an indication of the ubiquity of modern portfolio
theory.
That being said, MPT has some shortcomings in the real world. For starters, it often
requires investors to rethink notions of risk. Sometimes it demands that the investor
take on a perceived risky investment (futures, for example) in order to reduce overall
risk. That can be a tough sell to an investor not familiar with the benefits of
sophisticated portfolio management techniques.
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Furthermore, MPT assumes that it is possible to select stocks whose individual

performance is independent of other investments in the portfolio. But market historians
have shown that there are no such instruments. In times of market stress, seemingly
independent investments do act as though they are related.
Likewise, it is logical to borrow to hold a risk-free asset and increase your portfolio
returns, but finding a truly risk-free asset is another matter. Government-backed bonds
are presumed to be risk free, but, in reality, they are not. Securities such as Malaysia
Treasury bonds are free of default risk, but expectations of higher inflation and interest
rate changes can both affect their value.
4.8 Collective investment scheme
A type of investment scheme that involves collecting money from

different investors and then combining all the money collected to fund the investment.
A collective investment scheme may also be called a mutual fund. Similar to a mutual
fund, a collective investment scheme provides almost absolute control of the
investment to the company pooling and investing the money
5. SHARIA COMPLIANT PRODUCT
5.1 SHARES
Investment shares is the basic unit of ownership in a company. Shareholders have the
right to vote at general meetings. Shareholders can expect to benefits from the profits
earned by the company in the form of dividends if any and also form the growth in the
value of the company.
Risk associated with the buying shares:

 Value of shares may fall
 Dividends may not be paid
 Loss of the entire investment if the company goes out of business
 Difficult to sell if the demand for them is lacking.
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IS THE INVESTMENT SHARES IS PERMISSIBLE?
 Investment shares is permissible in Islam, it is a form of partnership. The share

certificate represents the equity of the company where shareholders are the
capital provider (rabb al-mall) and the company is the entrepreneur (mudarib).
Buying and selling of the shares on the stock market are also permissible as the
shares are legal property that can be traded. The permissible status also applied
to their bonus and right issues.
In Malaysia, the screening process of the Sharia compliant companies listed on
Bursa Malaysia is done by the SC. The list is published twice a year which is in
May and November.
5.2ISLAMIC UNIT TRUST

Islamic Unit Trust Funds, more commonly referred to as Shariah funds are a group
of specialized collective investment funds which offer investors the opportunity to
invest in a diversified portfolio of securities that are managed and selected by
professional portfolio managers in a accordance to Shairah principles.A Shariah Funds
offers similar benefits to any other funds with the same investment objective the only
difference is that it only in companies that are in compliance with the Sharia principles
as outlined by the Sharia Advisory Council (SAC) of the Malaysian Securities
Commission like all the other non-Islamic Funds in Malaysia., Sharia Funds are
registered by the Securities Commission and placed under the same stringent regularity
criteria.
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WHAT KIND OF COMPANIES ARE SHARIA FUND ALLOWED TO INVEST IN?
Companies whose core activities are not the Sharia principles are classified as approved
securities. The securities that are from the list approved securities are based on the following
criteria:
 Financial services based on riba (interest)

 Gambling (maysir)
 Manufacture or sale of non-halal products or related products
 Conventional insurance
 Entertainment activities that are non-permissible according to Shariah
 Manufacture or sale of tobacco-based products or related to Shariah
 Stockbroking or share trading in Shariah non-approved securities and
 Other activities deemed non-permissible according to Shariah.
5.3 ISLAMIC PRODCUT ETF
ETF is an exchange-traded funds, is a unit trust funds that is listed and traded on a stock
exchange. ETF are open-ended with unique kind creation and redemption mechanism
supported by a system of participating dealers and liquidity providers. The difference
between ETF and unit trust is in the manner in which their units are bought and sold.
An ETF is an index tracking fund. Most ETF are passively managed index although
there is ongoing work to create enhanced and actively managed ETF. In managing
index funds passively, mangers do not pick stocks based on fundamental analysis.
Instead managers track the performance of a benchmark index.
WHAT IS AN ISLAMIC ETF?

An Islamic ETF and conventional ETF share common characteristics. The main
difference between a conventional ETF and Islamic ETF is the benchmark index that
the Islamic ETF tracks. An Islamic ETF only tracks an Islamic benchmark index where
the index constituents comprise companies which are Sharia companies.
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5.4 ISLAMIC PRODUCT REIT

REITs is an investment vehicle that proposes at least 50% of its total assets in real
estate. It can be through direct ownership or through a single company whose asset
comprises of real asset. Islamic REITs is a collective investment scheme in real estate
whose operate permissible that are in line Sharia principles.
PERMISSIBLE ACTIVITIES :
 Financial services based on interest
 Gambling manufacture/sale on non halal products
 Conventional insurance
 Entertainment activities not in line with sharia
 Stock broking and trading in conventional securities
 Hotels and resort
COMPARISON BETWEEN REITs AND IREITs
Feature Conventional REITs Islamic REITSs

Shariah commite/advisor There is no necessity for any IREITs should assign a
Shariah committee advisor shariah committee to certify
conformity with shariah
conditions
Permissibility of activities No constraint Only allowable activities
perform by tenants approved
Insurance for properties Conventional insurance with The manager has to be
insurance companies as concern about the
permitted by trustee availability of Islamic
insurance before going to
conventional insurance
Financing No limitations Financing should be shariah
compliant
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5.5 ISLAMIC PRODUCT DERIVATIVE

A financial instruments used to manage one’s exposure to today volatile markets. A
derivative product’s value upon and is derived from an underlying instruments, such as
commodity prices, interest rate, indices and share prices. Derivative instruments can be
traded in an organized exchange or over-the counter (OTC). Future and options are
essentially elementary derivative mostly traded on exchange.
5.5.1 FUTURE CONTRACT

Is a between two parties to buy or sell the underlying instrument at a specific time in
the future for a specific price determined today.An option, providers the holder/buyer
the right, but not the obligation, to purchase or sell a certain quantity of the underlying
instruments at a stipulated price within a specific time period by paying at a stipulated
price within a specific time period by paying a premium.
5.5.2 OPTION CONTRACT

Financial instruments that convey a right, but not an obligation to engage in a future
transaction on some underlying securities or in futures contract.Option are traded both
on exchange and in the over the counter market. Call option gives the holder the right
to buy the underlying asset by a certain date for a certain price. Put option gives the
holder the right to sell the underlying asset by a certain date for a certain price. The
price in the contract is known as the exercise prices or strike prices. The date in the
contract is known as the expiration date or maturity.
SHARIA COMPLIANT DERIVATIVE INSTRUMENT
All Islamic Financial instruments in general must meet a number of criteria in order to
be considered halal (permissible)
 Riba
 Gharah
 Maysir
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5.6 ISLAMIC PRODUCT SUKUK

Sukuk are bonds based on Islamic principle. Sukuk are monetary determined
participants certificate of equal unit value issued to investors, to represents their
proportionate share in the ownership of the underlying assets and a pro rata share in the
income generated by those assets.The sukuk certificate holders can earn a pro rata share
in the receivables generated appreciation by the assets and depending on the type of
assets in any capital appreciation of the assets that is realized once those assets are sold.
Sukuk certificate are traded in the secondary market.
DIFFERENCE BETWEEN SUKUK AND BOND
CONVENTIONAL BOND ISLAMIC SUKUK

Papers which evidence indebtedness issued Papers which evidence in indebtedness
by the issuer/borrower an IOU with a ownership and investment issued by the
promise to pay debt at maturity issuer/borrower using Shariah principles
loan Not a loan: based on sale, lease, partnership
or agency relationship
Paper in exchange for months Asset in exchange for months
interest Profit/income from asset
Trades-sales of debt instruments Trades-sales of asset
No restriction on utilization off proceeds Utilization of proceeds for Shariah compliant
purpose
5.6.1 TYPE OF SUKUK
a) SUKUK AL-IJARAH
The popularity of this structure can be attributed to a number of different factors; some
commentators have described it as the classical sukuk structure from which all other
sukuk structures have developed, whilst others highlight its simplicity and its favour
with Shari’a scholars as the key contributing factors. In the Islamic finance industry,
the term ijara is broadly understood to mean the ‘transfer of the usufruct of an asset to
another person in exchange for a rent claimed from him or, more literally, a lease. In
order to generate returns for investors, all sukuk structures rely upon either the
performance of an underlying asset or a contractual arrangement with respect to that
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asset. The ijara is particularly useful in this respect as it can be used in a manner that
provides for regular payments throughout the life of a financing arrangement, together
with the flexibility to tailor the payment profile and method of calculation in order to
generate a profit.
b) SUKUK AL-MURABAHAH
contractual arrangement between a financier (the seller) and a customer (the
purchaser) whereby the financier would sell specified assets or commodities to the
customer for spot delivery in the expectation that the customer would be able to meet
its deferred payment obligations under the murabaha agreement.
The deferred price would typically include the cost price at which the financier
had purchased the assets/commodities, plus a pre-agreed mark- up representing the
profit generated from its involvement in the transaction. The payments of the deferred
price from the customer may be structured as periodical payments on dates specified at
the outset, thus creating an income stream for the financier for the term of the
transaction.
The same characteristics of the murabaha structure can also be adapted for use as
the underlying structure in a sukuk issuance. Sukuk proceeds from Investors may be
applied by Issuer to acquire commodities and on sell such commodities to the
Originator to generate revenue from the murabaha deferred price which would be
distributed to the Investors throughout the term of the sukuk al- murabaha.
c) SUKUK AL-SALAM
A salam contract involves the purchase of assets by one party from another party
on immediate payment and deferred delivery terms. The purchase price of the assets is
typically referred to as the salam capital and is paid at the time of entering into the
salam contract. The assets sold under the salam contract are referred to as al-muslam
fhi, delivery of which is deferred until a future date.
A salam contract may be construed as being synonymous with the objective of a
forward sale contract. Forward sale contracts are generally forbidden under Sharia
unless the element of uncertainty (gharar) inherent in such contracts is effectively
eradicated. For this reason, certain criteria must be met in order for a salam contract to
be Shari’a compliant.
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d) SUKUK AL-MUSHARAKAH
Its simplest form, a musharakah arrangement is a partnership arrangement between
two (or more) parties, where each partner makes a capital contribution to the partnership
(musharakah), in the form of either cash contributions or contributions in kind.
Essentially, a musharakah is akin to an unincorporated joint venture but may, if
required, take the form of a legal entity. The musharakah partners share the profits of
the musharakah in pre-agreed proportions and share the losses of the musharakah in
proportion to their initial capital investment.
e) SUKUK AL-MUDHARABAH
The term mudarabah is broadly understood to refer to a form of equity-based
partnership arrangement whereby one partner provides capital (the Rab al-Mal) and the
other provides managerial skills (the Mudarib).The same characteristics of the
mudarabah structure can also be adapted for use as the underlying structure in a sukuk
issuance as each Investor’s purchase of sukuk would represent units of equal value in
the mudarabah capital, and are registered in the names of the sukuk certificate holders
on the basis of undivided ownership of shares in the mudarabah capital. The returns to
the Investors would represent accrued profit from the mudarabah capital at a pre-agreed
ratio between the Rab al-Mal and the Mudarib, which would then pass to the Investors
according to each Investor’s percentage of investments in sukuk mudarabah.
f) SUKUK AL-ISTISNA
In the modern day context of Islamic finance, the istisna has developed into a
particularly useful tool in the Islamic funding of the construction phase of a project, it
is often regarded as being similar to a fixed-price turnkey contract. In order to enable
investors to receive a return during the period where assets are being constructed under
an istisna arrangement, some Shari’a scholars have permitted the use of a forward lease
arrangement (known as ijara mawsufah fi al-dimmah) alongside such istisna
arrangement. Accordingly, sukuk al-istisna often combines an istisna arrangement with
a forward lease arrangement – whilst the istisna is the method through which the
investors can advance funds to an originator, the ijara provides the most compatible
payment method to those investors.
17
5.7 INVESTMENT ACCOUNT
Investment account offered by Islamic banks is known as general investment account

(GIA). It is the Islamic version of fixed deposit. Investor has no authority to interfere
in the management of the funds.The bank has the right to manage the investment as it
thinks fit by placing it into profitable businesses that are Shariah compliant. This type
of partnership is known as Mudharabah Mutlaqah. The profit sharing ratio is
determined on the asset and forms the basis of the aggrement between the investor and
the bank. Investor determines how long his investment period would be upon maturity.
5.8 STRUCTURED PRODUCT
Structured product is a new investment alternative, giving investor’s access to a wider

range of markets and pay-out structures. It is linked to various classes of assets. Which
may include foreign shares, interest’s rates, foreign currencies, indexes and
commodities.The returns may vary, are not guaranteed and are subjected to the bank of
fluctuation in the underlying asset. Structured product must be with SC on structured
products.
5.9 INVESTMENT LINKED-TAKAFUL
An investment-linked takaful is a family takaful plan that combines investment and

takaful cover. Your contribution will provide takaful cover which includes death and
disability benefits, and part of the contributions will be invested in a variety of sharia
approved investment funds. Participants may choose the type of investment depending
on the takaful operators.
5.10 TAKAFUL CONCEPT IN INVESTMENT-LINKED TAKAFUL
Part of your contribution will be allocated to a takaful fund in the form of participative
contribution (tabarruq), and the balance of the contributions will be used to purchase
the investment-linked units. You will undertake a contract (aqad) to become one of the
participants by agreeing to mutually help each other, should any of the participants
18
suffer a misfortune arising from death or disability. If you did not make any claim
during the period of takaful, you are entitled to a share of the surplus in the takaful fund.
The surplus will be shared between you and the takaful operator based on the concept
of surplus sharing according to a pre agreed ratio. Your share of the surplus will be used
to purchase additional investment-linked units. The takaful operator acts as a manager
to oversee the management of the investment fund. In return, the takaful operator
receives a fee (ujrah) for its service.
6. ALTERNATIVE INVESTMENTS
6.1 Property
Investment property is real estate property that has been purchased with the
intention of earning a return on the investment, either through rental income, the future
resale of the property or both. An investment property can be a long-term endeavor or
an intended short-term investment such as in the case of flipping, where real estate is
bought, remodel or renovated, and sold at a profit. Investment in property is permissible
in islam as long as the financing is done according to shariah and the property is rented
out to those carrying permissible activities.
Protection of the property must also be obtained from takaful operators. Property
has traditionally been regarded as a hedge against inflation. In a diversified portfolio,
property works to balance the portfolio as it has the potential to reduce the risks without
significantly reducing returns. An investor must know the market in which he is
searching for property or hire an expert to help. For investors seeking an income stream
from rental properties, the most important aspects to consider are property location and
market rental rates. As for location, many successful rentals are located in close
proximity to major schools. For example, if you buy a property near a state university,
students are likely to want to rent it year after year. There are also many other features
of a profitable rental property, and some take time to learn. the biggest difference
between a rental property and other investments is the amount of time and work you
have to devote to caring for it. If you don't want to, you can hire a professional property
manager. But his or her salary then becomes an expenses that impacts your investment
profitability.
19
6.2 Gold
In order to fully understand the purpose of gold, one must look back at the start
of the gold market. While gold's history began in 3000 B.C, when the ancient Egyptians
started forming jewelry, it wasn't until 560 B.C. that gold started to act as a currency.
At that time, merchants wanted to create a standardized and easily transferable form of
money that would simplify trade. Because gold jewelry was already widely accepted
and recognized throughout various corners of the earth, the creation of a gold coin
stamped with a seal seemed to be the answer. Following the advent of gold as money,
gold's importance continued to grow.
History has examples of gold's influence in various empires, like the Greek and
Roman empires. Great Britain developed its own metals-based currency in 1066. The
British pound (symbolizing a pound of sterling silver), shillings and pence were all
based on the amount of gold (or silver) that it represented. Eventually, gold symbolized
wealth throughout Europe, Asia, Africa and the Americas. Gold is a type of precious
metal. Gold and other precious metals are assets that are both tangible but not liquid
unlike real estate which is tangible but not liquid or company shares and bonds which
are liquid but not tangible.
The most important reason for investing in gold is diversifying risk. Gold is an
excellent portfolio diversifier, since it has very low correlation with other assets. This
is why the yellow metal is one of the most effective hedges or safe havens. Gold can be
seen as an insurance against tail risks, financial black swans, high and accelerating
inflation or systemic crises. There are many ways to invest in gold. The most traditional
way of investing in gold is by buying bullion bars or coins. However, investors can also
purchase gold exchange-traded products or gold certificates, to avoid the risks and costs
associated with the transfer and storage of physical bullion. Investors can also invest in
gold via derivatives, such as forwards, futures and options. The indirect way to have
exposure to the price of gold is buying the shares of gold mining companies.
20
6.3 Commodity
Commodities are raw materials that are sold in bulk, such as oil, wheat, silver, gold,
pork bellies, oranges and cocoa. They are generally raw materials that are eventually
used to produce other goods such as oil for gasoline, cocoa for chocolate, wheat for
bread, etc. As such, they give an investor the opportunity to invest in the materials that
a country (or corporation) produces as well as those that it consumes. Most larger
manufacturers buy the commodities they need on the "spot market," where the full cash
price is usually paid on the spot. Speculators typically buy and sell commodities with
option and futures contracts. There are several types of commodity investment which
is direct and indirect.
Direct refers to cash purchase of physical commodities such as agricultural
products, metals, crude oil. Indirect refers to the acquisition of indirect claims on
commodities such as equity in plantation companies or future contracts. Commodities
offer investors a number of benefits. First, Hedge Against Inflation: Commodity cash
prices may benefit from periods of unexpected inflation, whereas stocks and bonds may
suffer. Commodities are "real assets", unlike stocks and bonds, which are "financial
assets". Commodities, therefore, tend to react to changing economic fundamentals in
ways that are different from traditional financial assets, particularly with respect to
inflation.
Commodity prices usually rise when inflation is accelerating, so investing in
commodities can give portfolios a hedge against inflation. Conversely, stocks and
bonds tend to perform better when the rate of inflation is stable or slowing. Faster
inflation lowers the value of future cash flows paid by stocks and bonds because those
future dollars will be able to buy fewer goods and services than they would today.
However, this inflation advantage is captured more efficiently by direct investment in
commodities than, for example, investment in commodity-related equities whose prices
also reflect the financial prospects of the issuer or actively managed commodity futures
accounts, which tend to reflect the manager's skills at selecting the right commodities.
Second, Performance/Return: Investor interest in commodities has soared in

recent years as the asset class has outperformed traditional assets such as stocks and
bonds. Over the five-year period ended March 31, 2006, the Dow Jones AIG
Commodity Index has returned 10.6%, versus 2.6% for the S&P 500. Part of this
21
superior performance is attributable to a rise in commodity prices driven by increased

demand from China and other emerging countries.
Third , Enhanced Diversification: Portfolio diversification is the primary
benefit of holding commodities. The reason for that is the commodity investor is
exposed to commodity futures prices. Changes in those prices reflect changing
expectations about future supply and demand for commodities. Factors that change
expectations - such as a weather event in the Midwest or a strike in a copper mine
in Chile - typically don't have anything to do with stock and bond markets.
7. SHARIAH SCREENING ON SHARIAH COMPLIANT SERVICES.
Shariah screening methodology was formulated by the Shariah Advisory Council

(SAC) of Securities Commission (SC) of Malaysia to assist investors in identifying
Shariah-compliant securities. This is to ensure that their investments are in accordance
with Shariah principles which prohibit the elements of riba, maysir and gharar. The
earlier methodology which adopted quantitative assessment that comprises four
activity-based screening benchmarks and qualitative assessment was introduced in mid
1990s keeping in view the infancy of the Islamic capital market in Malaysia. Based on
the methodology, the SAC classified securities issued by companies as either Shariah-
compliant securities or Shariah non-compliant securities.
The methodology had recently been revised as an effort to harmonize the standard
to global expectation with the introduction of the two-tier quantitative approach which
applies the business activity benchmarks and the newly- introduced financial ratio
benchmarks, while existing qualitative assessment continues to be applicable. The main
references for the screening methodologies are the Quran and Sunnah.
However, the Holy Quran and the Sunnah do not explicitly state the guidelines for
the quantitative criteria. For instance, the thresholds for financial ratios are based on
interpretation in the form of ijtihad (reasoning from the source of Shariah by qualified
Shariah scholars) and Shariah statements that are not directly related to capital markets.
There is some degree of freedom for scholars to specify their quantitative criteria.
These different opinions and judgements of the scholars can be due to complexity of
transforming the historical and verbal Shariah sources into quantifiable and formal
22
guidelines to be used within a modern guideline evaluation and portfolio management

system”(Derigs & Marzban, 2008).
Therefore, screening guidelines and strategies among users of screening process
varies and changes over time. Dated back to the mid 1990s, Shariah screening
methodology in Malaysia has been established in accordance with the infancy of the
Islamic Capital Market (ICM). Since then, the ICM has shown a tremendous progress.
In year 2000, market capitalisation of Shariah-compliant securities was RM254.1
billion and it has increased to RM1.017 trillion in May 2013 (Malaysian International
Islamic Finance Centre, 2013).
In Malaysia, the SAC of the SC plays an important role in certifying and updating
the list of securities that have been classified as Shariah-compliant securities. This
Shariah-compliant certification is done through the input and support received from the
SC. To classify security as whether Shariah comply or not, SAC will analyse the data
gathered by SC from various sources including the annual reports and enquiries made
to the companies. Based on the latest annual audited financial statements of the
companies, the SAC continuously reviews the Shariah status of listed companies. The
SAC has applied a standard criterion to evaluate the business activities of the companies
and companies whose activities are not contrary to the Shariah principles will be
classified as Shariah-compliant securities (Securities Commission Malaysia, 2013a).
In classifying securities listed in Bursa Malaysia as whether Shariah-compliant or

not, there are two stages of screening applied by the SAC of SC of Malaysia in the
previous Shariah screening methodology. In the first stage screening, based on the data
gathered by the SC, the SAC will be focusing on the activities of the company who
issues the securities. As long as the activities of those companies are not contrary to the
Shariah principles, their securities will be classified as Shariahcompliant securities.
However, their securities will be classified as Shariah non-compliant securities if they
are involved in any of the following core activities:
a) Financial services based on riba (interest);

b) Gambling and gaming;
c) Manufacture or sale of non-halal products or related products;
d) Conventional insurance;
e) Entertainment activities that are non-permissible according to Shariah;
23
f) Manufacture or sale of tobacco-based products or related products;

g) Stockbroking or share trading in Shariah non-compliant securities; and
h) Other activities deemed non-permissible according to Shariah.
Shariah screening process involves two assessments, quantitative assessment and

qualitative assessment. :
7.1 The quantitative assessment

In the quantitative assessment, the SAC will measure the level of mixed contributions
from permissible and non-permissible activities towards group turnover and group
profit before tax of the companies. The calculated contributions from non-permissible
activities will then be compared with the benchmarks which have been established by
the SAC based on ijtihad. If the contributions from non-permissible activities exceed
the benchmark, the securities of the company will be classified as Shariah non-
compliant securities. The benchmarks are as follows:
a) The Five Percent (5%) Benchmark

The contributions from activities which are clearly prohibited such as riba (interest-
based companies like conventional banks), gambling, liquor and pork should not
exceed 5%.
b) The Ten Percent (10%) Benchmark

The contributions from activities that involve the element of ùmum balwa (a prohibited
element affecting most people and difficult to avoid) must not be more than 10%. The
interest income from fixed deposits in conventional banks and tobacco-related activities
are good examples of the activities that belong to this benchmark.
c) The Twenty Percent (20%) Benchmark

The contributions from rental payment of Shariah non-compliant activities such as the
rental payment from the premise that involved in gambling, sale of liquor, sale of pork,
conventional bank etc. must be below 20%.
24
d) The Twenty Five Percent (25%) Benchmark

This benchmark is for activities that are generally permissible according to Shariah and
have an element of maslahah (benefit in general) to the public. However, there are other
elements that may affect the Shariah status of these activities due to the attachment of
activities which are non-permissible according to Shariah. Among good examples of
the activities that belong to this benchmark are hotel and resort operations, share
trading, stock broking and others. The contributions must be lower than 25%.
7.2 The qualitative assessment

As for the qualitative assessment, the SAC considers two additional criteria for mixture
activities companies. This assessment will be taking into consideration the followings:
a) The company must have a good image i.e. public perception towards the company must
be good; and
b) The core activities of the company are important and considered maslahah to the
Muslim ummah (nation) and the country, and the non-permissible element is very small
and involves matters such as ùmum balwa, ùruf (custom) and the rights of the non-
Muslim community which are accepted by Islam.
Hence, it can be summarized that for securities issued by mixture activities companies
to be classified as Shariah-compliant securities, it must pass both assessments i.e.
quantitative assessments as well as qualitative assessments (Securities Commission
Malaysia, 2013a).
The revised Syariah screening methodology
On 18 June 2012, the SAC of SC of Malaysia made an announcement on the

adoption of a revised Shariah screening methodology to determine the Shariah-
compliant status of companies which are listed on Bursa Malaysia. This revised
methodology adopts a two-tier quantitative approach which applies the business activity
benchmarks and the newly introduced financial ratio benchmarks, while maintaining
the existing qualitative assessment. The outcome of the revised methodology is
25
reflected in the List of Shariah-compliant Securities announced and published by the

SAC effective from November 2013 (Securities Commission Malaysia, 2012).
The main differences between the revised methodology and previous methodology are
as in Table 1 below:
Table 1: The Main Differences between the Revised Methodology and Previous
Methodology
Revised Methodology CHANGES Previous Methodology

First Stage Screening - focusing
All companies must undergo all Drop on the activities of the company to
screening stages which covers: determine the non-permissible
activities if any.
Second Stage Screening – a
mixture activities company should
undergo:
1. Quantitative assessment 1. Quantitative assessment
First-tier : Compute the contribution of
Compute the contribution of nonpermissible activities and
non-permissible activities and compare with the group turnover
compare with the group and group profit before tax.
turnover and group profit Benchmarks used;
before tax. Benchmarks used; Reduced i. 5%
i. 5% ii. 10%
ii. 20% iii. 20%
iv. 25%
benchmark
Second-tier : from four to
Compute the financial ratios: two
i. Cash/ Total Assets ii.
Debt/ Total Assets Each ratio
must be lower than 33%.
Newly
introduced
2. Qualitative assessment
a. Image of the company 2. Qualitative assessment
b. Maslahah,ùmum balwa, ùruf a. Image of the company
etc. b. Maslahah, ùmum balwa,
ùruf etc.
Unchanged
26
The reduced business activity benchmarks

The first-tier of the quantitative assessment in the revised Shariah screening
methodology is the business activity benchmarks. Under the revised methodology, the
business activity benchmarks which previously consisting of four benchmarks had been
reduced to only two benchmarks. Basically, the contribution of non-permissible
activities which are allowed for 10% benchmark under previous methodology had been
reduced to 5%. In other words, the contributions from nonpermissible activities that
involve the element of ùmum balwa now must not be more than 5% only.
The other benchmark is 25% benchmark which had been reduced to 20%
benchmark. It means the contributions from non-permissible activities such as hotel
and resort operations, share trading and stock broking now must be lower than 20%.
Under the revised Shariah screening methodology, the list of non-permissible activities
under each benchmarks are as follows:
 The Five Percent (5%) Benchmark

The contributions from the followings activities to the group turnover and profit before
taxation should not exceed 5%:
 conventional banking;
 conventional insurance
 gambling
 liquor.
 Pork and non-halal food and
beverages;
 interest income from conventional accounts and instruments, including
dividends from investment in Shariah non-compliant instruments and interest
income awarded arising from a judgement by a court or arbitrator;
 tobacco and tobacco-related activities
 other activities deemed non-compliant according to Shariah.
 The Twenty Percent (20%) Benchmark

The contributions from the followings activities to the group turnover and profit before
taxation should not exceed 20%:
 hotel and resort operations;

 share trading
 stockbroking business
27
 rental received from Shariah non-compliant

activities
 and other activities deemed non-compliant
according to Shariah.
The newly-introduced financial ratio

In the second-tier of the qualitative assessment, each company who issues the securities
need to undergo the financial ratio screening. This screening is newly introduced under
the revised methodology whereby there was no screening process for this financial ratio
under previous methodology. In this assessment, the SAC will calculate the following
ratio which intended to measure riba or riba-based elements in the company:
 Cash over total assets

Cash to be included in the calculation includes cash placed in conventional accounts
and instruments only. If the company placed the cash in the Islamic account, it should
be excluded from the calculation.
 Debt over total assets

Debt to be included in the calculation includes interest-bearing debt only. If the
company used Islamic financing such as sukuk, it should be excluded from the
calculation.
To fulfil the requirement for this assessment, each ratio must be less than 33% and only
securities issued by company that meet the requirement in all assessments will be
classified as Shariah compliant securities (Securities Commission Malaysia, 2013c).
28
8. REFERENCE
Internet :
https://i-epistemology.net/v1/economics-a-business/899-the-time-value-of-money-
concept-in-islamic-finance.html
http://www.business-guard.com/en/definitions/liquidity-planning
https://www.theirm.org/the-risk-profession/risk-management.aspx
https://economictimes.indiatimes.com/definition/risk-return-trade-off
https://www.accountingtools.com/articles/2017/5/13/risk-return-trade-off
Modern Portfolio Theory: Why It's Still Hip |
Investopedia https://www.investopedia.com/managing-wealth/modern-portfolio-
theory-why-its-still-hip/#ixzz54BOi09za
Book :
ISLAMIC FINANCIAL PLANNING AND WEALTH MANAGMENT
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MBFB 3083 (ISLAMIC FINANCIAL PLANNING AND WEALTH MANAGEMENT)

1. ISLAMIC INVESTMENT PLANNING

term “investment” is used differently in economics and in finance. Economists refer to

3. SHARIAH OVERVIEW OF INVESTMENT

Shariah is divine guidance from Allah. Shariah usually is understood as Islamic

4. Shariah Concept Relevant To Investment

4.1 Time Value Of Money

4.2 Liquidity Planning

4.3 Risk Management

4.4 Risk Return Tradeoff

Some investors develop a portfolio of low-risk investment, low-return

4.5 Risk return and risk

4.6 Investment diversification

4.7 Modern portfolio theory

 What MPT Means for You

Furthermore, MPT assumes that it is possible to select stocks whose individual

4.8 Collective investment scheme

A type of investment scheme that involves collecting money from

5. SHARIA COMPLIANT PRODUCT

Risk associated with the buying shares:

IS THE INVESTMENT SHARES IS PERMISSIBLE?

 Investment shares is permissible in Islam, it is a form of partnership. The share

5.2ISLAMIC UNIT TRUST

WHAT KIND OF COMPANIES ARE SHARIA FUND ALLOWED TO INVEST IN?

 Financial services based on riba (interest)

5.3 ISLAMIC PRODCUT ETF

WHAT IS AN ISLAMIC ETF?

5.4 ISLAMIC PRODUCT REIT

COMPARISON BETWEEN REITs AND IREITs

Feature Conventional REITs Islamic REITSs

5.5 ISLAMIC PRODUCT DERIVATIVE

5.5.1 FUTURE CONTRACT

5.5.2 OPTION CONTRACT

SHARIA COMPLIANT DERIVATIVE INSTRUMENT

5.6 ISLAMIC PRODUCT SUKUK

DIFFERENCE BETWEEN SUKUK AND BOND

CONVENTIONAL BOND ISLAMIC SUKUK

5.6.1 TYPE OF SUKUK

5.7 INVESTMENT ACCOUNT

Investment account offered by Islamic banks is known as general investment account

5.8 STRUCTURED PRODUCT

Structured product is a new investment alternative, giving investor’s access to a wider

5.9 INVESTMENT LINKED-TAKAFUL

An investment-linked takaful is a family takaful plan that combines investment and

5.10 TAKAFUL CONCEPT IN INVESTMENT-LINKED TAKAFUL

Second, Performance/Return: Investor interest in commodities has soared in

superior performance is attributable to a rise in commodity prices driven by increased

7. SHARIAH SCREENING ON SHARIAH COMPLIANT SERVICES.

Shariah screening methodology was formulated by the Shariah Advisory Council

guidelines to be used within a modern guideline evaluation and portfolio management

In classifying securities listed in Bursa Malaysia as whether Shariah-compliant or

a) Financial services based on riba (interest);

f) Manufacture or sale of tobacco-based products or related products;

Shariah screening process involves two assessments, quantitative assessment and

7.1 The quantitative assessment

a) The Five Percent (5%) Benchmark

b) The Ten Percent (10%) Benchmark

c) The Twenty Percent (20%) Benchmark

d) The Twenty Five Percent (25%) Benchmark

7.2 The qualitative assessment

The revised Syariah screening methodology

On 18 June 2012, the SAC of SC of Malaysia made an announcement on the

reflected in the List of Shariah-compliant Securities announced and published by the

Revised Methodology CHANGES Previous Methodology