“Is Islamic banking viable?”

The following is my answer to a Quora question: “Is Islamic banking viable?”

If by viable, you mean to ask if there is there a market for it, then it is because enough people believe in it for it to exist. It is a growing field, and it is evolving. If by viable, you mean to ask if it will ever be a credible alternative to normal banking and finance, I am extremely sceptical. There are structural issues for many of the products and the investment products do not perform as well as equivalent products in normal banking. In some areas, it is far too inferior to be viable for a wider market.

One of the problems is the definition of riba’, usury. Does it include any and all forms of interest? If I send you money in another country, and the financial institution charges more than the principal, is that riba’, when we understand that there is an infrastructure cost involved? Another issue is that Islamic finance products, such as the sukuk are essentially the same thing as normal financial products but with an Arabic name, and higher distribution costs. There is the normal distribution costs, and then there is the distribution cost of the “Islamic” accrediting authority. We can also argue that there is a credibility issue with the accreditation of so-called Islamic products when the shari’ah compliance committees are not independent regulatory authorities, but paid for by the banks themselves.

Before Islamic banking, there was a movement towards ethical banking. Instead of reinventing the wheel for cosmetic and vanity purposes, it would make more sense to revisit ethical banking, and make it a standard throughout the industry.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Is Islamic Banking Viable?]


Image for illustrative purpose only.

I have to agree with the points mentioned by Terence. And I would add:

  • Riba is greatly misunderstood in current times to refer to any form of interest, due to lack of understanding and ignorance of the current financial system.
    • We really need to review and revisit the definition and understanding of riba and how it applies in the current system.
    • We also need to understand why Al-Azhar and Egyptian Fatwa House view mortgages and other banking transactions as permissible while others regard them as riba. When such a khilaf (scholarly disagreement) exists, we are allowed to take the easier or practical view that facilitates livelihood, especially for Muslim minorities.
  • The higher distribution costs is often either overlooked or regarded as a “necessary cost” to ensure “compliance”.
    • I personally would disagree. It is like saying “halal certification is necessary” for something that is halal in the first place. Like fish in the supermarket or a meat that is known to be slaughtered by a Muslim.
  • And yes, I strongly agree that we should revisit ethical banking & finance, rather than reinventing the wheel.
    • I have sat in a fund house presentation, from which I understood that the fund house’s philosophy in investing includes being ethical; it won’t invest in companies like tobacco which it feels to be detrimental to society.

Muslim consumers need to wake up. It is no longer about embracing and instilling financial literacy, but increasing our knowledge and understanding of the financial industry so as to better engage it in facilitating our livelihood.

“Where does life insurance go if there is no beneficiary?”

The following is my answer to a Quora question: “Where does life insurance go if there is no beneficiary?”

Should there be no nominated beneficiary for a life policy, the policy pays out to the estate of the deceased, and distributed according to the will. It comes under the administration of the executor of the estate. If there is no will, and the deceased passed away intestate, the payout will still be consolidated with the rest of the estate, and distributed according to intestacy laws. If there was a beneficiary, and the beneficiary predeceased the deceased, meaning that the beneficiary passed away before the life insured, the policy pays out to the estate as if there was no beneficiary.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Where Does Life Insurance Pay Out to if There is No Beneficiary?]


Image for illustrative purpose only.

A brief and apt answer by Terence. I’d like to add a few points:

  • Nomination of insurance policies is just as important as having insurance policies itself.
  • It is important to plan your finances with the end in mind: who would you like your insurance payout specifically, and your wealth generally, be paid out (or distributed) to should you no longer be around?
  • Estate planning (planning how your wealth should be distributed after your passing) is as important as financial planning; often, it is a misconception that having a will is sufficient.

Speak to a financial consultant/planner with regards to your estate planning needs and concerns.

“Which one is better: a monthly contribution to income protection, or investing the same money every month?”

The following is my answer to a Quora question: “Which one is better: a monthly contribution to income protection, or investing the same money every month?”

That depends entirely on your intent, and your need. In the beginning, you need some sort of liability protection, and coverage for loss of income. Pure investment does not address that. For example, if you have saved a $100 a month for three months, and then had an accident, you only have $300, which is not even close to what you need to replace your income and pay your immediate costs. If that $100 a month was paid into a policy, it would have at least meant $100,000 coverage.

When you have a substantial investment portfolio, your need changes, and your priorities evolve. In such a case, you buy policies to complement your portfolio, because now, you have a legacy to protect.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Which is Better: A Monthly Contribution to Income Protection or Investing the Same Money?]


Image for illustrative purpose only.

Terence has addressed the question aptly.

One should not stand independently of the other; income protection is as important as growing one’s wealth.

Always go back to your goals and needs. And plan your finances accordingly.

Quite often, engaging a financial consultant/planner would help in finding the balance.

“What is better: a stock or a mutual fund?”

The following is my answer to a Quora question: “What is better: a stock or mutual fund?”

When you buy stock, each stock is the purchase of shares in individual companies. The advantage is that gains are more easily realised. In effect, a gain in share price may give you a potential profit may times what you paid for that stock. The disadvantage is that your investment is tied to the performance of the stock, and a drop in share price could result in you making a paper loss. There is more volatility here.

When you buy into mutual funds, you are, in effect, buying into multiple stocks in many companies. Due to this, the potential gains will not be as much as that of that from a single stock. However, because of the inherent diversification of the index, you are unlikely to make precipitous losses since that would involve the entire market losing capitalisation, not just a single stock.

You choose either, depending on your preference and risk profile, or you can choose both, and diversify your portfolio.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What is Better: a Stock or Mutual Fund?]


Image for illustrative purpose only.

In brief, it’s a choice of investing in shares of an individual company or stocks in multiple companies.

Each has its pros and cons. What matters is how it is managed in your overall investment portfolio.

“Do high yield bonds have a high default rate during a recession?”

The following is my answer to a Quora question: “Do high yield bonds have a high default rate during a recession?”

Yes. These bonds have a lower credit rating, meaning they are not investment grade bonds. These bonds are not rated corporate papers, or sovereign bonds. Their underlying issuer either has a weak financial position, or is already heavily leveraged. To attract investors, they have to offer a higher yield. Most such bonds are essentially junk bonds. Let alone a recession, a high yield bond from a start-up might default simply because that start-up missed a fund-raising target. These are not debt instruments for the faint-hearted, or those with liquidity exposure.

Terence Kenneth John Nunis

[Shared with permission from: Quora Answer: Do High Yield Bonds Have a High Default Rate during a Recession?]


Image for illustrative purpose only.

While the dividend rates of high yield bonds are enticing, we need to bear in mind that they come with some risk.

Yes, you can have high yield bonds as part of your investment portfolio, but it should not be the only bonds. Balance it with high grade bonds.

“What arguments exist for whole life insurance over term life insurance?”

The following is my answer to a Quora question: “What arguments exist for whole life insurance over term life insurance?”

Both whole life and term have their uses. Generally, I recommend whole life when the client is younger. If they can afford it, I recommend a limited pay whole life, so they pay for the coverage during their earning years only. When taken early, whole life is cheap. It will never be cheaper than a term plan, but when we calculate the total premium of a whole life plan over the course of the payment term against multiple term plans taken at successively later periods of life, whole life premiums are much cheaper.

Secondly, whole life plans have a surrender value; term plans do not. This makes them a financial instrument that can be borrowed against if it absolutely becomes necessary.

Finally, whole life coverage for the duration of the plan, once incepted, is guaranteed. When a term plan is up for renewal, and there is a claim against it, that renewed term plan may not cover the condition claimed against, treating it as a pre-existing condition. This may not be true for all term plans, however.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What Arguments Exist for Whole Life Insurance over Term?]

Image for illustrative purpose only.

Sometimes, customers, even financial planners, get carried away with the notion of “buy term, invest the rest”, as though it is the only right way to plan one’s finances and insurance.

Yet, individual circumstances differ. Hence, the financial and insurance planning differ as well.

Each insurance product type is created with a purpose. It has its advantages and disadvantages.

Hence, when it comes to insurance and financial planning, it is not about what product you should buy but how the product(s) fit into your overall financial plan and objectives.

“My mortgage is late. Should I call my bank and explain why?”

The following is my answer to a Quora question: “My mortgage is late. Should I call my bank and explain why?”

Yes. When it comes to taking loans from any financial institution, it is always important to be in constant communication and update them. A bank can tolerate late payment if they understand the reason why payment is late, and there is a date of payment. Even if there is a contention, this communication ensures that you have an avenue to negotiate, and even get a waiver on late fees.

Going silent on the bank sends them the signal that you are a likely recalcitrant defaulter, and they will treat you accordingly, including levying punitive fees. If you have failed to respond to their correspondence, they move your loan to the bad debt ledger, and that is a precursor to further legal action, including application for bankruptcy.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Should I Call My Bank to Explain Why My Mortgage is Late?]


Image for illustrative purpose only. Image courtesy of The Economic Times.

Key takeaway is: always be in constant communication with the bank or the financial institution you are dealing with.

You could get a waiver for late payment fee. Sometimes, refinancing might be the solution for you.

“What are the advantages of investing in a money market mutual fund over a savings account?”

The following is my answer to a Quora question: “What are the advantages of investing in a money market mutual fund over a savings account?”

A savings account has a low risk, and that corresponds to a lower return. A money market fund is also low risk, but it is still of a higher risk than a savings account. This allows for a marginally higher potential return. The return on a savings account is fixed. There is nothing you can do to increase the ROI except by maintaining a higher balance. However, in any reasonable scenario, the ROI is likely to be lower than the inflation. A savings account is a place to keep money, not grow it. With the money market fund, on the other hand, you actually have a reasonable opportunity for greater returns by undertaking a bit more risk.

Debt securities available to you via a money market fund are reasonably stable. They may include various types of government bonds and corporate bonds. They are the most reliable debt instruments. Proper weightage in your portfolio will ensure that you are almost as safe as having your funds in a savings account, but you have a higher return. Also, if you are in a developed market, the relevant securities commission monitors this market and keeps things relatively stable.

What may be surprising, is that in certain instances, the costs associated with keeping money in the money market may be equal or lower than the cost of keeping it in a savings account. Again, the fee structure has to be understood and managed. A bank will charge transaction fees, which can add up, and a fee for failing to maintain a minimum balance requirement. The fund has a management fee that is normally below half a percent. Provided you do not incur too much transaction cost for unnecessary movements of your funds in the money market, the fees can be considered negligible. The money market funds are almost as liquid as that of a savings account. There is a slight delay in converting the securities into cash, which may take a day or more. I personally consider this an advantage since it precludes impulse spending.

If the funds are substantial enough, you may incur tax. Depending on how you manage your investments, and where you put your money, and where you are domiciled, there is actually the possibility that much of what you earn in the fund would not be taxed, or taxed at a lower bracket than keeping an equivalent amount in a savings account. This might also be dependent on the vehicle used to manage the funds.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What are the Advantages of Investing in a Money Market Mutual Fund over a Savings Account?]


Image for illustrative purpose only.

This is something one should consider. Rather than keeping all of one’s savings in a savings account (or fixed deposit even), why not invest them in a money market mutual fund that is reasonably stable with a higher potential return?

Of course, you should still keep enough money in your savings account for immediate access and emergency needs (i.e. an Emergency fund).

Anything more than that, should be invested for potential growth, at least in a money market mutual fund.

“Where or how should I invest $500 monthly, at low-risk?”

The following is my answer to a Quora question: “Where or how should I invest $500 monthly, at low-risk?”

Even at low risk, you cannot go for the safest since the base objective is to still to have a higher return over the investment period than the rate of inflation. If you cannot match the rate of inflation, then there is no real point investment since you will have negative gains. I am assuming that you are reasonably young and have an intermediate to lengthy investment horizon based on the amount mentioned monthly. That being the case, I suggest an investment-linked plan as opposed to a pure mutual fund type investment.

Any sort of fund has the advantage of spreading the risk over several markets and sectors, reducing the chance of a downturn in any one market affecting the overall performance of your securities. However, an investment-linked plan allows you the opportunity of building an immediate estate and afford you some measure protection should anything untoward occur before your investments mature. Also, the ILP is as liquid as a normal fund, allowing withdrawals.

The investment horizon is between 15 to 20 years conservatively. However, these sort of products normally break even in 10 or 11 years. $500 monthly is $6,000 annually. This would be an estimated projection for a typical such investment, which has a similar profile of any conservatively managed fund. In 10 years, you would have paid out $60,000 in total premiums for a $60,000 investment value approximately, which is 0% ROI. In 15 years, you would have paid out $90,000 in total premiums for a $120,000 investment value approximately, which is 33% ROI. In 20 years, you would have paid out $120,000 in total premiums for a $195,000 investment value approximately, which is 60% ROI.

If you know how to manage the funds yourself and move them between the different funds to take advantage of the market, you can do better of course. Based on $500, your coverage is ideally between $100,000 to $200,000 for death, and total and permanent disability. This means, that the claim will be the $100,000 to $200,000 unless your investment value exceeds this amount. The amount paid out is always the higher amount.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Where or How Should I Invest $500 Monthly at Low-Risk?]


Here, Terence has highlighted the following key advantages of an investment-linked policy (ILP) as opposed to a pure mutual fund/unit trust, which are often overlooked:

  • Building an immediate estate
  • Afford some measure of protection should anything untoward occur before your investments mature
  • As liquid as a normal fund, allowing (partial) withdrawals

In fact, I personally feel it should be your first policy along with other protection policies to form a comprehensive insurance with investment portfolio.

“What is the secret to not losing money in the stock market?”

The following is my answer to a Quora question: “What is the secret to not losing money in the stock market?”

The secret to not losing money in the market is to not invest. However, money that is not invested anywhere still loses purchasing power over time due to the effects of inflation. Losses are not the problem. When you put money in the market, and that debt or equity instrument loses value, that loss is a paper loss. You can hold for long term, and allow it to eventually appreciate in value if the fundamentals of the underlying asset is good; or you can switch over to something else, which may compound that loss in the short term. However, if you take that money out of the market, that paper loss becomes a realised loss. There is no recovery from a realised loss, except by covering it with profits earned elsewhere.

It is possible to not make a realised loss if you have picked your counters carefully, and have an extended investment horizon since the market historically rises with time. That is the natural state of the market, even with cyclical crashes. It is also important to diversify to minimise risk, so that a fall in one sector of the economy, or one part of the world does not lead to an overall decline in your portfolio.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What is the Secret to Not Losing Money in the Stock Market?]

Image for illustrative purpose only.
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