wealth planning and management - islamic view

8/12/2019 Wealth Planning and Management - Islamic View

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THIS ASSIGNMENT IS A PARTIAL FULFILLMENT FOR TK1003

Wealth Planning and Management.

CERTIFIED ISLAMIC FINANCE PROFESSIONAL (CIFP)

INCEIF

Student Name: FASHOLA OLAYINKA NURUDEEN

Student ID: 1100275


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Question 1:

Financial planning is the process whereby an individual's personal and financial goals are

achieved through the development and implementation of a comprehensive financial plan. As a

financial planner I have to ensure that the following objectives are met towards certifying the

need of my client in this case Fariza.

Current needs and obligationso I have to ensure that Fariza current needs and obligations are met which in this

case to reduce her debt profile considerable. Considering that she now has a new

pay rise of RM 3,000 and another RM2,000 making a total of RM5,000 rise in her

pay on a monthly bases. I will advise Fariza to ensure that the balance shes

owing on her gold credit card is paid off, that is, the new increase in her salary

should be set aside to pay off the credit card loan else it will keep increasing and

she will find it difficult to manage in the short term considering the 20% interest

charged on the balance owned on a monthly with the payment of about RM3,000

to offset these debts monthly within a year Fariza would have paid off all the

debts and she would not have incurred new debts if she still maintain her current

spending patterns because the increase will ensure that the RM1,000 she spends

monthly over her take home pay would now be accommodate in the pay rise.

Future needs and obligationso I have to ensure that the future needs of my client is taken care of, in this case for

Fariza she not having a retirement saving I will propose to her and ensure that she

keep part of her current earning as a saving for her retirement scheme. Another


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future obligation is to ensure that she has a will in place in case of any

eventualities.

Cost of retiremento I have to ensure that Fariza realizes the fact that she needs to start putting some

money aside for her retirement plan considering the fact that current she has none

and what she taught she has is the EPF and this will not suffice for her if she plans

to retire at 55 years.

Emergency Fundo

The only constant thing in life is change I would ensure that my client Fariza

know that there is need to keep some funds as emergency funds because there

might be some expenses that may arise and its not part of her regular monthly

spent pattern and when these issue arise and it requires fund there must be some

savings in place to take care of sure situations.

Inflation effectso The effect of inflation on the savings of my client is another area I need to

concentrate on as a financial planner, I will ensure that Fariza understands the fact

that inflation can affect all her savings and spending hence the inflation rate will

be monitored to ensure that my clients are advised accordingly.

What I cant do for Fariza is to change her current life style and disposition to life, shes already

accustomed to this but as a financial planner I can only advise that she change her life style to

ensure that shes still able to maintain herself even when the funds arenot coming in as expected

in the event of any obstruction to the flow of her monthly salary or loss of her job.


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Question 2.

An amortization schedule is a record of your loan or mortgage payments, showing, payment

number, payment date, payment amount (and a breakdown of how much is principal and how

much is interest) and the balance owing after that payment has been made.

Assume you borrow $10,000 from a lender for an automobile purchase (car). The lender offers

you an Annual Interest Rate (AIR) of 12% and you agree to pay $888.94 each month. A 12%

Annual Interest Rate was chosen purposely, to demonstrate the simplicity of an amortization

schedule. Twelve percent per year is one percent per month. The lender advances you or gives

you the $10,000 on June 15th (June 15th is the advance date) and on July 15th (one month later)

the first monthly payment is due.

Date Pmt Payment Int% Interest Principal Balance

10,000.00

7/15/2011 1 888.49 12% 100.00 788.49 9,211.51

8/12/2011 2 888.49 12% 92.12 796.37 8,415.14

9/15/2011 3 888.49 12% 84.15 804.34 7,610.80

10/15/2011 4 888.49 12% 76.11 812.38 6,798.41

11/15/2011 5 888.49 12% 67.98 820.51 5,977.91

12/15/2011 6 888.49 12% 59.78 828.71 5,149.20

1/15/2012 7 888.49 12% 51.49 837.00 4,312.20

2/15/2012 8 888.49 12% 43.12 845.37 3,466.83

3/15/2012 9 888.49 12% 34.67 853.82 2,613.01

4/15/2012 10 888.49 12% 26.13 862.36 1,750.65

5/15/2012 11 888.49 12% 17.51 870.98 879.67

6/15/2012 12 888.47 12% 8.80 879.67 -


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At the end of the month, the lender multiplies the monthly interest factor times the outstanding

balance and the interest owing for the first month is $100.00 (.12 x 10,000/12). Only $788.49 of

the monthly payment is applied towards the principal and the balance owing to the Lender

immediately after you give them the $888.49 payment is $9,211.51. When any payment is given

to a lender the interest for the use of the money is calculated and taken first, the remaining

amount goes towards reducing the principal. If the payment is not large enough to cover the

interest, a negative amortization schedule is produced and the principal owing starts to increase.

The interest shortfall is added to the balance.

The next month payment is due on August 15th, the balance owing is $9,211.51 and the interest

owing for the use of the money for the second month is 0.01 x 9,211.51 = 92.12, thus $796.37 is

applied against the loan or mortgage. The balance owing immediately after that second payment

is $8,415.14

Most lender or financial institution prefers that the repayment plan should be end of period, that

is, at the end of the month because they will be able to charge interest on the fund for that month,

meaning that they will earn more interest on the funds. The example above shows the effect of

that because the repayment plan is base on end of the period. The repayment can also be at the

beginning of the period, if this option is adopted it means the lender/financial institution will not

earn any interest in the first month, meaning that all the amount paid by the client in the first

month will be used to reduce the principal amount. This will also affect the total interest that will

be received by the lender/financial institution it will be lower compare to when the end of the


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period option is used, that is why most lender opts for the end of the period option because they

will earn more interest on their funds.

Question 2A.

Under the old interest of 6.8% per annum on the mortgage of RM400,000 below is the

amortization table considering that she is making the payment on an annual bases.

The following are implies from the amortization table and how the calculation was done.

Farizasis expected to make a monthly payment of RM3,371since we are considering thepayment on an accumulated annual bases she is expected to make a payment of

RM40,452 which is 3,371*12.

The interest rate is base on 6.8% which is annually thus the interest rate paid on an annualbases is calculated thus: for the first year she paying an interest of 27,200 which is

400,000*6.8%.

The principal payment for the first year is calculated by subtracting the interest from thepayment which translate to 13,525, that is 40,45227,200.

The balance payment, that is, the amount Fariza is owing is 386,748 which is calculatedby subtracting the Previous balance of 400,000 from the principal paid for the year

13,252.

From the amortization table if Fariza chooses to make the fixed yearly payment of 40,452without any default she would have paid off the mortgage within 17 years as soon in the

amortization table.

At the end of the repayment period Fariza would have paid an interest of 286,240.26


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Pmt (Year) Payment Int% Interest Principal Balance

400,000.00

1 40,452.00 6.8% 27,200.00 13,252.00 386,748.00

2 40,452.00 6.8% 26,298.86 14,153.14 372,594.86

3 40,452.00 6.8% 25,336.45 15,115.55 357,479.31

4 40,452.00 6.8% 24,308.59 16,143.41 341,335.91

5 40,452.00 6.8% 23,210.84 17,241.16 324,094.75

6 40,452.00 6.8% 22,038.44 18,413.56 305,681.19

7 40,452.00 6.8% 20,786.32 19,665.68 286,015.51

8 40,452.00 6.8% 19,449.05 21,002.95 265,012.57

9 40,452.00 6.8% 18,020.85 22,431.15 242,581.42

10 40,452.00 6.8% 16,495.54 23,956.46 218,624.96

11 40,452.00 6.8% 14,866.50 25,585.50 193,039.46

12 40,452.00 6.8% 13,126.68 27,325.32 165,714.14

13 40,452.00 6.8% 11,268.56 29,183.44 136,530.70

14 40,452.00 6.8% 9,284.09 31,167.91 105,362.79

15 40,452.00 6.8% 7,164.67 33,287.33 72,075.46

16 40,452.00 6.8% 4,901.13 35,550.87 36,524.59

17 39,008.26 6.8% 2,483.67 36,524.59 0.00

286,240.26

Under the new interest rate regime of 6.4% after Fariza had made a payment for the first two

years with the interest rate at 6.8% and she is still making the annual payment of 40,452, below

is the amortization table for the new interest rate. The following implies from the table:

The interest rate for the first two years was 6.8%


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By the third year due to the reduction in the interest rate the interest rate applied is 6.4% Fariza maintains her yearly payment irrespective of the reduction in the interest rate. The total interest paid by Fariza is 261,774.19

Pmt Payment Int% Interest Principal Balance

400,000.00

1 40,452.00 6.8% 27,200.00 13,252.00 386,748.00

2 40,452.00 6.8% 26,298.86 14,153.14 372,594.86

3 40,452.00 6.4% 23,846.07 16,605.93 355,988.94

4 40,452.00 6.4% 22,783.29 17,668.71 338,320.23

5 40,452.00 6.4% 21,652.49 18,799.51 319,520.72

6 40,452.00 6.4% 20,449.33 20,002.67 299,518.05

7 40,452.00 6.4% 19,169.16 21,282.84 278,235.20

8 40,452.00 6.4% 17,807.05 22,644.95 255,590.26

9 40,452.00 6.4% 16,357.78 24,094.22 231,496.03

10 40,452.00 6.4% 14,815.75 25,636.25 205,859.78

11 40,452.00 6.4% 13,175.03 27,276.97 178,582.80

12 40,452.00 6.4% 11,429.30 29,022.70 149,560.10

13 40,452.00 6.4% 9,571.85 30,880.15 118,679.95

14 40,452.00 6.4% 7,595.52 32,856.48 85,823.47

15 40,452.00 6.4% 5,492.70 34,959.30 50,864.17

16 40,452.00 6.4% 3,255.31 37,196.69 13,667.48

17 14,542.19 6.4% 874.72 13,667.47 0.00

261,774.19


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Comparing the two amortization tables the following can be deduced for Fariza.

Using the first table with the old and higher interest rate she would have paid a totalinterest of 286,240.26

Using the second table with the old and higher interest applied for just two years and thelower interest applied for the rest of the period she would be paying a total interest of

261,774.19

With the wise decision taken by Fariza to maintain her yearly repayment irrespective ofthe reduction on the interest rate she would have save a sum of 24,466.07. That is

286,240.26 - 261,774.19.

Question 2B.

The table below shows the repayment of the credit card balance by Fariza, the following implies:

The initial balance on the credit card is 23,000 as at the time she met with the consultant. There was a monthly addition of 1,000 for 12 months. The interest 1.5% on the previous months balance form the table below the interest for

the first month is 1.5% * 23,000 which translate to 345.

The payment for the month is 20% of the previous months balance which is 20%* 23,000which translates to 4,600

The principal paid in the first month is calculated by subtracting the payment from theinterest, that is, 4,600345 which is 4,255

The new month balance is the previous balance is subtracted from the principal and itsadded to the monthly addition, that is 23,000-4,255 = 18,745 +1,000 = 19,745.0


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The total interest paid is 2,837.6 The total principal paid is 34,997.6 The ration is of the interest to the principal is 3:4774. The ration is calculated by dividing

the interest by the principal in this case 2837.6/34997.6

Period Payment Int% Interest Principal Monthly Addition Balance

23,000

1 4,600.0 1.5% 345.0 4,255.0 1,000.0 19,745.0

2 3,949.0 1.5% 296.2 3,652.8 1,000.0 17,092.2

3 3,418.4 1.5% 256.4 3,162.1 1,000.0 14,930.1

4 2,986.0 1.5% 224.0 2,762.1 1,000.0 13,168.0

5 2,633.6 1.5% 197.5 2,436.1 1,000.0 11,732.0

6 2,346.4 1.5% 176.0 2,170.4 1,000.0 10,561.5

7 2,112.3 1.5% 158.4 1,953.9 1,000.0 9,607.7

8 1,921.5 1.5% 144.1 1,777.4 1,000.0 8,830.2

9 1,766.0 1.5% 132.5 1,633.6 1,000.0 8,196.6

10 1,639.3 1.5% 122.9 1,516.4 1,000.0 7,680.3

11 1,536.1 1.5% 115.2 1,420.8 1,000.0 7,259.4

12 1,451.9 1.5% 108.9 1,343.0 1,000.0 6,916.4

13 1,383.3 1.5% 103.7 1,279.5 - 5,636.9

14 1,127.4 1.5% 84.6 1,042.8 - 4,594.1

15 918.8 1.5% 68.9 849.9 - 3,744.2

16 748.8 1.5% 56.2 692.7 - 3,051.5

17 610.3 1.5% 45.8 564.5 - 2,487.0


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18 497.4 1.5% 37.3 460.1 - 2,026.9

19 405.4 1.5% 30.4 375.0 - 1,651.9

20 330.4 1.5% 24.8 305.6 - 1,346.3

21 269.3 1.5% 20.2 249.1 - 1,097.2

22 219.4 1.5% 16.5 203.0 - 894.2

23 178.8 1.5% 13.4 165.4 - 728.8

24 145.8 1.5% 10.9 134.8 - 594.0

25 118.8 1.5% 8.9 109.9 - 484.1

26 96.8 1.5% 7.3 89.6 - 394.5

27 78.9 1.5% 5.9 73.0 - 321.5

28 64.3 1.5% 4.8 59.5 - 262.1

29 52.4 1.5% 3.9 48.5 - 213.6

30 42.7 1.5% 3.2 39.5 - 174.1

31 34.8 1.5% 2.6 32.2 - 141.9

32 28.4 1.5% 2.1 26.2 - 115.6

33 23.1 1.5% 1.7 21.4 - 94.2

34 18.8 1.5% 1.4 17.4 - 76.8

35 15.4 1.5% 1.2 14.2 - 62.6

36 12.5 1.5% 0.9 11.6 - 51.0

37 10.2 1.5% 0.8 9.4 - 41.6

38 8.3 1.5% 0.6 7.7 - 33.9

39 6.8 1.5% 0.5 6.3 - 27.6

40 5.5 1.5% 0.4 5.1 - 22.5

41 1.5% - 18.3


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4.5 0.3 4.2

42 3.7 1.5% 0.3 3.4 - 14.9

43 3.0 1.5% 0.2 2.8 - 12.2

44 2.4 1.5% 0.2 2.3 - 9.9

45 2.0 1.5% 0.1 1.8 - 8.1

46 1.6 1.5% 0.1 1.5 - 6.6

47 1.3 1.5% 0.1 1.2 - 5.4

48 1.1 1.5% 0.1 1.0 - 4.4

49 0.9 1.5% 0.1 0.8 - 3.6

50 0.7 1.5% 0.1 0.7 - 2.9

51 0.6 1.5% 0.0 0.5 - 2.4

52 2.4 1.5% 0.0 2.4 0.0

2,837.6 34,997.6

Question 2C

Time Value of Money is based on the concept that a dollar that you have today is worth more

than the promise or expectation that you will receive a dollar in the future. Money that you hold

today is worth more because you can invest it and earn interest. After all, you should receive

some compensation for foregoing spending. For instance, you can invest your dollar for one year

at a 6% annual interest rate and accumulate $1.06 at the end of the year. You can say that the

future valueof the dollar is $1.06 given a 6% interest rateand a one-year period. It follows

that the present valueof the $1.06 you expect to receive in one year is only $1.


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Using Fariza as a case study for her to have taken the decision to maintain the same repayment

amount of 3,371 after the reduction of the interest rate on her mortgage from 6.8 to 6.4 she ended

up saving about 24,466.07. if she invest this savings at a given interest rate say 5% she will earn

more on the fund saved which is what time value of money is all about thus at a future date she

has more money as oppose to the fact that if she had reduced the repayment amount she would

have nothing to save thus nothing to earn in the future.

Question 3d.

A net worth statement is like a snapshot that shows a financial situation at a certain point in time.

In simple terms, the net worth sheet shows how much money would be left if everything owned

was converted into cash and used to pay off all debts. The net worth statement includes what is

owned (assets) on the left side of the sheet, what is owed to creditors (liabilities) on the right side

of the sheet, and the net value or difference between what is owned and what is owed (net

worth).

Below is Fariza net worth statements the following assumptions were made before arriving at the

details blow.

That she has paid for 1 year on the car loan of 150,000 thus the balance as at todayconsidering that one year payment has been made is 139,192.75. This is calculated using

the 6% per annum rate on the 150,000 considering that she making a yearly payment of

26,807.25


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The balance on the mortgage is calculated on the bases that she has made two yearspayment as at today on the 40 years tenure of the mortgage. How the balace was arrired

at is detailed in question 2A above.

Net worth Statement of Fariza as at TODAY.

Assets Liabilities

Current Account 5,000.00 Credit Card 23,000.00

Fixed Deposit 2,000.00 Car Loan 139,192.75

EPF Account 200,000.00 Mortgage 372,594.86

Total 207,000.00 Total 534,787.61

Net Worth (327,787.61)

The cash flow statements primary purpose is to provide information regarding a companys or

personal cash receipts and cash payments. The statement complements the income statement and

balance sheet. It is important to notecash flow is not the same as net income. Cash flow is the

movement of money into and out of your company, and it can be affected by several noncash

transactions. Below is the cash flow statement for Fariza which shows are only source of income

that is, salary and the outflow that is, payment of her liabilities.

Cash Flow Statement of Fariza

Cash Inflow

Salary 12,000.00

Total In 12,000.00

Cash Out flow

Credit cardpayment 4,600.00

Car loan 2,197.87

Mortgage 3,371.00

Total Out 10,168.87

Balance 1,831.13


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Question 3a.

APR is a measure of the cost of credit that includes loan fees paid to the lender upfront, as well

as the interest rate. The higher are the loan fees, the larger will be the APR relative to the rate. If

there are no loan fees and the rate is fixed through the life of the loan, the APR will equal the

rate.

To calculate the ARP on Fariza car loan the flowing information were given

Interest rate is 6%

Loan amount is 150,000 Repayment period is 7 year No additional fee charged for the loan process base on the information provided and the

rate is fixed for the entire period of the loan. Thus its expected that the APR will be

equal to the rate.

To calculate the APR using Microsoft Excel shown below is how the calculation was done.

Find the monthly payment for loan and closing costs:

=PMT(0.06/12,84,150000)

The format is: PMT(rate,nper,pv,fv,type)

.06 divided by 12 is the rate (youre using a monthly rate to find monthly payments)84 is the number of periods (payments or months7 years here)150,000 is the present value of your loan.


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The result is $2,191.28.

Next, Solve for the APR:

=RATE(84,-2191.29,150000)

The format is: RATE(nper,pmt,pv,fv,type,guess)

84 is the number of periods you pay on the loan (84 months or 7 years)- 2191.29 is monthly payment150,000 is the present value of your loan (the amount borrowed)

The result of .500%. This is a monthly rate. Multiply by 12 to get 6.0%.

There is no difference between the APR and the rate becauseno additional fee charged for the

loan processing base on the information provided and the loan rate is fixed for the entire period

of the loan.

Rule 72 explained:

Rule 72 is a rule of thumb estimating how long it will take for an investment to double. One

calculates this by dividing 72 by the rate of return. The rule of 72 is not exact, but it provides a

quick look at the effects of compounding on an investment. A formula used to determine the

amount of time it will take for invested money to double at a given compound interest rate,

which is 72 divided by the interest rate. The logic is as follows. The time for an amount A to

double is given by 2A=A(1+i)^t where ^ represents exponent and i is the interest rate, e.g. .05 is

5%. The A term cancels from both sides of the question. Solve for t by taking the natural log of


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both sides of the equation. Hence, t= [ln(2) over {ln(1+i)}], which is approximately equal to 0.72

over i. Hence the rule of 72.

The mathematical rule used in approximating the number of years it will take a given investment

to double in value. The number of years to double an investment is calculated by dividing 72 by

the annual rate of return. Thus, an investment expected to earn 10% annually will double the

investor's funds in 72/10, or 7.2 years. Dividing 72 by the number of years in which the investor

wishes to double his or her funds will yield the necessary rate of return.

Rule 78 explained:

A practice in which lender amortize repayment of short-term loans in a way that the borrower

pays most of the interest earlier. For example, in a 12-month loan, the borrower will pay nearly

all of the interest over the first, say, six or seven months before his/her payments cover any

principal at all. The Rule of 78 guarantees that the lender will still make a profit if the borrower

repays the loan early.

A practice, called the Rule of 78, means that lenders front-load the interest they charge on a

short-term loan to guarantee their profit if you pay off your loan before the end of its term.

In other words, you pay most of the interest before you begin to make substantial repayment of

principal. For example, on a one-year loan, you'd pay 15% of the interest in the first month, 14%

in the second month, and only 1% in the last month. The practice is called the Rule of 78 because

that's the sum of the twelve payments in a one-year loan (1+2+3+...+12 = 78).


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Question 3bi

From the question Fariza requires 7.8 Million in her within the next 15 years and she currently as

4.5 Million this means that 3.3Million saving is required within the next 15 years to meet her

target.

Amount Required 7,800,000.00

Current Balance 4,500,000.00

Expected in 15 years 3,300,000.00

The table blow shows what Fariza should be contributing monthly for the different years

considering she expected to make a total contribution of 3.3 Million. The details below shows

how the table was arrived at.

For year 1 12,000 is the amount available the Amount monthly is calculated with theassumption that Fariza saves 90% of the 12,000 for her EPF contribution. This means that

10,800 will be contributed monthly, for the whole year that will amount to 129,600

For year 2 we assume an 8% nominal annual growth, thus the fund available in year 2 is12,960 and the monthly contribution is 90% of 12,960 which translate to 11,664 monthly

and 139,968 for the year with a cumulate figure of 269,568.

At the end of the 15 years she would have saved a total of 3,518,913.97 which is a littleabove what is expected.


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Year Amount Available Yearly Increase Amount Monthly Year End Cumulative

1 12,000.00 10,800.00 129,600.00 129,600.00

2 12,960.00 8% 11,664.00 139,968.00 269,568.00

3 13,996.80 8% 12,597.12 151,165.44 420,733.44

4 15,116.54 8% 13,604.89 163,258.68 583,992.12

5 16,325.87 8% 14,693.28 176,319.37 760,311.48

6 17,631.94 8% 15,868.74 190,424.92 950,736.40

7 19,042.49 8% 17,138.24 205,658.91 1,156,395.32

8 20,565.89 8% 18,509.30 222,111.63 1,378,506.94

9 22,211.16 8% 19,990.05 239,880.56 1,618,387.50

10 23,988.06 8% 21,589.25 259,071.00 1,877,458.50

11 25,907.10 8% 23,316.39 279,796.68 2,157,255.18

12 27,979.67 8% 25,181.70 302,180.41 2,459,435.59

13 30,218.04 8% 27,196.24 326,354.85 2,785,790.44

14 32,635.48 8% 29,371.94 352,463.23 3,138,253.67

15 35,246.32 8% 31,721.69 380,660.29 3,518,913.97

Question 3bii.

To meet her goal with the saving of 60% of her surplus each month there must be a nominal

annual growth of about 12.40% as shown in the table below, she would have made a total

savings of 3,326,565.72 by the end of the 15 years which is a little above the target of additional

3.3 Million.


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1 12,000.00 12.40% 7,200.00 86,400.00 86,400.00

2 13,488.00 12.40% 8,092.80 97,113.60 183,513.60

3 15,160.51 12.40% 9,096.31 109,155.69 292,669.29

4 17,040.42 12.40% 10,224.25 122,690.99 415,360.28

5 19,153.43 12.40% 11,492.06 137,904.67 553,264.95

6 21,528.45 12.40% 12,917.07 155,004.85 708,269.81

7 24,197.98 12.40% 14,518.79 174,225.46 882,495.26

8 27,198.53 12.40% 16,319.12 195,829.41 1,078,324.68

9 30,571.15 12.40% 18,342.69 220,112.26 1,298,436.93

10 34,361.97 12.40% 20,617.18 247,406.18 1,545,843.11

11 38,622.85 12.40% 23,173.71 278,084.55 1,823,927.66

12 43,412.09 12.40% 26,047.25 312,567.03 2,136,494.69

13 48,795.19 12.40% 29,277.11 351,325.34 2,487,820.03

14 54,845.79 12.40% 32,907.47 394,889.68 2,882,709.72

15 61,646.67 12.40% 36,988.00 443,856.00 3,326,565.72

Question 3biii.

To meet her goal with the saving of 30% of her surplus each month there must be a nominal

annual growth of about 20.80% as shown in the table below, she would have made a total

savings of 3,327,592.66 by the end of the 15 years which is a little above the target of additional

3.3 Million.


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1 12,000.00 20.80% 3,600.00 43,200.00 43,200.00

2 14,496.00 20.80% 4,348.80 52,185.60 95,385.60

3 17,511.17 20.80% 5,253.35 63,040.20 158,425.80

4 21,153.49 20.80% 6,346.05 76,152.57 234,578.37

5 25,553.42 20.80% 7,666.03 91,992.30 326,570.67

6 30,868.53 20.80% 9,260.56 111,126.70 437,697.37

7 37,289.18 20.80% 11,186.75 134,241.05 571,938.43

8 45,045.33 20.80% 13,513.60 162,163.19 734,101.62

9 54,414.76 20.80% 16,324.43 195,893.14 929,994.76

10 65,733.03 20.80% 19,719.91 236,638.91 1,166,633.67

11 79,405.50 20.80% 23,821.65 285,859.80 1,452,493.47

12 95,921.84 20.80% 28,776.55 345,318.64 1,797,812.11

13 115,873.59 20.80% 34,762.08 417,144.92 2,214,957.03

14 139,975.30 20.80% 41,992.59 503,911.06 2,718,868.09

15 169,090.16 20.80% 50,727.05 608,724.56 3,327,592.66

Question 4a.

Faraid or Muslim law of inheritance stipulates how the estate of a Muslim is to be dealt with and

distributed after his or her death. Inheritance in Islam will not take place unless the reasons for

the inheritance and the three pillars coincide which include al-muwarrith, al-warith and al-

mauruth.

Al-Muwarrith is when a benefactor dies, whether genuinely, taqdiri or hukmi. Al-Warith is a beneficiary who will receive an inheritance and is required to be alive

during the demise of the benefactor, whether genuinely, hukmi or taqdiri.

Al-Mauruth refers to the inheritance wealth owned by the benefactor, be it liquid or solid

wealth and all rights associated with the wealth.


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Before the estate of the deceased can be distributed to his heirs, all debts owing by the deceased

and all prior claims against him must first be paid. In order of priority, payments from the estate

are as follows:

1. Satisfaction of religious obligations, such asa. Satisfaction of all zakat payments that are unpaidb. Performance of the Haj through an acceptable proxyc. Making donations of the specified amount to redeem fast days unobserved.

2. Payment of funeral expenses3.

Redemption of mortgaged property

4. Payment of all other debts owing by the deceased.5. Payment of legacies under a valid will.6. Distribution of net estate among Specified Heirs

Heirs entitled to share in the net estate of the deceased in accordance with Faraid are specified in

the Quran. These Specified Heirs include the following:

Spouse (surviving wife or husband) Children (adopted children are excluded, and children conceived out of wedlock can only

inherit from their mother, even if their birth is legitimised)

Parents Paternal grandparents and paternal great grandfathers Maternal grandmother Descendants from the male line, i.e. children and grandchildren of sons (a daughters son,

although a grandson, is not a Specified Heir)


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Siblings including half siblings who share a common father ("consanguine sibling") or acommon mother ("uterine sibling")

Nephews (limited to sons of full brothers and consanguine brother) Paternal uncles Male cousins (limited to sons of full paternal uncle and consanguine uncle)

A Muslim can only make a will in favour of his non-Specified Heirs, such as his adopted

children, certain maternal relatives such as maternal aunt or maternal grandfather, or third parties

such as close friend or protege. A will can only be made in respect of not more than one third of

the net estate of the testator. This is to protect those persons with a legitimate claim to the estate,

such as spouse and children. If the will purports to bequeath more than one third of the net estate,

the bequests may be reduced proportionally such that the aggregate will not exceed one third.

Alternatively, if the Specified Heirs voluntarily agree to reduce their own entitlements

accordingly, it is possible that the aggregate amount paid on the bequests could exceed the one

third limit.

In the case of Fariza she was right to have made a will base on the Islamic concept of Faraid that

allows that a Muslim can will only one third of his/her net asset in this case Fariza willed her car

to her friend Jane Chong is a Buddhist. She Jane is entitled to what was willed to her. Thus the

executor of the will should honor that section of the will where Fariza bequests her car to Jane.

Fariza father does not have any control over that asset because his daughter has willed the car to

her friend and this is still within the allowed limit of one third of her net assets. Since Jane has


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rejected/ not in need of the bequest the car should be added to the asset that will be shared by

Fariza heirs.

Question 4b

A Muslim can only will not more than one third of the net estate. The portion can only rise above the fractional ceiling if the Specified Heirs voluntarily

agree to reduce their own entitlements accordingly; it is possible that the aggregate

amount paid on the bequests could exceed the one third limit.

She cannot exclude are relatives from inheriting from her because her will should not bemore than one third of her net estate except the heirs are willing to let go their portion of

the inheritance.

wealth planning and management - islamic view

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