The Comprehensive Guide to Shariah-Compliant Wealth Management

Wealth Management in Islam

How can Muslims in Singapore navigate their financial journey while adhering to Islamic principles?

In a world dominated by conventional financial practices, maintaining compliance with Shariah can feel challenging.

This article provides a step-by-step approach to managing wealth ethically and responsibly, ensuring that every financial decision aligns with Islamic values.

Whether you’re just starting to save, planning your investments, or exploring risk management options, this article equips you with the tools and insights to achieve financial stability while fulfilling your spiritual obligations.

Wealth management involves the strategic planning and handling of financial resources to achieve specific goals. This process encompasses various stages:

1. Wealth formation,

2. Wealth accumulation,

3. Wealth protection,

4. Wealth distribution, and

5. Wealth purification.

Islamic wealth management builds upon these principles, ensuring that every step complies with Shariah law, while at the same time foster financial stability and prevent hardships.

The essence of Islamic wealth management lies in balancing material and spiritual goals. Unlike conventional methods, it prioritises adherence to Shariah principles, ensuring that wealth is earned, spent, and shared in alignment with Islamic values.

In Singapore, a country known for its robust financial infrastructure, Shariah-compliant financial services are relatively limited compared to conventional options. This guide aims to assist Muslims in navigating financial decisions while adhering to Shariah principles, with insights applicable to similar global contexts.

Wealth Formation in Islam

Wealth formation in Islam is rooted in the principle that wealth is a trust from Allah SWT, to be managed responsibly and ethically. This process begins with the acquisition of wealth through halal (permissible) means, ensuring that all financial activities comply with Shariah law.

Muslims are encouraged to engage in productive and ethical economic activities, avoiding Riba (interest), Gharar (uncertainty), and other prohibited practices.

The goal is to create wealth that benefits not only the individual but also the wider community, aligning with the Maqasid as-Shariah (objectives of Islamic law) to promote justice, fairness, and social welfare. By adhering to these principles, Muslims can achieve financial stability and contribute positively to society.

Islamic wealth formation can be effectively achieved by pursuing a career that is lawful in Islam. This entails working in any permissible sector and avoiding activities that encourage others to commit unlawful acts.

Prohibited careers in Islam include those in sectors like Riba-based banks, conventional insurance companies, and gambling establishments.

Additionally, selling alcohol, raising pigs, drafting Riba contracts, or selling items intended for unlawful purposes are considered unlawful. Directly or indirectly aiding in such activities is regarded as prohibited and sinful in Islam.

Wealth Accumulation in Islam

Wealth accumulation is a necessary objective, but it must not come at the expense of others or through unethical means, such as Shariah-prohibited elements.

Before focusing on wealth accumulation, Muslims should allocate resources to personal and social obligations, such as Zakat and Sadaqah. Wealth accumulation can be achieved through regular monthly savings or by making investments.

1. Saving

Saving is a straightforward means of accumulating wealth, providing financial security for emergencies and future needs. However, Muslims must ensure their savings methods are Shariah-compliant, avoiding savings or current accounts that are interest-based, regardless of how minimal the interest may seem.

Savings can help individuals avoid debt by building reserves for short-term needs and unforeseen expenses. It also fosters discipline to achieve future financial goals.

2. Investment

Once a solid savings foundation is established, Muslims can explore Shariah-compliant investments to grow their wealth. Investing is an effective way to build wealth, particularly for long-term goals and combating inflation.

Allowing your money to idle can lead to its value diminishing over time and missing opportunities for growth.

Shariah-compliant investments avoid speculative practices and impermissible industries, ensuring that profits are ethical and lawful while potentially reducing the risk of significant loss.

For instance, Islamic contracts such as Mudharabah (profit-and-loss sharing) enable justifiable profits without fixed returns, fostering mutual benefit between investors and institutions.

Wealth Accumulation in Singapore’s Context

Islamic savings and current accounts, for both retail and businesses, are now easily accessible in Singapore.

Both CIMB and Maybank, originally from Malaysia and with branches in Singapore, offer these solutions, including Islamic financing options.

Additionally, the digital financial facilities provided by these banks, such as internet banking and PayNow registration, are almost on par with those of local banks like DBS, OCBC, and UOB, addressing the usual community concerns about switching to non-local banks.

Therefore, Muslims in Singapore no longer have a reason to opt for conventional banks, especially for long-term savings.

Regarding investment, popular wealth accumulation options in Singapore include stocks and ETFs, accessible through online brokerage platforms, as well as unit trusts recommended by financial advisors through Investment-Linked Policies (ILPs) or brokerages they are licensed to represent.

Here’s how Muslims can ensure these investments are Shariah-compliant:

1. Stocks and ETFs

• Use Shariah stock screeners to identify compliant shares and ETFs.

• Avoid speculative practices like options trading, and ensure transactions adhere to Islamic principles (e.g., immediate settlement).

2. Unit Trusts

• Engage financial advisors who are knowledgeable about Shariah-compliant funds.

• Opt for certified Islamic unit trusts that align with your financial planning objectives.

• Choose financial advisors who can manage your portfolio using available Shariah-compliant funds in accordance with changing market conditions, to minimize loss if situations persist.

Many certified Shariah-compliant unit trusts are available in Singapore, offering diverse strategies ranging from fixed income to equity funds and hybrid options.

When engaging financial advisors for Islamic financial planning, Muslims should inquire about the funds they recommend, prioritizing an all-Shariah-compliant portfolio.

Most general financial planning objectives can be met with the options currently available.

Private equity and cryptocurrency investments are also available but require meticulous scrutiny to ensure Shariah compliance. This article will not cover these options.

Moderate Spending of Wealth in Islam

Before addressing the next point, it is imperative to note that even if wealth formulation and accumulation are pursued as previously outlined, financial disadvantage will persist if one does not practice mindful spending and avoids extravagance.

Islam discourages both extravagance and excessive frugality, advocating for moderate spending as the ideal approach.

Overspending can lead to insufficient savings and debt, while stinginess denies oneself and dependents of essential needs.

Moderate spending ensures:

• Meeting basic needs while saving for future goals.

• Avoiding unethical spending habits.

• Maintaining financial stability without unnecessary debt.

To achieve this balance, Muslims should cultivate financial literacy and budgeting skills, preventing unplanned purchases and promoting sustainable financial habits.

Wealth Purification in Islam

In Islam, all wealth is entrusted by Allah SWT, and Muslims are custodians of this wealth. A portion must be allocated to benefit society through Zakat and other charitable acts.

Zakat purifies wealth, ensuring it remains ethically earned and spiritually blessed. It is compulsory for every capable Muslim and is designed to provide financial assistance to those in need.

By redistributing wealth, Zakat reduces inequality, uplifts the underprivileged, and fosters socio-economic development.

Wealth Protection in Islam

Wealth protection aligns with the Maqasid as-Shariah objectives of safeguarding life’s necessities. Any reduction or loss in accumulated capital can significantly impact an individual's standard of living.

Islam encourages measures to secure wealth against unforeseen risks to preserve it for oneself and dependents.

Takaful (Islamic insurance) provides a Shariah-compliant alternative to conventional insurance. It operates on principles of mutual cooperation and risk-sharing.

Takaful helps individuals manage medical expenses, education, retirement, and emergencies while enabling charitable contributions through Zakat and Sadaqah, benefiting society at large.

Wealth Protection in Singapore’s Context

When it comes to risk management, Takaful products are the preferred choice for Muslims.

However, Takaful products are currently unavailable in Singapore due to the absence of operators since 2012. The only exception is travel health Takaful, specifically for Hajj and Umrah pilgrims.

In light of these limitations, the MUIS Fatwa Committee, in a fatwa issued concerning the Revocable Insurance Nomination, briefly addresses the ruling on insurance in Singapore.

The Fatwa Committee acknowledges that Muslim scholars hold differing views on the permissibility of purchasing insurance.

While some scholars view insurance as permissible for protecting the welfare of Muslims, others regard it as prohibited due to Syubhah (doubtful elements) and Gharar (uncertainty).

The Committee recognizes the economic and demographic changes that necessitate financial planning for old age or future family needs. These considerations are especially relevant for low- and middle-income individuals, who may rely on insurance as a financial planning tool.

Ultimately, the Committee holds that each Muslim is responsible for selecting an insurance scheme that best meets Shariah requirements, based on the views of the jurists they trust.

As discussed earlier, risk management is a fundamental consideration for every individual.

Thus, it becomes crucial to seek insurance as a means of safeguarding oneself and one’s family from the sudden loss of primary sources of income or to preserve hard-earned savings.

Within the framework of necessity (Darurah) and the limited Shariah-compliant options in Singapore, it is deemed permissible to purchase various insurance products available in the market.

However, specific conditions and exceptions to this ruling must be observed:

• Coverage Adequacy: Ensure the policy meets your needs without excessive coverage or unnecessary premiums.

• Avoiding Riba: Select policies that exclude interest-based returns or investments.

• Necessity Principle: Conventional insurance is permissible only when no Takaful alternatives exist, and usage is limited to what is necessary.

Muslims in Singapore must remain cautious and well-informed when selecting insurance products, striving to align as closely as possible with Shariah principles.

Conclusion and Next Steps

Shariah-compliant wealth management is not merely about financial growth but about fulfilling our responsibilities as custodians of the wealth entrusted to us by Allah SWT.

By adhering to Islamic principles in wealth accumulation, protection, and purification, Muslims can achieve financial stability while contributing to societal well-being.

For Muslims in Singapore, navigating the financial landscape may present unique challenges, particularly with the limited availability of Takaful products and other Shariah-compliant options.

However, these challenges also offer opportunities for greater diligence, financial literacy, and ethical decision-making.

Next Steps:

1. Evaluate Your Financial Goals: Reflect on your long-term and short-term financial needs and align them with Islamic principles. Prioritize obligations such as Zakat and Sadaqah before wealth accumulation.

2. Consult Knowledgeable Experts: Seek advice from certified Shariah advisors, Islamic financial planners, or trusted scholars to identify compliant investment and insurance options.

3. Leverage Available Tools: Use Shariah stock screeners and consult resources like MUIS Fatwas or opt for only certified Islamic unit trusts in your financial decisions.

4. Stay Updated: The financial industry evolves constantly. Stay informed about new Shariah-compliant products or changes in local fatwas to make better-informed decisions.

5. Promote Awareness: Share your understanding of Islamic wealth management with your community to help others align their financial practices with Shariah.

By embracing Shariah-compliant wealth management, Muslims can not only secure their financial future but also fulfill their spiritual obligations, contributing to a just and equitable society.

Reference:

Hossain, B., Abdullah, M. F., & Hossain, G. M. S. (2022). An Islamic debt and wealth management framework in the context of Malaysia. The Journal of Muamalat and Islamic Finance Research, 19(2), 41–57. https://doi.org/10.33102/jmifr.v19i2.460

Majlis Ugama Islam Singapura (MUIS). (n.d.). Revocable insurance nomination. Office of the Mufti. Retrieved November 22, 2024, from https://www.muis.gov.sg/officeofthemufti/Fatwa/English-Revocable-Insurance-Nomination