Islamic Financial Planning

1. ISLAMIC
FINANCIAL PLANNING
Mahyuddin Khalid
Personal Credit Management

2. Chapter Outline
Content
Personal Credit Management
Concept of Credit in Islam
Borrower and Lender
Responsibilities
Principles and Good Credit
Management
Types of Credit
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3. Personal Credit Management
Personal financing is a form of financial aid to a individual
to meet his/her personal use.
Examples of personal needs are purchase furniture, buying
expensive equipment, marriage, vacation, business start-up
and many others.
Whatever the reason for the personal financing, one has to
have a discipline to keep to the principles of good credit
management:
 Make sure for necessary items only
 Plan repayment - settle more than the borrowed amount and/or
settle early
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4. Credit Concept in Islam
Process of managing
wealth through borrowing.
Deals with how a person
enhance wealth
•by applying the ‘principles of
good credit management’
Islam do not prohibit from
borrowing
•credit purchase or sale is part of
normal business transaction.
Honesty and responsible is
more important
•it must be paid and put in writing
•borrowers are encouraged to pay
more than amount borrowed
•lenders are not to charged more
(lending money with interest)
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5. Credit Concept in Islam
Islam does not prohibit it
followers to borrow
Neither to encourage
them.
Islam has proposed a clear
guide how to deal with
the debt between
borrower and lender.
It is compulsory to have
written agreement
between both parties
Must be witnessed by at
least two mans (Surah al
Baqarah, 2:282)
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6. Credit Concept in Islam
 Once they are in debt, it is their responsibility to pay when
the time is due.
“If someone in debt and he passed away, his soul can’t go
to heaven until the debt is cleared (by his family)”.
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7. Borrower and Lender responsibility:
Borrower’s responsibility
Pay back as the debt as promised.
Write a will that stated about the
debt.
Borrower is encouraged to pay more
than the borrowed amount.
Lender’s responsibilities
Do not charge an usury on the
borrowed amount.
Do not force the borrower to pay
early than the agreed period.
Do not publicly announce about the
debt.
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8. Measuring Individual Credit Capacity
GENERAL RULES OF CREDIT CAPACITY
Debt Payments-to-Income Ratio
Consumer credit payments should not exceed a max of 30% of
your net income
*Not including house payment which is a long-term liability
Monthly payments*
Gross income
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9. Measuring Individual Credit Capacity
GENERAL RULES OF CREDIT CAPACITY
Debt To Equity Ratio
*Excluding home value
Total liabilities
Net worth*
= Should be < 1
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10. Applying For Credit
 Before applying for any credit the bank will check the history of
the borrower from a system call Central Credit Reference
Information System (CCRIS) and Credit Tip-Off Service (CTOS)
 CCRIS
 CCRIS collects credit information on borrowers from lending
institutions and furnishes the credit information collected back to the
institutions in the form of credit report
 CTOS
 CTOS report provide information on bankruptcy, summons of any
individual in Malaysia. Due to this, it is important for anyone to ensure
their CTOS report is clear in order to apply for credit.
 CTOS is essentially an electronic ‘archive’ of information collated from
gazettes, newspapers, court notices, and searches at the relevant
statutory bodies. A 'credit lead' information system.
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11. Applying For Credit
What
Creditors
Look For
5 Cs
Character - Do you pay bills on time?
Capacity - Can you repay the loan?
Capital - What are your assets and net
worth?
Collateral - What property do you
have to pledge that the lender can
repossess if you default on the loan?
Conditions - What economic
conditions could affect your ability to
repay the loan?
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12. Advantages of Credit
Current use of
goods and services
Permits purchase
even when funds are
low
A cushion for
financial
emergencies
Advance notice of
sales
Easier to return
merchandise
Convenient when
shopping
Can take advantage
of float time/grace
period
May get rebates,
airline miles, or
other bonuses
Indicates financial
stability
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13. Disadvantages of Credit
Temptation to
overspend
Failure to repay loan may
lead to loss of income
It does not increase total
purchasing power
Credit costs money
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14. Types of Credit
Consumer Loan (Instalment
Credit)
• It is a fixed term loan which require you to liquidate the loan or an instalment basis
• It is call amortization, meaning that we paying up the principal and the interest over stated
number of periods or instalments
• Home financing
• Personal financing
• Hire purchase
• Education loan
Open Accounts Credit (Revolving
Credit)
• It is a line of credit where you can pay up and re-borrow
• The banks may require a certain minimum payments over a specified term but banks allow the
credit to revolve
• Card facilities
• Overdraft
Alternatives modes of Credit • Al-Rahn
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15. Card Facilities/ Services
The key element in card services is purchasing something
without involving any cash.
Certain card facilities allow for a deferred repayment
deferred, withdrawals and some other purchase
conveniences.
These selected individuals are given credit limits as a form
of advance by the banks for any purchases made.
The limits are given based on the financial background of
the individuals.
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16. Card Facilities/ Services
 To use the card for any purchases, the card will be handed to
the retail outlet.
 The outlet will then ‘swipe’ it on to a readable card machine to
identify card holder details and to confirm the authenticity.
 The payment is considered done if the purchases amount is
within the limit.
 Later the outlet will claim payment (reimburse) from the card
issuing bank.
 There are 3 type of card services offered by banks:
 Credit card
 Charge card
 Debit card
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17. Credit Cards
Given out to individuals with a credit limit.
It offered to individual by banks and credit card companies
such as VISA and MASTER.
It allows us to make purchase without immediate cash
payments
It does not require cardholders to pay the bill in full each
month
Minimum payment is 5% out of the outstanding bill.
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18. Charge Cards
This charged card is suitable for customers who want to
make payment of goods and services on credit.
It can also be seen as a form of delayed cash payment.
Examples of charged cards are American Express and
Diners Club International.
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19. Charge Cards
Facilities given to customers without any specified credit
limit.
The other main feature is that the card holder must pay the
amount outstanding in full as indicated in the statement
given out to customers every month.
If the outstanding amount is not paid or not paid in full, a
higher interest charges will have to be born by customers
and non-payment for two months in a row can lead to
suspension of facilities.
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20. Debit Cards
Form of payment facility whereby the card holder account
is debited immediately once it is used at the participating
outlet.
It is another form of conveniences available to customers
for making payment for goods and services.
Thing to remember for the card holder is before making
any payment : to ensure the amount available in the
savings or current account is sufficient.
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21. Debit Cards
If account is insufficient the transaction will not ‘go
through’ or in other words no payment is made and
therefore the purchase is not done.
Credit cards have limits given to card holders but for debit
card the ‘limit’ is actually the amount that he has in the
account.
It is suitable for customers who do not want to be
bothered by debt.
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22. Management of Credit Cards Usage
Ways to
minimize the
outstanding
balance
Pay as much as possible.
Limit the usage to important things
only.
Pay in cash until the credit balance is
fully settled.
Plan to settle the balance in a specific
period.
Use soft loan from relatives.
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23. Personal Financing
Help an individual who is in need of funds for personal use.
Examples?
Make sure for necessary items
Plan repayment, try to settle early
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24. Refinancing
Purpose : To reduce cost of financing.
Arrangement whereby the borrower applies for a new
financing (borrow) from an institution with the purpose of
settling the old financing.
As cost of financing can varies depending on the prevailing
market condition, it provides an opportunity for borrower
to strategies in reducing its cost of financing.
It is done only when the cost of financing or interest rate
(in conventional banking system) is in the low regime.
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25. Refinancing
Cost of financing (as announced by
BNM/financial institutions) is lowered
apply for refinancing
financing cost lowered
expenses reduced
net income increase
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26. Al-Rahn
 An Islamic approach to help Muslim in difficulties
 A customer can borrow some amount of money from the
operators by surrendering his valuable goods for specific
periods.
 An operator will lend the money and the goods will be under
his custody.
 When the period is due, the customer will return back the
money and the operator will return the goods with service
charge on the custody of the goods.
 If the customer fails to pay the loan, the goods will be sold at a
current market price.
 The operator will take the amount of the loan and the balance
will be returned to the borrower.
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27. Other Features of Al-Rahn
Loan amount can be up to RM5,000 per day and
collectively up to RM25,000 or RM 50,000 depending the
provision given to the operator.
Margin of loan (financing) - the financing amount received
by the borrower is between 60% to 75% of the value of the
gold.
Safekeeping fees - between 40 sen to 60 sen for every
RM100 depending on value of gold, and service fee of 50
sen per transaction
 Loan repayment method - lump sum or instalment
amount and by cash or cheque.
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28. Mahyuddin Khalid
End of Chapter
Personal Credit Management
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