Islamic Financial Planning

Islamic Financial Planning: Guiding Principles
Financial Planning, as defined conventionally, is “a process which helps individuals set and achieve their long-term financial goals, through the proper management of your finances.” Financial planning normally covers the areas of investments, tax planning, asset allocation, risk management, retirement planning, and estate planning. In other words, financial planning can also be broadly divided into five areas or pillars of focus, which are wealth accumulation (retirement planning), wealth enhancement (investment planning), wealth maintenance (money & tax management planning), wealth protection (insurance planning) and wealth distribution (estate planning).
It is not hard to envisage that Islamic financial planning by definition would read something like this: “A process which helps individuals set and achieve their long-term financial goals in accordance to the principles of Islam, through investments, tax planning, asset allocation, risk management, retirement planning, and estate planning which are syariah-compliant”.
Other than using syariah-compliant products, the management of a Muslim’s wealth should be based on a fundamental principle in Islam, that is, wealth is held in trust for Allah swt. As such, everything within the chain of what a Muslim does in connection with his wealth – how he accumulates, distributes, enhances, protects or maintains it – must be in line with the role he undertakes as a trustee, and thus in accordance to the wishes of its true owner, Allah swt.
What then are the conditions or guiding principles that govern a Muslim’s (the trustee) responsibility towards managing his or her wealth? In general, three are conditions serve to guide how a Muslim should administer his or her wealth as a trustee:
(1) Wealth must be accumulated in an absolutely honest manner;
(2) Wealth must be managed in a highly responsible manner to benefit not only its owners and family but the community as a whole;
(3) Wealth does not in any way distract Muslims from their strong faith in Allah.
The first condition is probably the most straightforward and easiest of all these three conditions to fulfill. In very simple terms, the question surrounds how one accumulates one’s wealth i.e. the source of one’s wealth must be halal or from a permissible source. Very clearly, wealth from sources like bribery, devouring the wealth of orphans, embezzlement, earnings from alcohol and gambling, prostitution and other immoral activities, and the hoarding, monopoly and black marketing of goods, are all haram.
Underscoring the importance of this is the following hadith where the Prophet pbuh warned: “If a clothing which is bought from a forbidden source of income is used in prayer, therefore as long as the clothing is used, the prayers are not accepted by Allah.” (Shu’ab Al-Imran)
Note that wealth does not only accumulate from its source (e.g. salary) but also from returns through investments such as property and stocks. Thus, the manner in which such investments are conducted needs to be halal.
“Whoever accumulates money in a forbidden manner, then he donates the wealth, he will not get any blessings at all from Allah, but only sins.” (Ibn Khuzaimah, Ibn Hibban and Al-Hakim)
It is this very area that syariah-compliant products have managed to serve very well, evidenced by the proliferation of syariah-complaint products in recent years as it meets the growing needs and affluence of the global Muslim population.
The second guiding principle; wealth must be managed in a highly responsible manner to benefit not only its owners and family but the community as a whole; underscores the key responsibility of the trustee. The focus is on the individual’s responsibility not only to himself, but also to his family and the community at large when managing this wealth. And this in itself is a trial from Allah swt:
“It is He who hath made you (His) agent, inheritors on earth. He hath raised you in ranks, some above others, that He may try you in the gifts He hath given you…” (Al-An’aam 6:165)
In prior paragraphs we have discussed the issue of accumulating wealth in a halal manner. But wealth is not only managed from the income side but also from the expenditure side. And when it comes to managing expenditures, the challenge is even greater.
When dissected, a Muslim’s spending pattern should also reflect certain Islamic principles among which are:
1. The need for moderation in every aspect. A Muslim should not go to the extreme of being spendthrifts or overly extravagant in their spending, both of which are shunned by Islam. Instead, Islam encourages one to be moderate – as in other aspects of life –in their spending.
“But squander not (your wealth) in the manner of a spendthrift. Verily spendthrifts are brothers of the evil ones..” (Al-Israa’ 17:26-27) “But he who is a greedy miser and thinks himself self-sufficient,…We will indeed make smooth for him the Path of Misery” (Al-Layl 92:8,10)
“Those who, when they spend, are not extravagant and not niggardly, but hold a just (balance) between those (extremes)” (Al-Furqaan 25:67)

2. Understanding that a part of one’s wealth is further held in trusts for the poor. This goes back to the core principle whereby Muslims hold their wealth in trust for Allah swt and thus, as a trustee, Muslims should exercise their responsibilities according to the “trust deed” clearly set out by Allah swt.
“And in their wealth and possessions (was remembered) the right of the (needy), him who asked and him who (for some reason) was prevented (from asking)” (Al-Dhariyat 51:19)
“Believe in Allah, and His Messenger, and spend (in charity), out of the (substance) whereof He has made you heirs. For those of you who believe and spend (in charity) – for them is a great reward” (Al-Hadid 57:7)
3. To avoid the hoarding of wealth. Again, this is tied to the principle of trusteeship where there is strong condemnation and prohibition against the hoarding of wealth, where men treat it as his absolute ownership and deprive others from its use.
“Woe to every scandal monger and backbiter, who piled up wealth and layeth it by, thinking that his wealth would make him last forever!”
(Al-Humazah 104:1-3)
“And collect (wealth) and hide it (from use)! Truly man was created very impatient…And niggardly when good reaches him” (Al-Ma’arij 70:18-21)
This third guiding principle; wealth does not in any way distract Muslims from their strong faith in Allah; is probably best understood with the phrase “Money is the root of all evil”. Wealth is not prohibited in Islam and in fact is highly encouraged. Only with a financially strong ummah can Islam thrive and prosper in every sense. However, it is the challenge of keeping one’s faith intact with all the tribulations from being wealthy that is the point of contention. Muslims should thus always remind themselves as they seek the richness of this world that it cannot come at the expense of their standing with Allah swt. There are numerous warnings in the Quran regarding how wealth can result in believers turning their backs on Allah swt:
“O ye who believe! Let not your riches or your children divert you from the remembrance of Allah. If any act thus, the loss is their own” (Al-Munafiquun 63:9)
“Amongst them are men, who made a covenant with Allah that if He bestowed on them of His bounty, they would give (largely) in charity…but when He did bestow of His bounty, they become covetous, and turned back (from their covenant)…” (Al-Tawbah 9:75-76)
In many ways, this can be related to the second condition, as a Muslim who has strong faith in his creator will have little problem in departing with his wealth. Thus, it is an individual’s “love for wealth” which is deplored in Islam, not wealth itself.
Financial planning is becoming a crucial part in our lives and we should all take some time to understand how, as Muslims, to correctly approach this to gain His blessings. InsyaAllah.