Building Up Your Wealth
Islamic wealth management is an area which is attracting increasing interest. This is especially so with the rise of Islamic finance – a global financial system that complies with Shariah law, a code of conduct that guides all aspects of Muslim life.
Some of the core ideas promoted by Shariah include the following:
Allah SWT (God) is the owner of all wealth
Humans are merely the trustees of wealth, which belongs to Allah SWT. Humans must manage wealth according to Allah SWT’s commands. Shariah law promotes balance and justice and discourages behaviours of excess. Muslims have the right to enjoy whatever wealth they acquire and spend in shariah-compliant ways.
Economic transactions should take place within a just, responsible, freemarket economy
Islam does not restrict economic activity but instead directs it toward being responsible to other people, to the earth, and to Allah SWT. Islam allows for a freemarket economy where supply and demand are decided in the market, but it directs the function of the market mechanism by imposing specific laws and ethics. A primary purpose for imposing these laws and ethics is to promote social justice: a balance in which wealth is not accumulated only by a few while most others suffer.
An individual’s needs must be balanced with society’s needs
A Muslim needs to consider society in general when enjoying Allah’s bounties. These considerations include promoting justice in all economic activities, remembering that people have mutual responsibility for all others, and using the earth’s resources wisely.
Material pursuits must be balanced with an individual’s spiritual needs
A Muslim’s economic activities and pursuit of wealth should balance with the spiritual aspects of life. Economic activity conducted according to Shariah is, itself, an act of worship, but finding balance between economic activities and spirituality is key. A Muslim is expected to seek moderation in the material world — to avoid being either stingy or too materialistic.
In support of these principles, Shariah prohibits business transactions based on the following:
Riba, the Arabic word for interest, means to increase, grow, or multiply into more than what would be due. Riba is prohibited by Islam because it creates societal injustice; in a riba-based transaction, the owner of the wealth gets return without making any effort, and the borrower carries all the risk.
Two Arabic words — maysir and qimar — refer to transactions that involve gambling. Maysir is the acquisition of wealth by chance instead of by effort. Qimar refers to a game of chance. Both types of transactions are based on uncertainty; no one can know how a gamble will pay off.
The Arabic word gharar means uncertainty or to cheat or delude. Transactions based on gharar are unclear or ambiguous; not everyone involved knows what to expect and can make an informed decision. Gharar exists when two parties enter a contract and one party lacks complete information or when both parties lack control over the underlying transaction.
Prohibited (Haram) products & industries
Islam prohibits products and industries that it considers harmful to society and a threat to social responsibility. Examples include alcohol, pork, prostitution, pornography, tobacco, and any products based on uncertainty or gambling.
What is most important in Islamic Wealth Management is that we know how to act as trustees in the five main dimensions of wealth -Wealth Creation, Wealth Protection, Wealth Accumulation, Wealth Purification and Wealth Distribution. This brochure will focus on Wealth Creation and Wealth Accumulation.
Wealth Creation and Wealth Accumulation
Islam strongly encourages the earning of livelihood through trade and other economic activities. In fact, it is an obligation upon a Muslim to find his own income for living and avoid from begging from others. Seeking one’s livelihood is definitely ordained by Allah SWT, with the reminder that the obligation to Allah SWT. surpasses every worldly activity.
The Prophet Muhammad SAW himself was involved in entrepreneurship and a wellknown hadith states that trade generates nine-tenths of man’s income and livelihood. The most illustrious names in Islamic history, including the companions of the Prophet and jurists, had been actively involved in economic ventures and trade. Reports from the Prophet and his Companions praise efforts to acquire wealth with a view to achieve financial security. The Prophet SAW said that it was better to “leave one’s heirs free from want than that he left them in financial hardship, dependent upon other people.” [Sahih Bukhari] [Narrated by Ibn Abbas and reported by Al Hakim]
During his caliphate Umar ibn Al-Khattab R.A. urged people to invest extra moneys as “this will increase their capital and after them their children would have something left and would not be empty-handed.” [Al-Baladhuri, Futuh Al-Buldan]
Investing of money or capital is done in order to gain profitable returns, as interest, income, or appreciation in value.
As a Muslim, there are 2 main questions that you should ask yourself before investing:
- Ensure a faster, cheaper process upon death
- Choose Executors you trust to handle your affairs after you die
Legal aspects of Investing
Before deciding to make an investment, it is good to ask yourself 5 critical questions:
What am I investing in?
Make sure that you understand what you are paying for when you part with cash. Are you buying equity, shares or ownership in a business? Are you financing a project? Are you doing project financing? What exactly are you getting in return for your money?
Who are the parties involved?
It is essential that you know who you are creating legal relations with. Whose names are on the legal documents? Can you confirm or check on the veracity of the identities of parties? Who is paying you money and who is taking your money?
Where is my money going?
Know exactly what your money is this money being used for? If you are unsure, ask! It is better to ask now then regret later. If it is structured for a loan, what is it financing and how can you protect you money? How can you improve your chances at recovery if anything bad happens? If money buys equity, what are your shareholdings and dividend payouts?
Why are they approaching me?
Is there a reason why this opportunity is being offered to you? Is anyone else investing? Be careful when schemes seem too good to be true. Think about whether the returns can potentially out-weigh the investment.
How am I getting my money back?
Deliberate on the repayment terms. For example, would you prefer monthly or yearly returns? Would you receive money through dividend payouts or loan repayment? Subsequently, you have to ensure that the repayment terms agreed by you are reflected in legal documents.
Investing through Shariah-compliant Contracts
Once you have considered the legal aspects of investing, you should also deliberate on the kind of contract you are going to enter. In accordance with Shariah law, wealth creation and accumulation have to be based on specific types of contracts. These Shariah-compliant contracts support productive economic activities without betraying key Islamic principles as some conventional financial products do. Sharia-compliant contracts cannot create debt, cannot involve the payment of interest, and must provide for a sharing of risk and responsibility between the involved parties.
To be valid, an Islamic contract must feature subject matter that is lawful, has value for a Muslim, and is specific enough to avoid uncertainties. The service or asset described in the contract generally must exist when the contract is being created, must be owned by the seller and must be deliverable.
Here are some of the most commonly used contracts in Islamic Wealth Creation and Accumulation:
Contracts of partnership
Allow two or more parties to develop wealth by sharing both risk and return:
This contract creates a joint venture in which both parties provide investment capital, entrepreneurial skills, and labor; both share the profit and/or loss of the activity.
Contracts of exchange
Sales contracts that allow for the transfer of a commodity for another commodity, the transfer of a commodity for money, or the transfer of money for money
In this cost plus contract, an Islamic financial institution sells a commodity to a buyer for its cost plus the profit margin, and both parties know the cost and the profit in advance. The buyer makes deferred payments.
One party gives money to another party, which invests it in a business or economic activity. Both parties share any profit made from the investment (based on a pre-agreed ratio), but only the investor loses money if the investment flops. The mudharib loses the value of the time and effort it dedicated to the investment. (However, the mudharib assumes financial responsibility if the loss results from its negligence.)
Islamic Venture Capital: Crowd Funding
Shariah law is based on the principals of social justice, where wealth as well as risk and rewards are shared. Crowd funding complements these principles. Typically, access to capital and access to deals or funds are reserved for high net worth individuals and institutions. Crowd funding allows all entrepreneurs to pitch their ideas to a network of investors, who contribute small amounts of capital. Through crowd funding, communities come together to pool their resources to launch a business. The investors may invest across a diversified portfolio of start-ups to minimise their overall risk. In addition, crowd funding encourages job creation and lessens ‘brain drain’.
3 Important Tips to Remember :
- Never part with cash before knowing your legal rights!
- Know what you’re paying for and know how you’re getting it back before it is too late!
- Legal advice is not expensive compared with the money you can potentially lose when you invest a substantial amount of cash.
Need Legal Services?
ARLC Solutions is a subsidiary of Abdul Rahman Law Corporation. Our aim is to make your life easier. Whether you are representing yourself in court or part of a law firm, we can save you hours of drafting time. We do this by helping you prepare and draft everything you need whether it’s court documents or Corporate Agreement for you to move things fast and affordably. To keep updated on the law, you can sign up for our seminars, which will help you understand the legal issues that impact you.
Abdul Rahman Law Corporation (ARLC) is a boutique law firm that offers comprehensive legal services across a range of practice areas, from estate planning, probate and conveyancing to Syariah matters. If you’re looking for a socially-conscious legal practice with uncompromising standards of excellence, ARLC is definitely the law firm for you. Contact us for a free consultation today.