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Book Summary

TK 1003 Wealth Planning & Mgmt

September December 2010


Topic 1: Wealth Creation and Mobilization............................................................................................1

Topic 2: Nature and Scope of Wealth Planning ...................................................................................2
Topic 3: Wealth (Asset) Allocation Process ............................................................................................4
Topic 4: Investment in Real Estate .......................................................................................................14
Topic 5: Investment in Securities .........................................................................................................18
Topic 6: Insurance and Takaful Scheme ...............................................................................................20
Topic 7 Estate planning and Faraid ......................................................................................................23
Topic 8: Retirement Planning ...............................................................................................................27
Topic 9: Taxation Planning and Management ......................................................................................34
Topic 10: Zakat .....................................................................................................................................40
Topic 11: Waqaf ...................................................................................................................................41
Topic 12: Issues Related to the Wealth Planning and Management....................................................45

Topic 1: Wealth Creation and Mobilization

Summarized by: Shujau HP: 010-8931372.
Q1: What is wealth?
Wealth is an abundance of items that has economic value - Money, real estate, health care, and
Wealth is a relative concept and varies between societies and countries: wealthy person in village is not
so in KL. A wealthy person in KL may be an average person in New York.
Wealth increases with production and decreases with consumption.
Wealth also means surplus income. (wealth sustains you when you are not working)
Income and wealth: Income is how much assets that come in, whereas wealth is how much assets one
has accumulated over a period of time.
Wealth is not limitless it may be available for certain period of time.
Q2: What are the three fundamental characteristics of wealth in conventional aspect?
1. Growth.
2. Consumption.
3. Marginal Value- Resources are scarce.
Q3: What is the difference between wealth in conventional and Islamic perspective?
Islam: wealth consist both elements of life: material and spiritual. Conventional: only material.
Q4: What are the Steps of Wealth Planning?
1) Creation
2) Accumulation
3) Protection
4) Distribution
5) Purification. (Purification is found in Islam unlike conventional perspective). Hadith: Give alms from
your wealth for indeed alms purifies
Q5: what are the rights to wealth from Islamic perspective?
1. Right to God we are trustee- the real owner is Allah.
We shall be accountable: must pay Zakat.
Must follow the guidelines of Shariah while accumulating and distributing the wealth.
Blessed wealth is the wealth that brings benefits to oneself and others. Hadith: the upper hand is
better than lower hand (Giver is better than the receiver in the sight of Allah)
2. Right to men.
Give the Poor and needy
Poor: Whose income is less than 50% of their basic needs - Food, clothing, and shelter.
Needy: Income is not sufficient to their needs. (Income greater than 50% but not enough)
Q6: What are the two aspects of private ownership?
Formal ownership: legal aspect proof of your ownership, e.g. you own a house.
Exercise of ownership rights: usufructs rights, e.g. you rent a house.
Q7: What is wealth accumulation?
It is an investment strategy to preserve the invested capital so that it cannot be lost under all
Preservation is the primary objective in wealth creation according to many wealth planners.
In wealth accumulation, the higher the risk the higher the return you earn.
Q8: What are the three basis of wealth creation?



Q9: What is the challenge in wealth accumulation?

The challenge is to strike a balance between preserving the accumulated wealth and beating inflation at
the same time beating the risk of losing the purchasing power.
Q10: What are the three main factors in wealth accumulation?
1. The more we save the more we accumulate.
2. The more we save, the less we spend.
3. The more we save, the less rate of investment we need.
4. Other four factors: Externalities (health costs, pollution); Commercial activities (destruction of natural
habits); Harmful goods (cigarette); and ethics (Pollution and environmental costs may not be
Q11: What does Islam say about wealth accumulation and wealth generation?
Wealth accumulation (It may imply hoarding and monopoly) is prohibited (Q9:35).
Wealth generation (It implies the expansion of wealth) is encouraged (Q55:60).
Wealth must not be kept idle, but it should be invested. Hadith: Whoever develops an idle land, it
belongs to him.
Abdul Rahman bin Aufs wives inherited 80,000 dinars and his relatives 40,000 dinars.
Wealth generation is not restricted even during sacred day Friday. (Q62: 9-10)
Hadith: It is not your wealth unless you spend it. (meaning)
You spend your wealth to get falah (success) in this world and Hereafter.
Paying alms - Zakah (one of the pillar of Islam) is one of the forms of wealth management that helps to
reduce the inequalities in wealth and income distribution. (Reduce the gap between haves and havenots).
Sacred duty - If you dont pay Zakat you may receive capital punishment. (Caliph Abu Bakr)
Q12: What are the skills that you need in wealth generation?
Skills in mobilizing
Planning and management skills
Financial skills
Communication skills
Marketing skills
Credit skills
Technical skills
Q13: How does Islamic world view play significant role in wealth planning?
The world view of Islam is based three concepts: Tawhid (Oneness of Allah), Khalifa (Vicegerency),
and Al-Adl wal Ihsan (Justice and benevolence).
Justice (adl): A fair exchange between money and goods.
Benevolence (Ihsan): Do better than justice or excellence in performing the task.
Shariah not only forbid riba but it provides an alternative trade. (2:275)
There are many Shariah based commercial instruments: Salam; Istisna Murabahah; BBA; Ijarah;
Mudharabah; Musharakah and so on.

Topic 2: Nature and Scope of Wealth Planning

Wealth Planning and Management Summarized By: Shinta. Email:

Wealth planning
More sophisticated and complicated than financial planning, especially for High Net worth Clients
(HNWC) who have so much surplus in their wealth.
Its used to make sure weve enough in future. Use for long term and need some help from specialized
Step of wealth planning :
1) Generate the wealth
First step, how to get the wealth is. It must be through halal ways
2) Expanding/increasing/make it growth
Through the right way according to Shariah
3) Enhancement
Allocate the wealth correctly and properly
4) Preservations
Make protection toward the wealth through insurance/takaful
5) Distributions
Use the wealth in right way (consumption, saving, etc)
6) Purification (redistribution)
Other people right in ours.
Example : waqf, sadaqah, faraid, zakah
Aspect of wealth planning;
Investment planning
Designed to help individuals with investment strategies with the objective of generating
positive return on investment.

Education planning
Object to plan our children education to prepare better life for them.
Since the cost of education has increased over the years, parents should develop a saving
strategy before their children start post-secondary education. For education plan, the earlier
the start it will be better.

Tax planning
The objective is to minimize or defer income taxes payable. The plan should be made through
legal ways by structuring the right mix of investments.
e.g.: by investing in different countries where tax rates are lower
by leveraging on tax laws that allow for tax restructure so that we can pay the tax later
Generally the minimization of income tax can be viewed from two perspectives. While individual is still
alive there are variety ways (in many countries) which will either defer tax of shift income so that annual
income taxes can be paid at some stage and arrangements can be made so that the funds income tax may
come about by leaving specific assets to certain group of taxpayers. At the time of death, it may come
about by leaving specific assets to certain group of taxpayers.

Retirement planning
Plan to ensure that weve enough money to spend when we retire. Depend on what we want to do in our
retirement time (lifestyle, place to live) including the future inflation rates, anticipated cost living, current
retirement asset, current retirement saving, and also investment strategies
e.g. : Insurance policies, investment in properties, saving

Estate planning
It is a lifelong affair planning. It can protect peoples wealth and legacy, helping to grow and preserve asset
to our asset the heir in the future.

The major objective of this plans are to ensure:

Protection of heirs by providing them with control and continuity of service
Control who manages and receives assets after the death of us
Administrative expenses and legal fees associated with handling the estate planning and management are
- Greater share of assets are transferred to our heir and other beneficiaries
Element of wealth planning (refers to page 34-35)
- Use of private banking technology
- Customer relationship management
- Financial planning tools
Process of wealth planning (refers to page 36-37)
- Taking inventory
- Analyze and evaluate
- Designing the plan
- Implementation
- Monitoring and reviewing
A major dimension of wealth planning process is the adjustment of liquidity (the nearness of a financial asset to
cash which itself is a financial asset differing from all others in that cash is only used as a medium of exchange).
The liquidity of a given financial asset is gauged by the ability to convert the asset into cash at any time without
making a loss.
Wealth Planning in Islam
Islam encourages people to make planning about their wealth, although the real wealth actually belongs to Allah
and man is only trustee. They are required to manage wealth according to the dictates of Allah, because they
have been respected and considered as vicegerent of the earth and Allah will ask them about their responsibility
toward their wealth in hereafter.
In Islam, one must always give preference to the hereafter unlike the risk return where one has a choice whether
to take a higher risk in exchange of a higher expected return. It is consider to trade-off concept in Islam which
has another dimension between this world and the hereafter. Meanwhile this does not mean that one should not
manage risk.
According to Islam, process of wealth planning should include the following:
- Cooperative effort
- Peace and stability
- Service to others
- Charity to help others
- The principle of sharing
- Responsibility towards development
Islamic wealth planning is subject to three major conditions:
- Wealth must be planner in absolutely honest manner
- Wealth must be planned and managed in a highly responsible manner, to benefit its
owner. Family, and community as a whole
- Wealth must be planned through halal (permissible) means and does not in any way
distract Muslim from their strong faith in Allah
Objective of wealth planning in Islamic Perspective
- To obtain only income, which is not forbidden according Shariah principle
- To encourage mankind to work hard and honestly in increasing income and managing
- To generate and accumulate income in a legitimate way
- To donate and develop well being

Topic 3: Wealth (Asset) Allocation Process

Summarized by: Asrar and Suha.

Wealth allocation process divided into four sub topic:

1) Establishing of objectives:
-Financial planner should understand the modern portfolio management
-Islamic financial planner should ensure that the process is Shariah compliance
-Modern portfolio theory (MPT): The analysis of rational portfolio choices based on efficient use of risk and has
two important roles: a) Practitioners recognize the important of portfolio management for the investment
objectives. B) Helped spread the knowledge and use of quantitative methods.

A)Speculation and quantification of clients objectives, constrains and preferences

1) return requirements and risk tolerance level
2) Muslims objectives avoid investment in riba, maisir, gharar, haram
1) Internal: Liquidity needs, time horizon and unique client circumstances
2) External: Tax, Legal, regulatory requirements

Portfolio polices and strategies

-Investment policy statement defines the investors objectives, constraints, amount of funds, investment
-Investment policy statement will allow for continuity of policy decisions regardless of change in fiduciaries.
-Investment policy statement long term goal: helps the investor keep sight of objectives and match the
appropriateness of objectives.
-Investments policy statement short term goal: lead to sub-optimal investment performance.
- Based on the investment policy statements planner can make asset allocation decision that suits the investors
investment strategies to make security selection.
Investment approaches based on investment structure are:
-Passive investment approach:-doesnt react to changes in expectations.
-Buy or hold strategy
-Portfolio of securities design to replicate the return
-fixed portfolio
-Active investment approach:- Does react to change in expectations
-changes benchmark or composition portfolio
-positive excess risk-adjusted return or positive alpha
-Semi-active, risk-controlled, enhanced index approach:-react to change of expectation
-managers increase the weightage to make holding profitable.
B) Economic/ market factors:-Forming of capital market expectations
-differentiate between assets in the long run based on level of risks and expected

The Execution step:-The manager constructs and revises a portfolio within the guidelines of strategic asset allocation.
-Also used to determined asset allocation
-Investment strategies + expectations= Portfolio
-When the planner used portfolio he should understand the transactions cost includes:
1) Explicit transaction costs (ex-commission)
2) Implicit transaction costs (ex-bid, ask price)
3) Missed trade opportunity costs (ex-lower price)
The Feedback step Diagram

Return Objective:
-Return requirement: is the return level necessary to achieve the investors primary long-term objectives driven
by i) Annual spending ii) Savings
-Return desire: is the return level to achieve secondary goals or objectives
-Approach used is total return which look at investors goal + annual return
-If return objective doesnt meet the level of risk of the investor, the financial planner should eliminate the goals
and objectives
-By the cash flow analysis in the investment policy statement we can calculate the required return.

For the Financial planner must address his investors return objectives by knowing the following
-How is return measured?
-How much return does the investor say he wants?
-How much return does the investor need to achieve on average?
-How is the return objective set?
For the financial planner to address his investors acceptance level of risk through knowing the following:
-How do I measure risk?
-What is the investors willingness to take risk?
-What is the investors ability to take risk?
-What are the specific risk objectives?

According to Malkiel (1996) factors affect persons risk:

Risk level takes several forms:
1) Market beta which calculate level of fluctuation of market return
2) Mean-variance (MV) the mean of periodic returns
3) Investors likelihood returns affected by inflation rate

Investment constrains

1)Investors investment
time horizon
(based on liquidation)
There are three ways the
time horizon influence:

2)The tax regime which

regulates the particular
investment or investor

3) Liquidity needs may

determine the type of
investment suitable for an

-Tax effect on the


4) Legal consideration
and special circumstances
faced by the investor
-ethics, beliefs

-Liquidity: quick sale

-Marketability: ability to
sale off

The length

b) The policy


-Short term investment

stable prices
-Long term investment
take more risk


Markowitz model

Samuelson-Merton Model

Measure of wealth

End wealth

Life time consumption


Single period

Multi periods


Savings and diversification

Saving, diversification, hedging,


A guide line for benchmark must be :


Specified in advance
Cleary measurable
Reflective of current investment
Specified in advance.

2- Identifying potential opportunities.


Capital market expectations: after the manager decides the asset allocation then processes the principle
of diversification. Being by dividing potential investment channels into asset classes .
Capital market expects future return and volatile correlation .
Capital market expectations based on historical returns ( disadvantages
1. Lack of accuracy . 2. Irrelevant data to the presents .)

Long term capital + return / risk objective + constrains = Appropriate strategic asset allocation

2. Shariah Compliance of Asset Class:

Haram generate profit in unacceptable way e.g. alcohol , gambling etc.
Scholars accepted 5% of the core business and some 10 % .
Riba is forbidden because it is predatory and produces profit at another persons expense.
Ratios to measure riba :
Ratio to measure the amount of a companys liquidity.
Ratio to measure a companys interest income.
Ratio to evaluate how much interest paid on debt.
3. Possible Investment Asset Classes:
Aim to achieve the highest return with the given level of portfolio risk.

-Mark Kritzman characteristic for asset class:

1) Independent
2) Raise utility without superior
3) Internally homogeneous
4) Investable
4. Asset Allocation Strategies
a. Integrated Asset Allocation as a strategy:- consist of series of decision step:
-Optimal portfolio determination, three steps:i) Advisor choose a function to maximize
ii) Historical time series data
iii) Input obtained allocation decision
-Investors who are higher risk tolerance level the lower the lower the penalty of the required return.
To eliminate portfolios:1) Mean-variance are the best approach to determine investor utility
2) Stochastic dominance: by selecting a group of factors whose combination will be closest to the desired
result. (e.g. graph p.104) (B lies right= higher return)
3) Combine the two approaches and specify the portfolio by minimizing the probability that the return
will fall short of the target rate of return
b. strategic asset allocation as an Asset Allocation Strategy
-long term policy uses to estimate future capital market return, risk and covariance by using long
term mean return, riskiness, covariance and forecast of future capital market conditions over the
planning horizon.
-Manager do minor rebalancing during the planning horizon to meet the investor`s
- Rebalancing shouldnt be more than once a quarter
- Strategic asset allocation is the same as integrated asset allocation except there is no need for
feedback loops via D4 (page 97)
c. Tactical asset allocation strategies
-It is active asset management approach
- Attempt to derive incremental returns from changes in capital market conditions.
-Class appraisal: The proportion of the portfolio in stocks rose relative to bonds
-Investor risk tolerance and investor-specific information are assumed to be unchanged unlike under
the strategic allocation approach
-Tactical asset allocation is the same as intergraded asset allocation except feedback loops via step
D4 doesnt involve feedback to step A1
-Implement asset class the fund manager must:


i) Establish portfolio normal mix jointly with the investor

ii) Establish a normal range or mix
d. Insured asset allocation as an asset allocation strategy:
- Reactive asset strategy known as constant proportion strategy
- Capital market conditions, risks and returns do not change but the investors objectives and constrains
change along with the investors wealth/ net worth
- Increase in the proportion invested in equity also bonds drop in the allocation for t-bills
-Hedging is a common method of achieving an insured portfolio
e. The great debate over the value of asset allocation
-Allocation of asset most crucial part of the investment process
f. Asset-liability approach to asset allocation
- Portfolio management focus risk volatility of returns from invested assets
-Focusing on asset gives only a partial optimization process
-Facing risk from variable of returns and asset also claim on them
-To achieve the goal involve hedging liability risk with asset risks
-It called portfolio dedication or liability funding
-Asset-liability management involves two: i) cash matching ii)duration matching
-Cash-matching using a portfolio of bonds is constructed matches portfolio with the nearly possible
-Duration matching is slightly more complex approach requires the reinvestment of the interim returns
of a bond (e.g.. Reinvestment returns over the investment horizon plus the original principle due to
-The present value of cash flows will be received is matched against the number of years into the future
the liability is due Passive , Active or Semi- approaches to Investing:
Active asset allocation approach is routinely change after initial allocation is made so should be
checked continuously.
Passive asset allocation approach once its established, left alone
Is when markets are efficient and processes that generate return are stable in the long run.
Traditional allocation strategies are passive.
Constant mix approach:
-Low portfolio turnover but doesnt preclude that adoption of active security selection procedures.
-The portfolio allocation mix is set but may be allowed to vary within a given tolerance levels difference
away from the benchmark allocation.
-This tolerance level may be as fixed percentage of the portfolio value as the investor decide (e.g..+- 5%)
Constant proportion portfolio Insurance:
-Seeks to vary the amount invested in stocks according to a formula that includes a floor portfolio value as:

Ringgit Value Invested in Stocks = Multiplier x (portfolio value- floor value)

Buy and hold strategy:

-were advocated therefore active security selection was though unnecessary, by scholar research
Semi-active approach:
-Allows recourse to lower cost passive selection alternatives but retain the flexibility to make asset or
security selection.
Rebalancing the stocks portion of an asset portfolio:
1) Indexing approach
2) Constant Beta approach
3) Constant Proportion approach
Rebalancing the bonds portion of an asset portfolio:
1) Indexing


2) Ladder of maturity approach

3) Barbell portfolio approach
4) Bullet Strategy approach
5) Substitution Swap
6) Rate Anticipation Swap
7) Inter market/ Yield spread Swap
8) Rating Swap
Manager selection:
Choosing fund managers criteria:
1) Investment approach
2) Expected return
3) Expected impact on the volatility of clients portfolio
4) Liquidity
5) Trust
6) Fees
Fund selection:
Unit trust mutual funds provide diversification, divisibility, low transaction costs, record keeping, and
professional management for the individual investor.
Unit trust/mutual has made choosing the right funds a challenge to many investors although
performance statistics and fund attributes (e.g.. Information on fund managers, expense ratio etc)
-In the beginning the financial planner should know his investors risk aversion, investment horizon, tax
and financial status.
-The approach used when selecting funds is the analytic hierarchy process (AHP)
Advantages of this approach are:
1) Based on each individuals unique investment objectives and constraints it provides a systematic
approach to rank the mutual funds.
2) It prevents the investor from making inconsistent preference assignment
3) It minimize the amount of technical input required from investors
The difference between AHP and MPT is that AHP concern about investor preferences

The AHP methodology consists of four steps:

1) Develop the hierarchical structure:
-Selection criteria
2) Assign a relative importance of each selection
3) Rank alternative under each criterion
4) Rank each alternative`s contribution to the mission
AHP framework helps in to represent the problem in a hierarchical structure.
There are two hierarchies structure (refer p.124)
Each is divided into three levels: (refer p.125-127)
Risk measurement tool:
-Markotwiz and sharp
-Jensen and information
-VAR: value at risk it focus on the current portfolio
i) var should be computed to an asset, benchmarks and liabilities of the investors portfolio
ii) var can be used for short-term as well as long-term


iii)var measure the worst case

Portfolio performance evaluation:
-Superior performance achieved by :i) superior security or ii)superior timing
-Performance can be measured in two ways: i) absolute measure ii) compare relative terms

Ways of measuring return:

1) Dollar-weighted Return
Dollar weighted return (%)=
2) Chain-linked Returns
Chain-linked Returns= [(1+PR1 ) x (1+PR2)+ (1+PR3)x.x(1+PRn)] -1
3) Cumulative return:
-Total return up by two was: i) Actual growth or ii) cumulative percentage
4) Annualized Time-weighted returns
Annualized return
5)Simple cash flow-Adjusted returns

6)Time-Weighted Return approach

Time-Weighted return= [(1+R1 )x(1+R2 )x(1+Rn )]1/n -1
Modified Diets=
Ways of Adjusting Returns for Risks
1) Sharpe Ratio
Sharpe Ratio=
2) Treynor Ratio
Treynor Ration=
3) Jensens Alpha or excess Return

4)Modigliani-Square or M measure and Treynor square or T measure

5)Information Ratio or Excess Return to non-systematic risk ratio or appraisal ratio
Information ratio =


6)Downside Deviation or risk of loss measure

Downside Deviation risk=
7)The Sortino Ratio
Sortino Ratio=
8)Value at Risk
( refer page139)

4. Potential Investment Channel

Structured Products
-Any investment vehicle designed to fulfill a principal objective by combining a range of techniques or
elements, which couldnt achieve the same result individually
-Areas or structuring the fund are i) hedging ii)zero coupon
1) Multi-asset means clients assets are invested equally across fixed income, property,
equities and hedge funds
2) Multi-manager allows the selection of a range of managers who are skilled in
managing the different asset classes
3) Multi-style: within each assets class, the investment team gets to blend investment
styles and approaches. Ads further diversification and reduces duplicating holding
4) Multi-currency led to development where the exposure is kept to the base currency of
the fund thus reduce currency risk
5) Neutral asset allocation means the portfolio is rebalanced on monthly bases to ensure
investors exposure to the four asset class is virtually equal.
Customers are not exposed to deliberate over or underweight asset allocation
Increases risk but remains neutral
Allows fund to make a profit from rising asset classes and reinvest the falling

Topic 4: Investment in Real Estate

Summarized by: Shujau. (010-893-1372)
4.1 Definition
Real estate refers to real property.
Real is also mean royal. During the time of kings it is known as Royal property.
4.2 Characteristics of real Estate
4.2.1 Physical characteristics:
1. Immobility effect: no physical market
2. Huge in Size
3. Heterogeneous Each property may vary according to location, design, size, layout, security etc.
4. Durability/Perpetuality
5. Long Production Time - normally take long production time to be completed.
6. Property Management
4.2.2 Economic Characteristics:
1. Interests and Rights It must be capable to transfer of ownership and any particular interest.
2. Decentralized Market Normally properties are bought and sold through agents.
3. Hedge against Inflation real estate provide better hedge against inflation.



Large Transaction Costs/Indivisible include many costs professional fees- estate agency, legal
fees, registration of interests with relevant authorities, high renovation costs and so on.
Supply limited overall supply of land is virtually fixed.

4.2.3 Legal Characteristics:

1. Different legislation and law real estate transaction is subject many laws National Land Code
1965, Contract Act 1950, Town and Country Planning Act 1972.
2. Complicated Transaction Procedures Laws and regulations require strict compliance.
3. Statutorial charges assessment charge, quit rent, premiums, and Real Property Gain Tax.
4.3. Price determination
Price is determined by the forces of demand and supply.
Real estate property is relatively inelastic in nature due to physical in nature of land, planning laws
and security measures.
There are four main interests in real estate:
Investment generally long term.
Speculation generally short term.
In general there are main six factors which affect when determining price of real estate. There are:
1. State of the economy e.g.: recession demand goes down.
2. Changes in the structure of the economy- e.g. increase use of IT will need to increase size of office.
3. Productivity of the property.
4. Government intervention e.g.: New shopping centre shift the demand to that area.
5. Changes in the transport facilities e.g.: Establishment of new LRT line will increase the price
properties nearby.
6. Alteration in the size and the structure of the population e.g.: increase in population itself and
working population may increase the demand for real estate properties.

Nature of the Market

Space markets means that households and business buy and lease buildings to live and work.
Asset markets means investors buy and sell the rights to future cash flows that real estate will generate
from the users in the space markets.

In real estate there two types of market: open and controlled market.

Open Market
In an open market it is not possible to tell definitely whether the existence of supply result in demand or
vice versa.
There are many factors that affect the price of real estate in an open market. Some of them are as follows:
a) Economic Factors.
1. Regional e.g. Property in Malaysia may be more demanding than Thailand.
2. International e.g. Currency exchange rate - change of oil price affects global economy.
b) Geographical
a. Location e.g. Properties in KL is more demanding than Selayang.
b. Topography e.g. Houses in Hilly area more demanding than low-lying houses or flats.



Climate Areas where natural disasters like typhoon or earthquakes are less demanding
than other some area of Japan (always quakes) some area of Bangladesh (always
d. Communications e.g.: Condominiums with telephone line, broad band and wireless
demand higher price.
e. Services e.g. Proper security, club house, and proper maintained condominiums demand
higher price.
c) Population grow of population demand higher price.
d) Physical Diversely shaped, with uniquely designed, build with special materials with new
facilities, equip with high technologies would result to demand higher price for such properties.
e) Technological or Building Method.
f) Fashion and Trends
g) Occupancy Status
h) Development Approvals Announcement of government plan to develop area would attract more
investors and may increase the price consequently.
a. Tenure and Title Conditions or Restrictions e.g.: Freehold demand higher price than
Leasehold properties.
b. Parties Involved.
i. Valuers or Property Consultant Independent Professional Valuers determine
the price of the real estate by using different valuation techniques or methods.
ii. Real Estate Agents They tries to obtain a reasonable price by bargaining
between the vendor and purchaser.
Control Market
1. Government Policy Controlled Ceiling Price e.g. 30% of houses in particular area should not
exceed RM42, 000. This is to facilitate the middle and lower class of the country to enjoy the
constitutional right to live.
a. New economic Plan Quota on Ethnic Group Purchasers (Discount) e.g. Bumiputra
gets 5-10%. To reduce the unequal of income distribution between two ethnic groups.
Methods of Evaluation
There are five common methods to evaluate real estate:
1. Comparison Method
2. Investment Method.
3. Cost Method.
4. Profit Method.
5. Residual Method.
1. The comparison Method (* Most important method for exam purpose)
In this method you compare similar property in the same area where the market is really stable.
When comparing the two properties the difference must be borne in mind: size of property; the floor
area; the design; the number of rooms; age; and condition of the property.
The problem may arise when the market is not stable and this method of evaluation may not be the
appropriate one.
Note: To understand how the comparison method is done please refer to the table in page 164.
2. The investment Method
This method is used for valuing properties which are normally held as income producing investments.
The formula for investment valuation is (Net income Years Purchase = Capital Value)
Note: To understand how the investment method is done please refer to page 165.


3. The cost Method / Depreciated Replacement Cost (DFC)

This method is used just to cover the cost and it is not used to make profits.
The government may use this method when building schools, fire stations, government quarters, temple
or mosque.
In this method, as estimate must be made to find the cost of replacing the site and building at the same
time making an allowance for depreciation.
Note: To understand how the cost method is done please refer to page 166.
4. The profit or (Account) Method
This method is used when you find the comparison method is not available. (!!!)
The types of properties are restaurants, hotels, or theatres.
Under this method, the valuation may have to be made purely by reference to the profits which the
entrepreneur wishes to make from that particular property.
Note: To under how the profit method is done please refer to page 167&168.
5. Residual Method
This method is used for redevelopment: how much will it takes to renovate a particular property.
Note: To understand more please refer to page 169.
Real Estate Cycles
a) Mechanism of Real Estate Market Cycle.
a. Intervention by government during peak or low
b) International Influence
c) Regional Influence
Risks involved in Real Estate Business
1. Economic Investment Risk
a. International Risk of speculation cause economic downturn sometimes e.g. International
speculator George Soross speculation affect negatively on South-East Asian currency market
in 1990s.
b. Regional Regional political corporation e.g. Political Boycott e.g. UN sanction on Iran.
c. Cycle of Demand and Supply we can always predict but we can never know the actual
d. Government Policy e.g. higher rate of Tax of Real Property Gain.
e. Value Depreciation however, depreciation could be offset by appreciation of land value.
2. Building Physical Risk
a. Expected Risk
i. Normal wear and Tear
b. Unexpected Risk
i. Natures Act e.g. Flood, landslide, earthquake, Tsunami and so on.
ii. Lack of maintenance or low construction quality e.g. cracks on wall movement of
the base, erosion on the construction materials.
3. Legal Risk
a. Acquisition Government acquisition may be to develop Highways.
b. New zone declared by government.
4. Government Policy
a. New Structure Plan e.g. Vision 2020.
Laws Relating to Real Estates
1. National Land Code 1965 The purpose of this law is to ensure the uniformity of law and policy with
respect to land tenure, registration of titles relating to land, transfer of land, leases, and other rights
throughout Malaysia.




Town and County Planning Act 1976 - it guide to structure the planning system and formulates a policy
in general.
Local Government Act 1976 It deals with provision of services to the residents and tax assessment
from landlords.
Real Property Gains Tax (RPGT) to control the real estate secondary market to reduce the
transaction of buying and selling of real estate which is done not intended for the primary purpose
dwelling and other business purposes.
Stamp Duty Act 1949 It guide on the assessment and collection of stamp duties according to the
Strata Title Act 1985 It deals with the duties and rights infringed with the property e.g.
Condominiums all the landlords bear the responsibility of maintaining, renovating, of the common
areas of the condominium and swimming pools and other properties by charging maintenance fee and
sinking fund from the landlords or strata title holders.

Proper valuation and examination should be done while acquiring a property.
Investment in real estate today requires complicated researched, tools, and strategies.
We require deep understanding of characteristics, price determination and life cycle of real estate.
We need professional advisors who can advise investors in strategy study, legal study, compatibility
study, market study, marketability study, architectural study, engineering study and financial study.

Topic 5: Investment in Securities

Summarized by Habibur Rahman HP: 014-930-8935
Securities are financial assets traded in capital market. Investors hope to get return with these market
traded instruments form the annuity payments and from the potential increase in the value of the capital. The
objective for issuing securities is always to raise financing.
Types of Securities: Instruments are broadly categorized into two categories: Equity instruments and Debt
instruments. (A third increasing popular category is hybrid which combines features of both). The difference is
that debt is fixed in time and fixed in claim whereas the equity residual in claim and perpetual in time, because it
provides ownership. The most common equity instrument is the common stock and the most common debt
instruments are binds.
Equity Instruments: Common Stocks: It represents ownership in a listed company which is jointly owned by
its shareholders. Shareholders enjoy the 1) rights to residual value of a firm in the event of liquidation, 2) right
to dividends and 3) voting right in AGM. Investment in stocks is certainly riskier as compare to investing in
bonds and deposits, however, over the long run; it tends to be higher returns as empirical studies in several
developed markets have shown.
Initial Public Offering: This is a process for a firm to sell its stock to the public. A firm must get approval from
the Securities Commission to become a public listed firm after following its guidelines and requirements. Firm
hires a Merchant bank to undertake IPO issuance. IPO market is often called Primary Market while the place
where trading takes place subsequently is called Secondary Market.
Halal Stocks and the Shariah Index: Shariah Advisory Council was formally established on 16 May 1996. It
was formed to advise SC on matters related to the Islamic capital market. Shariah compliant companies will be
classified as approved securities and listed on Bursa Malaysia. Securities will be excluded from this list if riba,
haram products, gharar, or gambling are involved in the operations. In order to classify the securities SAC uses
Quantitative and Qualitative methods. In Quantitative classification companies are either 100% permissible or
100% non-permissible or mixed where the non-permissible activities are less than 3%. Quantitative method is


about the public image of the company, whether it has maslahah to the Ummah, and the country, haram element
is small enough etc. Each company is reviewed based on its last financial reports.
Debt Instruments: These are the promissory notes issued by the borrower. Sovereigns are the bonds issued by
the governments in order to finance development projects. Private entities issue Private Debt Securities. Bonds
are also classified by their tenor. Short term (less than 1 year) bonds are known as Treasury Bills if the issuer is
the government and Commercial Papers if the issuer is a firm. Long term bonds are called Government Bonds if
they are from the government and Corporate Bonds if they are form firms. Coupon Bonds are bonds that payout
periodic interest.
Callable and Convertible Bonds: In callable bond, the issuer has right to redeem them at a predetermined price
before maturity and in convertible bonds the holder has the right either to receive the face value of the bon or to
convert them to a predetermined number of common stocks of the issuing firm at maturity.
Islamic Interbank Money Market: IIMM was established in 1994 to function as interbank market for Islamic
banks in Malaysia. The money market is where short term debt instruments are issued and traded. Over the 12
years, it has seen the introduction of several new instruments.
Islamic Debt Securities: Sukuk while IIMM instruments are of short tenor, Sukuk are intended to fulfill the
needs of medium and long terms securities. BBA, murabaha, istisna and ijarah are the underlying contracts of
bond in Malaysia. Most famous of them is BBA framework. Industry is moving towards Sukuk ijarah due to the
some concern about BBA.
Hybrid Instruments: These are instruments that have features of both equity and debts. Followings are few of
such instruments:
Preferred Stock Preference Shares: they have a par value, fixed dividend amounts and generally a terminal
maturity (these are the features of debt securities), dividend on preferred stock may be missed [if the company
lacks the financial ability] and are not tax deductible.
Warrants/Transferable Subscription Rights: It is a security that entitles the holders to buy stock of the
issuing company at a specified price. It is typically attached to loan-stocks or bonds issued by the company. The
exercise of warrants/TSRs leads to dilution.
Call Warrants: these are essentially call options issued by a third party, not the issuing company like TSRs. It
doesnt lead to dilution and it is not attached with other securities.
Irredeemable Convertible Unsecured Loan Stock: It is like fixed income debt instrument and then converted
into equity at predetermined dates, at or prior to maturity.
Price Determination:
Pricing/Valuation of Stock: there are numerous factors that influence the movement of stock price, like us firm
specific factors, industry factors, the macro environment, investor psychology, sentiments, performance of other
regional stock markets. One of the modules is Dividend Discount Model (DDM). Stocks price today = present
value of future dividend+ Future selling price of the stock (for more information look, p. 195). Since future price
of the stock cannot be determined today DDM concentrates on earnings from the stocks. Therefore there are
three forms of DDM:

Zero Growth Model: dividend has no growth perpetually. (p.196) D=2rm, 2rm etc.
Constant Growth Model: Dividend grows constantly (p.196) 2rm, 2.1rm, 2.31rm etc. 10%
Accelerated Growth Model: dividend grows faster. 1.8rm, 2.16rm. 2.59rm et. (20%, 22% etc).


The market required rate of return: p=D/(k-g), p=discounted price, D=Dividend, K=The market required
rate of return, G=growth (p.200).
Required Return and Risk: K should increase when the market is riskier.
Pricing/Valuation of Bonds: refer to p. 202.
Bond Yield and Yield Cures: to determine bond price four variables are important; face value, time to
maturity, coupon amount, required yield as discount rate. The yield curve is essentially a locus of points
relating the required yield to the time to maturity for a given risk class of bonds (p. 203).
Interest Rate Change, Bond Yields and Duration: by increasing the interest rate yield curves shifts
upward. The required yields would increase and given the higher discount rate cause bond and other assets
prices to fall (p. 204).
Coupon and Yield To Maturity: the coupon of the bond is the interest paid on the bond YTM is the
required return for the bond. This two elements impact bond prices. If the coupon of is equal to YTM then
the bond sells at par (market price equals its face value or par value). If the coupon is the lower than YTM,
the bond would sell at discount to par (p.205)
Pricing of Islamic Accepted Bills: pricing of Islamic Interbank Money Market instruments is based on
same logic of conventional instruments (discounting model). The prices are determined by discounting
future amounts receivable using market required yields.
Risk Elements: following are the major sources of uncertainty or elements of risk in investment:
Business Risk: Uncertainty of income flows caused by the nature of a firms business.
Financial Risk: increase in uncertainty because of fixed-cost financing, (possibility that a bond issuer will
Liquidity Risk: The risk that arises from the difficulty of selling an asset due to the insufficient secondary
market for that specific asset.
Currency Risk: Risk arises from the changes in exchange rate.
Country Risk: risk arises from the possibility of major changes in the political or economic environment of a
The Capital Asset Pricing Models (CAPM):???
Law Relating to Securities: Banking and Financial Institutions Act1989 (BAFIA) BNM supervises
financial institutions under this act.
Security Commission Act 1993: The role of SC is to promote a strong securities and future market and to
ensure the orderly development of the capital market in Malaysia.
Security Industry Act 1983: It provides a regulatory framework of the securities industry in Malaysia.
Securities Industry (Central Depository) Act 1991: it regulates the central depository relating to the deposit,
holding and dealing in securities deposited etc.
Future Industry Act 1993: It provides regulatory framework of the future industry in Malaysia.

Topic 6: Insurance and Takaful Scheme

Summarized by: Ramil Mirkasimov e-mail: HP: 017 6900 773

Insurance and takaful are instruments that create an instant estate. The word takaful is derived from the Arabic
root word kafala which means to guarantee. The Takaful Act 1984 of Malaysia defines takaful means a
scheme based on brotherhood, solidarity and assistance.
Insurance plays a great role in protection of assets. Planning for the unexpected today may help you avoid
unpleasant surprises in the future. Insurance reimburses people for insured losses in the event of an untoward
incidence such as illness, accident or death. At the same time it can provide investment capital, lend money and


help to reduce anxiety for individuals and society. In general insurance provide financial security against
premature death and disability.
Life insurance, payable when one dies, can provide a surviving spouse, children and other dependents the fund
necessary to help maintain their standards of living, help repay debt and fund education tuition costs.
Factors affecting the need for insurance and takaful:
(a) Income-replacement needs: income that is lost and value of benefits thatd have been provided to
the family had the client been alive
(b) final-expense needs: related to burial, expenses such as burial plot, washing, embalming and
(c) readjustment-period needs: when client dies and his wife is unable to work, wealth planner should
conduct an actual financial needs the clients wife during the adjustment period
(d) debt-repayment needs: include loans on houses, cars, business loans, personal loans, etc.
(e) College expense needs: for families who dont have a college fund
(f) Government benefits: social security survivors benefits like the Employees Provident Fund in
Malaysia and pension funds also affect the need for insurance
(g) Existing insurance and assets: families and individuals will build up some level of savings
earmarked for retirement, travel or college funds.

Mechanisms of insurance and takaful

1. The contract mechanism
Under the contract of conventional insurance the insurance company promises to pay losses in the
event of an insured peril. Many Muslim scholars equate the insurance contract to the sale contract.
Muslim scholars opinion on takaful is that it should be based on tabarru (donation). The insured would
donate his payments to the company and companies compensate him in the event of calamity with an amount
which would assist him and reduce the burden of his loss.
Although the function of insurance and takaful is the same, they differ in the intention, principles and

Important aspects of takaful according to the Working committee for the establishment of Islamic insurance in
the company doesn't assume the risk but it is the various participants who mutually cover each other
company doesn't have any rights to the takaful benefits
all contributions paid by participants will be accumulated in the Takaful Fund
all payment of takaful benefits will be paid by Takaful Fund (money credited to the fund can be
invested in areas approved by Sharia)
surplus from the operation would be shared with the participants by company
company which acts as the mudharrib is entitled to part of the surplus according to a pre-agreed ratio
Under the Takaful system the contribution by each participant should be with the intention of tabarru and not
exchange of goods. Self interest motivated by material gain has no place in takaful scheme.
Bilateral relationship between the operator and the participants is based on (1) mudharabah (profit-sharing) or
(2) wakalah (agency) contract.
Mudharabah contract can be divided into (1a) pure mudharabah and (1b) modified mudharabah contract.
(1a) Pure mudharabah contract: the operator and participant share direct investment income only and the
participants is entitled to a 100% share of surplus


(1b) Modified mudharabah contract: the investment income is reinvested into the takaful fund and the operator
share with the participants the surplus from the fund

There are also two types of wakalah contacts: (2a) pure wakalah and (2b) modified wakalah.
2. Risk management mechanism:
(1) Risk control mechanism: when client is known to have a serious illness such as diabetes. Steps need to be
taken to minimise claims by suggesting participant to take medical insurance or takaful
(2) Risk retention mechanism: insurance or takaful company takes up all claims and has no resource to claim
from any third party
(3) Risk transfer mechanism: transfer of part of risk to reinsurance or retakaful company
(4) Risk sharing mechanism: share the risk with another insurance or takaful company under a co-insurance
Basically there are two types of insurance and takaful products: the life and general for insurance and family
and general for takaful.
1. Life insurance products
There are 4 major types of life insurance: (1) term, (2) whole life, (3) endowment and (4) investment-linked.
(1) term (or temporary) insurance pays only when death occurs during coverage and no payment at the end
of the term. The term is 1, 5, 10, 15, 20 or 30 years. This is the cheapest and can be renewed at a higher
premium. Instead of specifying the number of years the policy is stated in terms of age such as up to
age 65 or 80. and there is no renewal guarantee.
(2) whole life insurance covers the insured's entire life or very long terms such as up to age 88 or 100.
Whole life cash values arise as a by-product of the method selected for paying the premiums. A (2a)
straight life contracts is one where premiums are payable as long as the insured lives. In a (2b) limitedpay life policy premiums are paid for a specified period of time such as 20 years until age 65. Instead of
paying in instalments the premium can be paid in one lump sum and is called (2c) single-premium life.
If insurers terminate their whole life policy before death they will get refund (cash value).


(3) endowment is similar to whole life, but it provides death benefits for a specified time period. It has
cash values and the policy holder is paid the contract's face value at the end of the protection period.
(4) Investment-life insurance divides the premium into two parts: investment account (belongs to the
insured) and risk account (used to manage the fund). In the event of death the insured will get the face
amount plus whatever in his investment account at that time.
2. Family takaful products are similar to investment-linked insurance. It has two accounts: the Participant's
Account (PA) and Participants' Special Account (PSA) which is based on tabarru. If participant dies before
maturity date he will receive whatever he has contributed up to the date of death plus his portion in the PSA
including the profits from investment.
Products related to insurance and takaful are mostly bank products.
Suppose a customer dies before he has finished paying of his loan. Under these circumstances the customer
should have taken a Mortgage Reducing Term Assurance (MRTA) or mortgage takaful. Some banks require
their clients to take up fire insurance. Bank products like savings or investment products, credit card products,
etc. can attach insurance or takaful products.
The laws governing the insurance and takaful industries are the Insurance Act 1996 and the Takaful Act
1984. The governing body for both is Bank Negara Malaysia.
Differences between the Insurance Act and Takaful Act:
the requirement of Sharia Advisory Council (SAC) under Takaful Act
provision of insurable interest in the Insurance act to eliminate gambling elements. Takaful Act is silent
on this
under Takaful Act a person below age of 18 and under Insurance Act a person below 16 is under no
capacity to participate in takaful or insurance
Takaful Act doesn't require any letters of administration to make payment to claimants

Topic 7 Estate planning and Faraid

Summarized by:Ramil Mirkasimov e-mail: HP:017 6900 773
The term estate planning is used to refer to accumulation, conservation and distribution of estate. The purpose
is to boost and preserve the financial welfare of individuals and their families. Estate planning includes not only
the provision that are made for the devolution of a client's property at death, but also those steps of enhancing
general family wealth and its securing while the client is still living.
Planning fundamentals:
determine which types of assets to leave behind and to whom
decide when he wants the beneficiary to receive the assets
compile the assets and estimate the approximate value
decide who will manage the assets
consider whom he wants to be the guardian of his minor children if he becomes incapacitated or died
appoint the representative in making decisions on his behalf concerning his care and welfare
(usually) write a will and prepare a trust, appoint power of attorney and health care proxy
(sometimes) review his estate plan



1. WILL - is the declaration in a prescribed manner of the intention of the person making it with regard to
matter which he wishes to take effect upon or after his death (Halsbury's Laws of England).
The Will is a written document that forces a person to recognize the people he wishes to provide for. It describes
the list of assets and liabilities and their detailed description, executor to effect his wishes, guardianship of
minors and rewarding a friend or relative who is not legal heir.
Purpose of a will is for the making of dispositions of property to take effect on or after the testator's death and
appoint executors to manage or assist in managing his estates.
The appointment of an executor or administrator is one of the essential clauses in a will. Testate person is
who leaves behind a valid will, otherwise he dies intestate and his estate fall under the ambit of the
Distribution Act 1958. A person will be considered intestate if he leaves a will but fail to name an executor.
Section 3 of the Probate and Administration Act 1959 provides that the appointment of an executor may be
Wills Act 1959, Section 3, 4, 5 of the Act claims that the will shall comply with the requirements:
(5) testator reached the majority age of 18
(6) testator of sound mind
(7) will is written in the language preferred by the testator
The Wills Act requires two witnesses other than the lawful beneficiaries to confirm the signature of testator and
that he was of sound mind at time of affixing his signature. The Wills Act doesn't apply to Muslims, inheritance
for them is outlined under the Sharia and is administered by the State Islamic Administration Enactments.
The Probate and Administration Act 1959, which is applicable for Muslims and Non Muslims, lays down the
procedural rules with regards to obtaining the Grant of Probate for the deceased's estate.
Petition is non contentious when the deceased has left a Will and named an executor, Order 71 of the High
Court will apply. Contentious proceedings occur when the deceased has not left a will and not named an
executor, Order 72 will apply and also third parties (creditors) can file a caveat vide Form C to register their
Small estate is defined as immovable properties not exceeding RM 600,000. Land Office under the Small
Estates Act 1955 is the authority to hear such cases. When a person has died intestate leaving a small estate, any
parties claiming an interest can lodge a petition to the Collector of Land Revenue for distribution of the estate.
2. TRUST refers to the legal relationship created by a person when assets have been placed under the control of
a trustee for the benefit of beneficiary or for a specified purpose. Its characteristics are (1) the assets constitute a
separate fund and are not part of the trustees' own estate; (2) title to the trust assets stands in the name of the
trustee; (3) the trustee has the power to manage assets (According to the Hague Convention on the Recognition
of Trusts). Trusts are usually created for the education, maintenance of children, aged parents, and disabled
dependents and for benefit of charities.
Elements of Trust:
time of coming into being of trust relationship
duties connected with the office of trusteeship

Types of Trust:



Express trust: (1) public (charitable) trusts and (2) private trusts which are divisible into (2a) fixed and
(2b) discretionary. The purpose is to benefit fixed people in a particular class
Implied trust
Resulting trust
Constructive trust: doesn't require formalities for its creation
Trust funds in the higher sense: cover governmental obligations

Power of attorney is an instrument created by the person granting the power of attorney (Donor) in favor of a
people named by Donor in the instrument (Donee). The purpose is to grant the Donee with the authority to
represent the Donor in certain transactions with regards to the Donor's affairs as if the Donor himself is carrying
out all the acts the Donors intends to effect. It can be (1) general (Donee is fully authorized to represent the
Donor in all matters) and (2) specific (Donor specifically mention which area of representation is required) by
nature. Most power of attorneys is specific.
Tenor is restricted by a time period. The instrument may be revocable or irrevocable. The requirements for
registration are specified in Section 4 and 9 of Power of Attorney Act.
Representative is a person appointed to act on behalf of the others person. May be known as personal
representatives, executors or administrators. Part V of the Probate and Administrator Act details the
powers, rights, duties and obligations of representatives. Duties of representative in the Administrator of Estate
are outlined in Part VI of the Probate and Administrator Act.
Beneficiary means a person or body of people, corporate or incorporated those benefits as a result of a Will
(According to Selangor Wills Enactment 1999). Non contested beneficiaries are named by the deceased in the
will. Contested beneficiaries (who may challenge the will if there is no adequate provision): spouses, unmarried
daughters, infant sons and mentally or physically disabled minors.
Beneficiaries entitled to receive property:
children, including illegitimate and adopted
mental patient
Protective Trust which protects the property to the bankrupt beneficiary
pet animals
Organizations such as clubs, societies irrespective of whether they are charitable or otherwise.
Rights of beneficiaries:
remove an executor on the basis of fraudulent acts
examine the accounts of estate
ensure that the investment made was upon due diligence
Ensure that executor makes choices of preference would not jeopardize the interests of estate and
Laws related to estate management:
Presumption of Survivorship Act 1950
Small Estates Act 1955
Distribution Act 1958
Probate and Administration Act 1959
Wills Act 1959
Inheritance Act 1971
Trustee Act 1949
Public Trust Corporation Act 1996
Labuan Trust Companies Act 1990
Trust Companies Act 1949
Faraid as a foundation of estate planning.


Faraid means something that has been predetermined. From Quran (4:7) From what is left by parents and
those nearest related there is a share for men and a share for women, whether the property be small or large, a
determine share. Prophet saw encouraged us to study faraid because of its importance.
According to a classical interpreter of the Quran, Imam Ibn Kathir, there 3 main verses that explain the laws of
distribution (faraid, law of inheritance): 11. 12 and 176 verses of 4th chapter which explain in detail the portions
inherited by mother, father, wife or husband, brother and sister.
Eligible heirs:
(1) On the male side:
son's son and agnatic descendants
father's father and agnatic ancestors
brother's son except in the case of a son of a uterine brother
father's full and half brother
son of above
surviving husband, not divorced nor repudiated
(2) On the female side:
son's daughter and other female descendants of a son
surviving wife, not divorced nor repudiated
If the eligible heirs are present only the husband/wife, father, mother, son and daughters are eligible, while the
rest are excluded from the inheritance.

3 tenets of inheritance:
(1) deceased: death of deceased must be either certain or pronounced by court


(2) heir: must be alive at time of death of the deceased and relationship is known. There are 2 types of
relationship: (2a) by marriage or (2b) blood relations
(3) estate: Baitul Mal may inherit the estate whenever there is a balance after distribution to the various
eligible heirs.
2 things impede inheritance (eligible heirs are not entitled to the estate):
(1) if a person kills his father in order to inherit his father
(2) difference of religion
2 types of exclusions:
(1) mahrum: the heirs are barred from inheritance although they are eligible
(2) mahjub: heir is excluded from inheritance because of another heir who is nearer in relationship.
Jabari's rule for determining of nearness:
(1) first to order
(2) next to degree
(3) lastly to the strength of the blood tie
The shares in estate distribution are determined by verses 11 and 12 of Surah An-Nisa (Chapter on Women):
Quranic Heir





If the wife does not leave children


If the wife leaves children


If the husband does not leave children


If the husband leaves children


If she is the only child


If there are 2 or more daughters and no sons


If the parents are the only survivors


If only mother is alive


If only father is alive





Topic 8: Retirement Planning

by: Shakirah Saibon- HP0123007430
RP is a comprehensive analysis of the tax-effective strategies which are available to assist you in achieving your
goals for retirement.
RP goal is to coordinate the financial resources available so an individual can plan for financially secure
RP process includes a comprehensive review and analysis of your assets, liabilities, savings patterns and
investment strategy in the context of timing of your retirement, retirement income and your tolerance for
investment risk.



1) Setting of retirement plan goals

Formulate retirement goals (specific, realistic and measurable i.e. the amount required and the
time parameter.
Determine the lifestyle desired in retirement
Priorities for planning are established i.e. date of retirement, lifestyle change, risk tolerance,
planned employment after retirement, if the need may arise.
2) Based on step 1 and 2, a person should be able to:
- determine savings required and if sufficient assets available to meet the retirement income needs.
- If assets are not available, a savings program is developed to cover the short fall. - If the saving program
is not realistic, go back to step 1 to re-evaluate needs and priorities.
Forecasting a person's income needs in line with the type of retirement or lifestyle he desires is VERY
TWO METHODS of computing a person's future income needs:a) Replacement Ratio Methods
b) Expense Method
a) Replacement Ratio Methods
The figure might be excessive in future
Simple to calculate
There may be some inaccuracies in
Easy to relate to
variables used (e.g.: rate of salary
The standard rate of living assumed can
be reasonably accepted


Changes in the cost of living will be reflected by changes in the individual's income
The post-retirement income needs can be estimated from the individual's pre-retirement income
Standard of living prior to retirement is therefore the determining element in the standard of living
b) Expense Method
Construct a budget for post-retirement living, that consists of:
- Housing costs
- Food
- Clothing
- Medical expenses, etc
More accurate in determining retirement
It is a tedious exercise to compute the
final figure
May be more convincing as actual costs
Some assumptions may not be accurate
are being worked out
i.e. not all expense item inflate at the
same rate
Tendencies to miss out some peculiar
expense item which may not be obvious
in the present times
3) Analyze Information and calculate savings needed to meet the objectives
Calculation of retirement fund, in order to meet the objectives is based on:
Various funding sources
The workings of current asset / future cash flows
Time value of money
Work out on:
a) Determination of required amount for retirement goal, info needed:
A cash flow statement showing the client's current annual sources and uses of cash
An annual budget listing present income and projected income at retirement
Review all available assets that will be utilized to meet retirement needs.
On the worksheet, list out the categories of asset that will be valued:
- Real estate: determine the value taking consideration of inflation rate and appreciation
value based on location factors, RPGT.
- Investment Assets: currently owned which will be sold during the retirement. It includes
unit trust funds or stocks and bonds or equities in non-listed companies.
- Retirement income sources i.e. EPF, pension or annuity. This include, deferred
compensation payment, monthly income from company sponsored plans or Trust etc
- Savings program: Fixed deposits, Wadiah account, Amanah Saham Bumiputera(ASB),
Tabung Haji, Cash value from Takaful or insurance.
b) Calculate the future value amount of current funding vehicles-rate of return would vary.
o Endowment policies
o Shares
o Properties and other invested assets, which are used to fund the amount in (a)
c) Analyze results:
(b) > (a) sufficient funds to fulfill the retirement needs
(b) < (a) short of funds
review the client's financial health
- meet the shortfall
Other factors need to be considered:
Long term assumed inflation rate
Duration of time before the retirement date


How many years to project the retirement

Income tax rate before and after retirement
After tax return on each investment
4) Plan the distribution, ascertaining the best method to distribute that is the best
Consideration of
Time value of money
Risk tolerance
a) Capital Retention / Principal Intact Method
b) Capital Liquidation Method
a) Capital Retention / Principal Intact Method-calculation refer page 276.
This method is apply when there is a sufficient accumulated capital which can generate
investment income
The preferred method as the retiree would not have to worry about outliving his savings
b) Capital Liquidation Method-calculation refer page 277.
This method is apply when the capital accumulated is not sufficient to serve his retirement
The earnings as well as the principal would have to be distributed over the estimated lifespan.
5) Implement the plan
Involve gathering other professionals (e.g. lawyers, insurance agents, tax consultants)
6) Review the plan
Revision should be made at least annually to ensure:
- Goals are being met
- Make any necessary changes

Aids from government

Aids from Non-government org

Extended family Concept (support

From children)


The financial needs should not transgress what is dictated by Islam. The satisfaction of these needs should
adhere with the teachings of Quran and Sunnah and therefore, gaining Allah's blessing and barakah.
RIBA forbidden
Investment structure must not involve in Riba transactions. It must be channeled through various Islamic
investments that available in the financial market.


Risk vs. Return

Risk factors

Islamic view on risk management

Risk must be managed properly. Islam encourages actions and planning to mitigate risk before
leaving it in the fate of God. Islam does not forbid its Ummah to invest but encourages savings and
investment for the future.
1) Quran: (12:67) and (12:47)
2) The story of Prophet S.A.W emigration also tells us how prophet S.A.W took steps through proper
planning using Risk management techniques. Prophet S.A.W reduced the risk of getting killed by
asking Ali to sleep in his bed during the night of emigration

Portfolio theory applied to retirement planning

1) Modern Portfolio Theory (MPT) - concept of diversification as a tool to lower the risk of the whole
portfolio without giving up high returns.
The key concept is BETA (Variance)
- a measure of how much a financial instrument such as changes in price relative to its market,
i.e. stocks moves 2% on average, when the KLCI moves 1% would have a beta of 2.
- A measure of investment riskiness. The higher the absolute value of Beta, the riskier the
This theory constructs portfolios where stocks with different +ve and ve Betas are mixed to give a
portfolio with minimal Beta for the whole group.
Capital Asset Pricing Model (CAPM)
used to select investment for a portfolio.
- Using Beta and the concept of risk-free return (e.g. short term US treasuries, government
- Used to calculate a theoretical price for potential investment.
- An attractive candidate for portfolio - If the potential investment is selling for less than the


Criticism against MPT:

- The concept of Beta: no way to know what its Beta will be going forward. Therefore, it is in
fact impossible to build theoretically perfect portfolio. This objection has been supported by
various studies illustrating that portfolios constructed with MPT do not have lower risks than
other types of portfolios.
- MPT also assumes that it is possible to select investments whose performance is independent
of other investment in the portfolio. Market historians have shown that the instruments in fact
behave as if they are related.
2) Diversification- core concern of portfolio theory
- A portfolio that is invested in multiple instruments whose returns are uncorrelated will have an
expected simple return which is the weighted average of the individual instrument's returns.
- Key strategy in minimizing the risks of investment especially to reduce the concentration risk.
- "Don't put all your eggs in one basket"
- Risk diversification in Quran (12:67) where prophet Yaakob advised his sons to enter the
gates of Egypt via different gates
3) Taxation
The choice of investment for retirement funding can be affected by current tax regime
i.e. Malaysia - Income tax 1967, RPGT Tax act 1976, Sales Tax Act 1972, Service Tax Act 1975

Tax advantages according to each asset class :a) Equities

- No capital gains tax for buying and selling of shares in Bursa Malaysia
- Dividends declared by listed companies to shareholder are taxed at source at the flat corporate rate
of 28%. After deducting this tax at source, the shareholders will receive the net balance.
- If shareholder inc tax bracket < corporate rate, he can claim for a tax refund or credit.
b) Property
- RPGT is levied on gains derived from the disposal of either real property situated in Malaysia /
shares in closely controlled companies with substantial real property interests.
- Malaysians are entitled to the election of an exemption, once in a lifetime, from RPGT when
disposing a private residence.
- No RPGT after 6th years.
- Property rental income is taxed part of the income tax. But if the property is financed with a loan,
tax relief can be claimed on the amount of interest paid for the loan prepayments.
c) Unit Trust
- Realized gain from a) the investment fund (not taxable)
b) properties (RPGT)
d) Cash and Fixed Deposits
- Interest other than exempt interest paid to resident individuals by approved FIs is
subject to withholding tax at 5%.
e) Life insurance and Takaful products
- Death coverage on own life, policyholders are entitled to a relief of RM5000 per
annum(inclusive of total contributions made o EPF)
- Medical coverage/children education purposes (relief RM 3000 per annum)

4) Asset Allocation is the process of determining optimal allocations for the broad categories of assets
invested in one investment fund.
- The choice of allocation will depend on the following factors:
a) Time horizon
b) Risk profile


c) Taxation
Property as an asset class- one of the most popular investment for retirement because :- more tangible,
less risky, satisfying feeling of ownership, income from rental, capital appreciation, demand is always
- Characteristics
a) Types of return : i- capital appreciation
ii- regular rental
b) Level of returns- depends on location
c) Leveraging tool buying a property via a bank loan
- Consequences i) multiply his return
ii) multiply his losses
- Risks in property mkt:a) Market risk
b) Specific risk
c) Financing risk

Types of Retirement:1) Pension scheme pension s a regular payment made by the state or a former employer to a person who no
longer holds office due to retirement or disabled.
a) Defined contribution pension scheme - Both employee and employer contributed a defined amount of
contributions to the funds.
- Also known as "money purchased pension scheme"
- Can be defined as % of the salary or on a fixed lump sum.
- If stipulated in the service agreement or allowed by law, the fund is portable where
new employer can continue with the same scheme.
b) Defined benefit Pension Scheme
- pension benefit is pre-determined at the inception with
consideration of the post retirement standard of living of retiree.
1) EPF
Compulsory saving known as KWSP under EPF Act 1991. Aiming to provide a measure of security for old
age retirement. Savings are made in form of monthly contributions credited into his EPF account. 2
contributions from the employer12% and the employee11 %( the latest is 8%). Three types of accounts
(Account I-retirement at age 55, Account II-housing and education at age 50, Account III- health and
medical critical illness) serve different types of purpose.
o Income stream is simply a term used to cover any range of products that bring forth a steady stream of
o Vehicles providing the income streams :Pension
Govt servants receive a monthly pension after
1) At age 50- Retiree may make partial
retirement, calculated as a percentage of a last
withdrawal of up to the balance
drawn salary. In the event of death of the
standing in his account II
retiree, pension continues to be paid to the
2) At compulsory retirement age 55deceased spouse
lump sum withdrawal of the whole
their balance.
Lump sum amount which is invested to give

Fixed Deposit Income

For low risk tolerance, returns are low about


returns. Payment are made in small sums

based on the lump sum initially invested
usually manage by insurance company. Two
-Immediate annuity makes regular payment
usually within about a month
- Deferred annuity allows the owner to take
part income while investing the rest.
Income from unit trusts/mutual funds
Managed funds that claim t spread the risks
as compared to direct investment in equities
market. Invested in a basket of shares
following the investment strategy of fund
Takaful/Life Assurance
- Topic 6
Income from properties
Rental income although is subject to tax, it is
a good guarantee in consistent income
-Capital appreciation
-RPGT exempted for property >5yrs

3% per annum. Also known as Mudharabah

Investment Account and fixed term
investment which is based on commodity

Income from shares

Can be multiple income streams. Income and
capital appreciation obtained normally from
quality stocks. capital gain is not taxable.
Now, we have Islamic Indexes listed by
Health Insurance
-Topic 6

Discounted Cash Flow(DCF) Calculations-refer page 312&313

The main important point is to know the 6 step processes in retirement planning and all the structures of
investment must be free from the prohibited elements involving riba, maisir, wine, pork, gharar, and so on,
means that they must encompasses Shariah Principles. A well designed retirement system either construct by
government or private entity should encompasses four elements: retirement income, stable payments, a safety
net and the ability to save.

Topic 9: Taxation Planning and Management

Summarized by: Nur Khadtijah. 012-2055744

Introduction (WPM pg 317)

Issue : Tax payers' compliance to tax laws

Solution : Must have measures to strengthen compliance
Taxation system
- Purpose
: for tax administrators to maximize revenue collections
- Results in
: lowering collection costs & improving tax compliance among taxpayers
Self-Assessment System (SAS)
- introduced by Malaysian Government in 2001
- Purpose: establish effective tax governance system
- Feature: reduced time lag between lodgment of tax returns & case finalization
- Results in: shift from routine assessment to more critical areas (audit, investigation and taxpayers
- Covers all taxpayers sole-proprietor, partnerships, cooperatives, companies, salaried worker



Criteria for Tax System Evaluation (WPM pg 318)

1) Certainty

2) Fairness (Equity)
3) Efficiency
4) Simplicity
5) Flexibility

- All tax liabilities should be certain, definite and predictable
- Public Rulings & guidelines (by Inland Revenue Board (IRB):
b. to inform & clarify tax laws
c. to give interpretation of tax laws and practices of the revenue authority
d. guide taxpayers and practitioners to comply with laws in computing tax
e. Priority for topics requiring explanation:
- transfer pricing rules
- ascertainment of bad debts (allowable as a deduction under Income Tax Act (ITA)
f. Reduce uncertainty, promote uniformity, increase transparency and enhance compliance
- Burden of tax should correspond to benefits received by taxpayer
- Horizontal and vertical equity
- Tax laws will not influence economic decisions
- Tax should not unnecessarily distort or modify choices
- Tax system: fair and non-arbitrary administration, understandable
- Minimum compliance & system administration costs
- System can be varied easily to have immediate impact in achieving econ objectives
- Fundamental guiding principle of all tax policies should be its neutral stance

Effective Tax system involves effort to achieve maximum output

Economic perspective:
a. Administrative Simplicity: Inexpensive to administer
b. Flexibility: Respond easily changes in economic condition
c. Transparent: Tax burden easily ascertainable
d. Economic Efficiency: Efficient allocation of resources

Comparative Tax Rates in Asia-Pacific Countries (WPM Pg 320)



China, New
Papua New

Corporate Tax
Rate (Jan 2005)




- Corporate Tax:
a. Corporations with paid-in capital in excess of Y100mil = 37.5%
b. Corporations with paid-in capital of Y100mil or less
= 28%
c. First Y8 mil of annual taxable income
= 37.5%
New Zealand:
- Efficient Goods & Services Tax (GST) system. GST Rate = 15%
- Corporate tax rate imposed on Co.s net profit
= 30%
- Small company with net profit < Baht 3mil or RM 272k = 20% or 25%




Corporate Tax rate

- Complements:
a. tax exemptions on increased value-added products
b. availability of pioneer status
c. investment tax allowances
d. imposition of indirect taxes
Small and Medium Scale Companies (SMEs)
- SMEs with paid-up capital of RM2.5mil and below:
a. 20% on chargeable income of up to RM500,000
b. 28% on chargeable income > RM500,000
- Raising chargeable income resulted in increased tax savings
- Corporate tax for year of assessment 2003 = 22% (unless qualified for tax
exemption or concessionary rate, usually 10%)
- Since 2002, Singapore Govt. grant partial tax exemption for chargeable
a. three-quarters (75%) of first SGD$10,000
b. one half (50%) of next SGD$90,000
- Current GST rate = 5%
Hong Kong
- Standard Profit tax rate = 17.5% (year 2003/04 assessment)
- Tax rate for unincorporated businesses = 16%
Others India: 36.75%, Pakistan, Sri Lanka: 35%, Fiji, Philippines: 32%, South Korea: 29.7%, Taiwan:
25%, Vietnam: 25/32%,

Malaysia vs UK Tax
1. - Malaysia:
a. ITA definition of allowable deductions for business expenses is narrower
b. Only all expenses incurred during the period in production of income
2. - UK:
a. c. allows any expenses wholly and exclusively lay out or expended for the purposes of the
business (sec 137)
b. expenses in production of income during the period + expenses associated with maintaining
and enhancing earning capacity of business
D) Sources of Tax Revenue (WPM Pg 322)
1. Direct Taxes- corporate, personal income, petroleum income, and other direct taxes
2. Indirect Taxes
3. Non Tax Revenues- Investment income, licenses, permits, registration fees, service fees,
petroleum royalties and gas payments fine and forfeitures
E) Scope of Income Tax (WPM Pg 324)
- Scope: limit or parameters within which income would be taxable in a country
- Income Tax = charged upon income of any person / entity
- must be verified against receipt of income nature
- Income accruing in or derived from within Malaysia or received in Malaysia from abroad would be subject to
tax (sec 3 ITA)
- But foreign income received by Non-resident exempted
- Since 2004, income remitted into Malaysia from abroad exempted
F) Scope of Taxation (WPM Pg 325)


Employment Income
(Chargeable to tax
under Section 4(b)



Accommodation provided
by Employer
Receipts from
Unapproved Pension &
Provident Funds
Compensation for Loss

Chargeable Income
(page 3 of this
Individual Tax Rates
and Rebates

- wages, salary, remuneration, leave pay, fee, commission,
bonus, etc.
a. Benefits convertible to cash:
- employers may issue employees shares or grant options to
purchase shares in the future.
b. Share options
- companies offer employees with a share option scheme
(ESOS) for an option to acquire shares in the company at a
concessionary price.
- gross income from employment includes an amount equal to
value of employees use or enjoyment over any benefit or
amenity (not convertible into money) provided by or on
behalf of employer.
- Among benefits in kind exempted from taxation:
a. Medical or dental treatment or child care facilities
b. leave passages within Malaysia and for travel purposes
d. benefits in connection with performance of duties
e. New computer provided by employer
*Refer to Appendix 9.1, page 358 for guideline on valuation
of Benefits-in-Kind
- Amount of the use or enjoyment over living accommodation
in Malaysia provided by employer, rent free or otherwise.
- Computation can be referred to in Sec 32(2) ITA
- Section 38(1)(b) on Deduction of Expenses
= Assess tax on withdrawn sum from an unapproved
provident fund.
- Sum normally withdrawn at time of retirement or resignation
- relates to any amount received by employee whether before
or after his employment ceases by way of compensation for
loss of employment
- Exemption (para 15, schedule 6) if termination due to ill
- Otherwise RM6k exemption each service year with same

Schedule 1, ITA

- Graduated rates of income tax on individual taxpayers can

be found in Schedule 1, ITA (refer to table 9.7, page 332)
- Once calculated, tax amount is reduced by tax rebates
Refer to page 333 for Tax rebates
- Zakat & fitrah: rebate for resident individuals
Separate and
- Incomes of husband and wife are assess separately unless an
election is made by either one
- By separate assessment, each will be given tax rebate for
respective zakat payment
- Refer page 334 & 335 for examples
Non-Business Income 4 (c) to (f)
- Other sources of income including unearned income:
a. Dividends
b. Interest
c. Rents
d. Royalties
e. Pensions
- Territorial & Remittance scope: Income within Malaysia or received from abroad subject to tax (sec 3 ITA)
Considerations for taxability of income:
a. Residence Status
- by no. of days an individual is present in Malaysia (quantitative test)
b. Classes of Income
- Classification should not be limited to exclude other income
c. Exemptions
- provided on a range of income


G) Determination of chargeable income (WPM Pg 324)

- 2 elements in tax calculation:
a. Determination of gross income
b. Adjustments made to determine taxable income
- Arrived at after deducting personal reliefs (refer to Table 9.6, page 331) from adjusted/taxable income.
- In Malaysia, burden of income tax determined by 2 factors:
a. amount of income subject to tax
b. rates of tax imposed
Tax Rates
- Refer to Table 9.7, page 332 for Individual Income Tax Rates
- 2 types of rates:
a. Fixed (example corporate tax rate of 28% for companies, trust bodies, executor of estate etc.)
b. Graduated
I) Self Assessment (WPM Pg 327)
- Taxpayers are required by law to:
a. determine taxable income
b. compute tax liability
c. Submit tax returns
- 2 stages implementation by government:
a. Companies (2001)
b. Businesses, partnerships, cooperatives, salaried individuals (2004)
- No notice of assessment (NOA) will be issued by system. NOA = tax return furnished by taxpayer
- Under SAS, Revenue authorities
- check and verify tax returns on a post-assessment basis
- to allow revenue officials to audit tax returns in 6 years that follow filing period.
- IRB may also demand payer to provide records to verify returns submitted
- Impact:
a. Section 82 ITA: Taxpayers must keep sufficient records
b. Reasonably accurate tax payable must be furnished to IRB
- Filing Procedures:
- Effective 2004, every individuals must furnish tax return to DGIR before 30 April. It is applicable to:
a. Chargeable income
b. no chargeable income, but has chargeable income or has furnished a return or that has been required
under Act
J) Laws related to Personal and Business Tax (WPM Pg 329)
- Business and employment income taxed under Section 4(a) and (b) of ITA 1967.
K) Taxable Income (WPM Pg 341)
- Statutory provisions: set out in Section 12 ITA so much of gross income as is not attributable to
operations of business carried outside Malaysia is deemed to be derived from Malaysia
Charge to Income Tax
Section 3:
- Income derived or accrued outside Malaysia or not received in Malaysia not subjected to
Malaysian tax
- Income remitted into Malaysia from overseas by resident individuals, trust bodies & Hindu Joint
Families exempted from tax since 2004
Source of Income = connotation of origin:
a) Contract is made at particular country
b) Taxpayer carried on a trade or business in that particular country
c) business employs capital in that country capital being used to earn the profits or is lent to others to
earn profit
d) services are perform in the tax country


Sole proprietor business

- Individual taxable income = gross income allowable expenses
- Governed by general provision in sec 33(1) ITA: All expenses wholly incurred in production of gross income
is deductible
- Each source / category of income is distinguished to determine statutory income
- a) Treatment of losses
b) Capital Allowances
Partnership business
- Each individual partner is assessed on respective share of partnership income
- Profit figure = net after adjustment made for salaries, interest in capital, and other personal expenses
- a) Divisible income [Sec 55(5)]
b) Partners adjusted income
c) Allocation of Capital Allowances in a partnership business
L) Deductible Expenses (WPM Pg 343)
- Section 33: allowable expenditures
- Section 39: expenditures not allowable for tax purposes
a) Principles of Deduction:
i. Revenue vs. Capital Expenditure
ii. Expenditure incurred by taxpayer carrying on a business
iii. Qualifying deductions under ITA
iv. Timing of the Expenditure
v. Expenditure wholly and exclusively incurred in production of gross income
b) Deductions Prohibited Under the Act:
1. i. Domestic and private expenses
[Sec 39 (1)(a)] Sec 39 (1)(a) to (m) ITA
2. ii. Expenditure not wholly incurred in production
[Sec 39 (1)(b)]
3. iii. Capital withdrawn and any sums employed as capital
[Sec 39 (1)(c)]
4. iv. Contribution to a non-approved scheme
[Sec 39 (1)(d)]
5. v. Qualifying mining, prospecting and agricultural expenditure [Sec 39 (1)(e)]
6. vi. Interest or royalties paid to a non-resident person
[Sec 39 (1)(f)]
7. vii. Payment for timber license or permit
[Sec 39 (1)(g)]
8. viii. Bonus payment
[Sec 39 (1)(h)] - deleted
9. vix. Failure to remit deduction from Contract Payment
[Sec 39 (1)(i)]
10. x. Failure to remit deduction from Special Classes of Income [Sec 39 (1)(j)]
11. xi. Lease rental
[Sec 39 (1)(k)]
12. xii. Entertainment
[Sec 39 (1)(l)]
13. xiii. Leave Passage Cost
[Sec 39 (1)(m)]
c) Specific Business Deductions (Sec 34 & 35)

: Refer to page 348 (item 9.5.3) for nature of Deductions

d) Double Deductions:
i. Employment of disabled employees
ix. Expenditure for approved training
ii. Insurance premium for import of cargo x. Expenses incurred in international trade fairs
iii. Training of handicapped persons
xi. Fees incurred in packaging design
iv. Export credit insurance premium
xii. Expenditures on advertising Malaysian products
v. Freight charges
xiii. Expenses on promoting brand names
vi. Research expenditure
xiv. Contributions to low cost housing fund (cash)
vii. Contribution to approved research institutes
xv. Expenses to promote export of services
viii. Overseas expenses for promotion of tourism
xvi. Interest on loans to small business
e) Zakat and Labuan Offshore company
- Effective 2004, tax rebate granted to Labuan offshore company for any zakat payment subject to
maximum tax charged (3% of audited net profits or RM20,000 upon election)
- Excess (rebate > tax charged) cannot be carried forward


M) Tax Planning Strategies (WPM Pg 351)

to plan tax affairs of an organisation
responsibility of directors and people in charge to minimize tax by legitimate means
engage tax professional or tax agent
Legality of tax avoidance scheme - Lord Tomlin: form over substance approach
1) Anti-avoidance provision
2) Tax Evasion
3) Tax Avoidance
4) Tax Planning under Self Assessment
5) Corporate Tax Planning Strategies:
Treatment of available losses
Treatment of capital allowances
Trade debts taken over in a merger or restructuring exercise
Transfer of section 108 balances
Valuation of stocks on transfer of stocks on cessation
Cross charging for services rendered
Transfer of profitable businesses into companies with business losses
Interest restriction

Topic 10: Zakat

Summary - By: Idrees.
Definition: zakat is a determined amount of wealth that is paid from a persons wealth in accordance with the
methods of Islam to those who have the right to receive it as specified in the Quran.
And Zakat is obligatory of every Muslims (fardhu ain) those to give zakat to those who Allah mentions in the
Quran, and it is the third pillar of Islam .
Allah has said: and establish regular prayers and give the Zakat, and whatever you forward for yourselves of
good, you shall receive it. Truly Allah sees all that you do. Al Baqarah2:110)
Meaning of Zakat
Zakat means growth in goodness , or increase, purifying, or making pure, what means bless of Allah to make
your wealth grow and increase.
And in Islam all money belong to Allah, and men are only trustee for Allahs wealth. And men have to account
for the wealth that Allah has given to us in the hereafter.
Benefits of Zakat:
1- Zakat provides financial help by way of food ,clothes, for the poor and needy.
2- assistance to those in debt by settling the debts.
3- Cleanses the soul from selfishness .
4- Teaches him to feel responsible towards the poor.
5- Reminds the rich wealth is entrusted by Allah and belongs to Allah.
Zakat terminologies
1- The hawl: is means a year ,if the owner has owned the wealth for twelve(12)months, he must pay the
2- The nissab: is the minimum amount upon which Zakat is due limit, if the wealth does not meet the
minimum amount Zakat is not obligatory.
The nissab for paper money :USD (2,550)
And gold (85 gram ),and silver (595 gram)
3- The milkut taamm: is means full ownership. And wealth are considered full ownership, as following:
A- Wealth of person who is placed under a guardianship.
B- Wealth that is seized illegally.
C- Wealth that cannot be located or lost.


D- Wealth that is loaned to others.

All of this, Zakat is obligatory and must pay.
4- Exemptions to Zakat.
Like : wealth of a mukaatab slave, and wealth given to the fetus that is yet to be born, and so on.

Conditions for Zakat payment:

1- He /she must be a Muslims.
2- The giver is free and not a slave.
3- The wealth has reached the nisaab.
4- A year (hawl)
5- The owner of wealth is known.
6- The wealth is fully owned.
Receiver of Zakat
Are the eight (8) categories of people who can receive Zakat are:
1- Needy Muslims .
2- Poor Muslims.
3- Aamil : are people who are administered the distribution of Zakat.
4- New converts to Islam
5- Fir-riqaab: they are slaves who are Muslims.
6- The Muslims who are in debt.
7- Fisabillah: they are those who strive in the cause of Allah .
8- Ibnus-sabil: they are travelers, who are traveling for permissible purpose.
Those who cannot receive Zakat :
1- Non-Muslims.
2- Rich people.
3- The families of prophet (pbuh).
Type of Zakat:
1- Zakatul-maal- Zakat on wealth.
2- Zakatul- fitr-Zakat on the person.
Type of wealth come under the Zakat laws:
1- Gold and silver,
2- Paper money.
3- Agricultural produce.
4- Livestock(al-anaam) are camel, cow, etc.
Zakatul-fitr: means , Zakat on person that is paid during the month of Ramadan just before Eidul-fitr. Is
2.3kg of the food or it is value.
Conditions of the obligatory Zakatul-fitr:
1- The giver is a Muslim .
2- He is a mukallaf
3- He is a free man and not slave.
4- He is able to pay the Zakatul-fitr.

Topic 11: Waqaf

Summarized By: Shinta. Email:
holding and preservation of certain philanthropy sadaqah (charity) with the intention of prohibiting
any use of disposition of the property outside the specific purposes to which the property is dedicated,
in such way that it cannot be bequeathed or sold.


According to different scholar

Abu Hanifah
waqf is the detention of specific property from the ownership of the founder (founder of the waqf), and
dedicating its revenue to charitable purpose in the manner of loan. According to him, the founder has
the right to return the waqf property to his ownership and can also sell it i.e. the waqf is revocable.
Abu Yusuf
Waqf only valid if it is irrevocable i.e. cannot be reverted back to the founder, but must be made in
perpetuity. He agreed that no movable property can be endowed as waqf, but in his understanding
weapons of war, cattle and implements of animal husbandry attached to the dedicated waqf land and
books can be dedicated as waqf
Imam Zufar
He approved all movable properties to be dedicated as waqf included the waqf of dinar and dirham i.e.
waqf al-nuqud (cash waqf)
Imam Malik bin Anas
Waqf as confinement for the cause of Allah, and its irrevocable and perpetual. He also agreed both of
immovable and movable properties as a subject matter of waqf even if it was waqf al-nuqud (cash
Imam Al-Shafii and Imam Ahmad bin Hanbal
Waqf is confinement of the property and the pledge is usufruct in perpetuity for the cause of Allah and
both agreed on the validity of both immovable and movable properties as subject matter of waqf.
Evidence from Quran and Sunnah on the legitimacy of Waqf
(refers to module, page 381-382)
Characteristic of Waqf
The founder cannot revoke the dedication if the property has already been declared as waqf
and his/her heirs cannot change its status
It must be perpetual once its created. No confiscation of waqf property will take place either
by the government or by individuals and it will ensure regular and continual support from the
waqf property towards financing charitable area.
The property of waqf is transferred to Allah SWT, although the usufruct derived from it can
benefit man. No one can ever become the owner to alienate it and the waqf property is thus in
nature like a frozen asset. It cannot be the subject of any sale, disposition, mortgage, gift,
inheritance, or whatsoever.
Waqf classification based on the beneficiaries
Waqf khayri (public waqf)
An endowment made by the founder to support the general good and welfare of the poor and
needy in society.
e.g. : in the form of building such as mosque, school, hospital, etc
Waqf al ahli (family waqf)
The founder endows his property to his children, grandchildren, relatives, or to other persons
whom he specifies. If the beneficiaries by the founder are no longer alive, then only in this
case will the waqf property be given for public welfare purposes,
Waqf al mustaharak (combined public and family waqf)
Waqf created by a founder to support both the public and the family.
Conditions for the validity of waqf
The founder must be aqil. He owns the property either by having bought it or by buying it
himself or through his inheritance of the property
The property can either be movable or immovable


The founder has to appoint a muttawalli (trustee), either appointing by himself or by

appointing some specified person in order to administer and to manage his own waqf
The beneficiaries should be specified by the founder in his waqfiah (waqf deed)
The creations of the waqf can be oral i.e. verbal and also can be created in written form known
as a waqf deed

Types of endowment assets

a. Immovable and movable property
Immovable property : land, fields, farms, buildings (mosque, school, or basic infrastructure such
as bridge, roads, water supply. Etc)
Movable property : cattle and implements of animal husbandry, cash, book, crops, weapon, etc
b. Waqf sahih (sound waqf) and waqf ghair sahih (unsound waqf)
- Waqf sahih : founded upon mulk land i.e. privately owned freehold property which the owner held
complete rights of alienation
- Waqf ghair sahih : founded upon land that had originally own by state and whose property therefore
belonged to the empires public treasury
c. Direct and Indirect waqf
- Direct waqf : created to serve the people free of charge
e.g. mosques, schools, hospitals, libraries in order to serve people for praying, provide free
education for children, and to treat patients free of charge
- indirect waqf : created to provide the running expense for direct waqfs
e.g. dedicating such assets as shops, houses, and agricultural land in order to enable them to be
rented and their income to be utilized to support the direct waqf
Restrictions to waqf
- Irrevocability
Once the property has been declared as waqf, the founder cannot revoke it back and
his/her heirs cannot change its status.
It will continue to get rewards from Allah SWT even after his death.
- Perpetuity
No confiscation of the waqf property by government or individuals and thus will ensure
continuous support from this waqf property towards financing charitable area such as
mosques, hospitals, etc
- Inalienability
Once the property of waqf is transferred to Allah SWT no one can ever become owner of
it. It has been alienated and cannot dispose, mortgage, gift, or inherited. The usufruct
from it can benefit man as intended.
Ten stipulations for the creations of waqf
1. Ziyadah (increase) and Nuqsan (decrease)
It gives the right to the founder to increase the share of one beneficiary and at the same time to decrease
share from another beneficiary.
e.g. : page 386
2. Idkal (addition) and Ikhraj (removal)
It allows the founder or trustee to add a new beneficiary and at the same time can remove another
beneficiary. This allows flexibility of public waqf as the founder or trustee can channel the funds to a
more needed parties.
e.g. : page 386
3. Ita (granting) and Hirman (dispossession)
It permits the founder or trustee to grant all or a portion of his waqf revenue to whomever he chooses
for a specified period and to dispossess whomever he chooses.
e.g. : page 386
4. Taghir (replacement) and Tabdil (conversion)



Taghyir gives the founder the right to replace use of the waqf revenue
Tabdil gives the founder the right to change the waqf property itself
e.g. : page 386
Istibdal (substitution) and Ibdal (exchange)
Istibdal : purchase of another property to replace the former waqf property
: actual selling of non-profitable waqf property.

Mode of financing for Immovable waqf

Immovable waqf agricultural land, real estate, and investment through direct rent.
For the case of idle waqf properties, the Muslim jurist agrees the four models to financing it in order to change
their state from unproductive to productive ones
- Hikr (long lease right)
It was developed to prevent the waqf property from being sold in case it came to any harm. The right is
given to trustee, the lease the waqf property on a long lease at nominal periodic rent. The right is sold
in large lump sum (equal to the value of the waqf property in advance and with nominal periodic rent
paid to the trustee)
The advantage: large sum of money can be obtain to finance other waqf property and generate more
The Disadvantage : the right to utilize the property has been given to the lessee for a very long period
of time. It can encourage the lessee to sell or inherit the property.

Al ijaratain (the lease with dual payment)

Its almost similar with long lease contract, but the difference between them is that building and the
land continues to be owned by the waqf as the large lump sum is used reconstruction and to renovate
the damage building
The advantage

: the property is still in the owners possession

The disadvantage : the large lump sum received by the waqf department had to be spent on
reconstructing and renovating the waqf property for the benefit of the lessee with a nominal periodic

Al istibdal (substitution)
Because the waqf property cannot be sold, it can be exchanged with another property or for money in
order to renovate the old ones. If the waqf property becomes incapable of producing services or
revenue either because of its location or because of its age, it can be replaced with the new ones with
exchanging them.
The advantage : its provide liquidity, which is needed in order to renovate part of the waqf property
The disadvantage: either it lost half of the waqf property or its good location
Al mursad
Advanced lump sum is paid by the lessee to be credited by the waqf department toward the agreed
upon periodical rent applicable after reconstruction.
The advantage : the waqf land is developed
The disadvantage : the lessee will claim his ownership of the land after a long time


Movable waqf
In case of the waqf property is not in liquid form, according to the views of Imam shafii. Imam Malik, and
Imam Ahmad bin Hanbal, everything whose sale is valid and which can be renewed from time to time by its
usufruct or otherwise, can be validly dedicated.
According to the view of Muhammad bin Abdullah al-Ansari, measurable and weighable waqf property could
be sold and its proceeds can be invested in mudharabah, i.e. changing its status from crops to cash waqf.
In the case of liquid form (cash waqf), the mudharabah partnership has been recommended by Muslim jurists.
According the view of Imam Zufar , he clarified that the money deposited as waqf can be invested in
mudharabah and the return to be used for pious purpose.
History of Cash Waqf (refers to page 389-403)

Topic 12: Issues Related to the Wealth Planning and Management

Summarized by Habibur Rahman HP: 014-930-8935
WPM is a new program while Islamic WPM is still in its infancy. One needs to understand the
importance of WPM to the user of this service, the responsibility of the service providers, the role of
regulator, code of conduct of this service provider and the professional responsibility that comes with it.
Users & Providers of WPM Services:
Users are mostly individuals and the providers are firms. The basic nature WPM is to manage ones financial
resources to meet life goals. WPM is needed to buy shares, purchase real estate, income tax, for banking
services, life insurance and trustee services. Technically speaking, everyone can be the user of WPM. A young
employee needs WPM to guide his expenditure, and then for his marriage, buying house, kids education,
retirement fund, family protection in case of death or disablement, kids special needs if any, all these with
Shariah compliance.
Provider of WPM Services:
Islamic Bank Managers: the first IB in Malaysia was Bank Islam established in 1983, and the second was
Bank Muamalat. Full-fledged IBs have mushroomed in many countries of the world including western
countries. On March 1993 BNM introduced SPTF (Interest-Free Banking Scheme). Currently in Malaysia all
except one bank provide SPTF services mostly through Islamic windows.
Insurance/Takaful Agents: They help to select insurance policies and assist policy holders to settle insurance
claims. They offer comprehensive WM services such as retirement and estate planning, or assist to set up
pension plans for businesses.
Unit Trust Agents: They assist in finance and investment planning; they may specialize in selling fixed income
or equity funds or a combination of both.
Trustee Agents: Their services are administration of estates, preparation, execution and selection of custodian
of wills, creation of trusts and the like. Other providers of WPM services are; zakat collectors, stockbrokers,
fund managers, accountants, lawyers, tax consultant and credit counselor.
Organizations & Governing Bodies: Financial Planning association is the main organization that governs the
financial planning industry with 17 countries offering CFP (Certified Financial Planners). International
Association for Financial Planning (IAFP) was formed in 1969. In December 13, 1999 the Financial Planning
Association of Malaysia was formed, it promotes the CFP certification process and CFP designation in
Regulatory Control: Regulation helps people to make a sound judgment regarding their wealth. In Malaysia
the key regulations are BAFIA, SC Act 1993, SC (Amendment) Act 2003, Security Industry (Central
Depositories) Act 1991, Security Industry Act 1983 and to a certain extent, the Insurance Act 1996 and Takaful


Act 1984. BNM announced the regulatory framework for licensing of Financial Advisers in 2005 which is
expected to help promote the orderly development of the WPM.
In Singapore, the sole governing body is Monetary Authority of Singapore (MAS) (1 January 1971) with the
objective of to conduct monetary policy, issue currency, supervise banking, insurance and securities and to
promote Singapore as an international financial center.
In UK, Financial Service Authority (FSA) regulates WPM industry. This is an independent non-governmental
body given statuary power by the Financial Service and Market Act 2000.
Ethics & Code of Conduct: Almost all major WPM organizations have adopted some kind of code of ethics.
As for Islamic WPM ethics are derived from Islamic teachings. The two most comprehensive code of conduct
are: FPSB codes of conducts that issues CFP designation which is called Code of Ethics and Professional
Responsibilities, and SFSP code of conduct which is called Code of Professional Responsibilities.
Seven principles mentioned in FPSB code of Ethics: Integrity, Objectivity, Competency, Fairness,
Confidentiality, Professionalism, Diligence.
In SFSP principles which are called Canons are somehow similar to the FPSB principles.
Islamic Ethics and code of conduct are very similar to the conventional ones; however, few certain
characteristics are added that should be adopted by the Islamic WPM professional. These characteristics are
knowledgeable, sincerity, truthfulness and trustworthiness since there is immense emphasis in Quran and
Sunnah on these characteristics.