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Good financial planning means taking into account future goals and devising a long-term financial strategy to achieve them. Do you want to get married and purchase a home?
Can you afford to perform hajj and umrah? What about retiring without selling your assets? As a Muslim investor, it’s not simply about wealth management. It’s about building a future on foundations that adhere to Islamic principles.
Below is a guide that looks at financial planning from an Islamic perspective. We’ve laid out five key principles to smart financial planning, but from a shariah-compliant perspective.
Nowadays there’s a growing number of excellent options for Muslim investors, so we hope this inspires you to secure your financial future while maintaining your Islamic ethics.
Growing your wealth while keeping it secure means allocating your savings across a mix investments. As a Muslim investor, you have to do this while avoiding industries that don’t align with Islamic values. That may sound tricky and time consuming, but there’s a ton of shortcuts and pre-selected pools of investments to guide you. Consider the following ideas:
a. Invest in shariah-compliant indices or exchange traded funds (ETFs). These halal ETFs are diversified investments that contain sharia-screened assets.
That means you don’t have to spend time deciphering whether any of the companies engage in prohibited activities. Popular ETFs include the Wahed FTSE USA Sharia ETF (HLAL) and the SP Funds S&P 500 Sharia Industry Exclusion ETF (SPUS). And there’s a growing list of others. For a more tailored approach, you can use online platforms and apps like Musaffa or Zoya to quickly research whether a specific stock or ETF is halal.
Read more: How Can A Muslim Investor Choose the Right ETF?
b. Want to get into debt investing? You can invest in sukuk. These operate like bonds, except rather than earning interest, you earn through profit-sharing or rental income on a tangible pool of assets.
You can buy sukuk from both sovereign entities, like the UAE , or corporate entities, like Saudi Aramco.
c. Want to buy property? Buying just one can be risky. To diversify, you can invest in shariah-compliant Real Estate Investment Trusts (REITs), generating rental income without having to buy any single property on your own.
REITs have become a growing choice for GCC residents since they launched in the region in 2010.
Read more: Conventional REITs Vs. Islamic REITs, And The Case For Investing in Them
To ensure a sustainable future, you should minimize debt and create a long-term plan to pay it off. Of course, in Islamic finance, loans must also be interest free. To pay for long-term assets like a home, you can pursue Islamic mortgages, or murabaha, a system in which the bank buys the property and sells it directly to the buyer with a profit margin and payable installments.
Read more: What Are The Main Islamic Financing Methods
In conventional wealth management, charitable giving is something of an afterthought, a kind gesture or perhaps simply a tax writeoff. Islamic financial planning however means thinking seriously about Zakat, one of the five pillars of Islam.
Typically Zakat means giving 2.5% of your eligible wealth annually. When creating a financial plan, it’s important to keep accurate records of Zakat-eligible assets, which include productive assets like cash, stocks, and precious metals (personal assets like primary real estate and vehicles are typically exempt).
There’s online Zakat calculators to help you figure this out, or you can consult an Islamic financial advisor if your finances are more complex.
It’s important to plan for rainy days. One of the major differences between conventional financial planning and Islamic financial planning is how to deal with risk.
While most people would agree that excessive risk taking is unwise and hedging against it with insurance is a smart idea, traditional finance often uses instruments like derivatives while hedging against risk – this type of speculative behavior is banned in Islamic finance, which prohibits both speculation and ownership of non-tangible assets. Islamic finance instead promotes risk sharing, mutual cooperation and shared responsibility.
To keep you and your loved ones insured against hardship, you can buy into a Takaful fund, which operates like insurance while remaining shariah-compliant.
Whether for life insurance, or health and property insurance, Takaful enables participants to make contributions that can be used in times of need.
Read more: Comparing Conventional Insurance and Takaful Islamic “Insurace”
Key to smart financial planning is building a long-term strategy for retirement - what will your income needs be later in life? What type of lifestyle do you hope to maintain?
Making regular contributions to a retirement fund can be a lifesaver in the years to come. This should be systematic and not sporadic.
Islamic pension plans - As with other areas of finance, conventional pension plans and retirement funds often invest in assets that break Islamic principles.
But here too there are many good halal alternatives. You can invest in any number of Islamic pension funds.
Examples include the AlRajhi Private Pension Plan or Dubai Islamic Bank’s Banca Takaful. Many commercial banks in the region have similar plans for making regular contributions into a shariah-compliant fund that can pay out later.
Discalmer:
"Funding Souq KSA is regulated by the Saudi Central Bank (SAMA). This communication is not directed at or intended to be acted upon by any Person in the DIFC. Funding Souq operates an Islamic Window. This content is not reviewed by the Firm's Shariah Supervisory Board, is for educational purposes only, and the Firm does not directly or indirectly provide these services."
