Saving

Investment
Participation

Saving leads to Investment

through participation
SAVING AND SAVING
CONDUCT

Goal in the Islamic financial

System in spreading the
saving awareness and
developing it to the need of
saver and the community.
 Individual Decision
 Saving is a decision that is taken
by an individual.
 Saving is a part of income kept

aside for spending at a later time.

 Islamic Banking give particular

importance and care to

individual’s savings.
 Savers are the partners of the

Islamic banks
 Reason that encourage to take
decision for avoiding un-necessary
spending of income and use saving
for better purpose.
 Saving distinguish a commitment

that define individual of realizing

his own interest and the betterment
of economic activities.
 Islamic Bank define way to saving
funds.
 Savings employed according to means
for incentives that give individual to
practice saving application.
 Saving do not neglect individual and
guided to lead saving motives to ensure
safety for future.
 Saving raise individual standard of
living, caution towards wastage and
guide to multiply the principal savings.
 Saving is a quality of a member in
healthy and welfare community due
to avoiding spending of wastefully
in regards to what he earns.
 Saving conduct is the saving for

future of community for common

goals.
 Saving is the contribution of

individual for socio development.

To apply the directives Islam called for
in Holy Quran what means
IX, 34 Chapter the Regret

And as for those who store

up gold and silver and do
not spend those in Allah’s
cause announce to them a
painful destiny
 Islamic Financial System do not
neglect saving motives.
 It make clear to individual step by

step as when he makes his saving

interest .
 It exercises a practical devotion of

worshipping.
 Savings operations in Islamic Banking
 It differ with conventional system that focus
on class of savings.
 It encourage of all volume of saving that

conventional system discourage savings of

below a minimum limit.
 It stress on continuous and timely

investment savings that are collected in any

size of amount.
 Islamic Banking emphasis on benefit for
the community and not remain to make
profit at all ways through funds colleted.
 Care saving conduct and not individual

interest by guiding the ways and benefits

of saving.
 Saving and Spending is the social

conduct and un-necessary saving is

discourage and moderate spending is
encourage.
 Saving is a part of broad Islamic
Financial System and provide
individual to take part in shaping its
individual character to adapts himself
for welfare of Community as a whole.
 More saving activity becomes a habit, it
expands large number of community
balance to community requirements
and increases community in becoming
strong and number of needy persons
decreases.
 Is Conventional system better then
Islamic System for Savings
 In their ability to attract savings by
offering interest on savings rather
Islamic system does not offer any
interest
 Risk free investment
 Easy to investment in any form and
in any product and services.
 Verity of saving products that give a
choice
 Inter-lending support in investment
of savings
 Multi currency conversion of saving
funds
 Compounding of return that increase
the volume of saving returns.
 Need no obligation on declaration of
details of saving results.
BUT …………..
 Islamic Financial System
 Restrict saving to be invested in
illegal form.
 Compounding of saving return

are prohibited.
 Savings are invested on Profit &

Loss Basis.
 Restricted saving products

available .
 Limited number of financial
institutions.
 Saving cannot be invested in

prohibited products and practices.

 Savings results are transparent,

short tenure and with clear

understanding of Profit & Loss.
 Human ego avoid pain whenever it

finds the way to that.

 Conventionally it is found that savers
have higher participation in
investment and lesser in receiving in
return.
 Savers are less important in in saving
operation whereas the savings are the
real players that generate the interest.
 Conventional system restrict higher
ratio of saver on the saving return and
allow higher return to the saving fund
operators.
 Besides social and educational effects for
spreading saving conduct, are there are
economic reasons in which Islamic
Financial play great notice to spread the
saving conduct.
 Voluntary individual savings as a part of
individual income for which he
temporarily postpones his spending.
 The saving he made help in financing the
economic activities for socio economic
development .
 INVESTMENT
There are common apprehension &
economic principles which can be
taken as guiding rules of the Islamic
Financial System for investment
 Saving leads to Investment
 Rule of Profit & Loss sharing is Participation.
 Loan leads to seeking price of money that
increase in capital.
 Financing is made on principle of safety for
capital and obtaining profit.
 Expenditure is deducted from profit and not
from capital.
 Profit which can be distributed is net profit
and not gross profit.
 Islamic Financial System allow
participation in Joint Stock
Companies or Limited Liability
Companies from its accounts or can
participate in a part of the capital of
existing companies
 Financing working capital in projects
at short term financing with
participation which is not lent at
interest.
 Legitimate participation is a way of
seeking profit through money from
the money owner and work close of
participator at a common purpose
among each participant for earning
profit.
 Riba Free Financial House can may

be the money owner and saver the

participator or vice versa.
 The Riba Free Financial Houses
are permitted to be a participator
from employer to re-participate
with the previous participated
funds on a Profit & Loss basis.
 The Riba Free Financial Houses
can be the second participator if it
receives participation from the
first participator.
 The Riba Free Bank may be the second
participator if it receives participation
from the first participator.
 The Riba Free Finance House as money
owner bears loss alone as long as the
participator does not exceed his role.
 If the Riba Free Finance House works as
a participator it does not bear loss as is
sufficient that the Riba Free Finance
House’s effort and work are of no return.
 It is allowed that the profit
between money owner and
participator is pre agreed. But
if it is determined sum of
principal amount of money
with the condition of no loss
then participation becomes null
and void.
 Riba Free Finance House can
trade its funding precious stone
and in foreign currencies on its
conditions written down in the
exchange contract.
 Investment in financial

securities is only valid in shares

and not in debentures.
In Conventional System traditions
do not approve the Finance
Houses or the lenders to perform
investments by itself whereas
Riba Free Finance House break
the tradition in three stages.
 Firstly
 Rule known to us that every person is
taken by his words.
 Allah’s word revealed in written form
and by traditions of Prophet (May Peace be
upon him) as considering Riba Free
Finance Houses and their systems are
the blessings and in purity which cannot
be break, provided these are followed in
according to its pure soul.
 Secondly
 With no doubt Finance Houses with
their present forms and existing
functions rose up in response to
different environments and non
Islamic philosophies in their present
form and they serve these
environments which are not
necessarily convenient for serving
Islamic communities in achieving the
Rules approved by Almighty Allah
 Thirdly
 Riba Free Financial System guide to
perform direct investments or financing by
participation and stop all practices of other
nature that deviate to its system.
 In case if continues its operations in style of
usurious banks and follow the lending of
saving funds by covering its administrative
expenses from these funds, this damage the
investment and create a difference between
the two system.
 Financing by participation means sharing
Investor (bank’s) capital of productive project
becomes a partner in the ownership project,
partner in management, running and
supervision and partner in all what it yields
from profit or loss according to proportions
agreed upon.
 The Investor (bank) can sell its share to a
limit restore only the price agreed upon in the
selling contract either it is less or more than its
capital.
 Justice must be secured and there should
not be exploitation as in the case of loan at
interest where the lender obtains all its
capital completely with an increase in its
capital equal to the mount of interest
either the project which borrowed makes a
loss or profit.
 Participation should exist on joint liability

between the financier and the financing in

case of loss and in case of profit.
 Financier or Islamic Bank is a partner in
the financing on the condition to accept
loss or profit as the condition of
participation.
 From here comes the glorious reference
and great wisdom, thus this
participation in the two cases (loss and
profit) obliges the two partners (every of
them) to make the project prosper, and
to do every effort to supervise it to
participate in its success and therefore
the efforts of the two partners should be
faithfully directed to its development
 PARTICIPATION
Participation operations lead at
the end to an ownership that is
applied in projects or
transactions. Islamic Financial
System through its Banking
System contribute in solving
the problems.
 Diminishing participation or participation
leading at the end to ownership.
 In participation were the financer or bank

gives the partner the right to replace it by

ownership.
 It is either at once or in parts according to

pre-agreed conditions on a basis of

organized arrangement by keeping a part
of income as an installment to repay
financing.
 Method of diminishing participation
 Entrepreneur presents the project to Financier.
 Financier sees its viability of the project.
 Financier financer as the partner of the project.
 Entrepreneur pay through earning of profit in
parts.
 If entrepreneur owner keeps it ownership to
him, the profit is distributed between financier
and entrepreneur according to the proportions
agreed upon.
 .
 In case entrepreneur pay the financing
either at once or in installments financier
has no right to obtain any privilege
because of the increase in prices.
 The financier or bank invest in project with the
capital and therefore it is treated as a partner in
the transaction either equally or in part and any
change in the value of the transaction the
working partner has always the choice either
to sell and earn profit or buy himself according
to market price.
 In hire selling method the financer has to participate
in construction on the land then rents the housing
units.
 The land owner pay the ownership and rent and
finally become an ownership to its hirer after a
period of time.
 Rent installment includes a calculated part of
costing.
 Rules of participation transactions
which financier follow with partner.
 Each participation transaction is under a contract
and conditions that specify investment and profit in
proportion of each partner and instruct two matters:
 The First: The participator should keep accounts
for the business operation.
 The Second: The accounts of the participation
transaction should be checked by the expert
accountant to approve their results.
 Islamic Finance has a social target.
 Participation through financing for the purpose
to enlarge economic base and opening doors for
every one desiring in work and in production.
 For small worker who needs a small financing
forcing him to keep accounting books is asking
him impossible act which could makes him
reject financing.
 Keeping accounting books and auditing exceed
the value of the financing.
 The expense of this checks are treated as the cost of
the transaction.
 How financier determine profits on
investment
 The First stage: Every participation
determine the share according to the rules of
participation contract.
 The Second Stage: By preparing Profit &
Loss account of investment operations and
determining the portion resulting from
participation transactions and from the results
of investment projects which the financier
operates alone.
 The Third Stage: The distribution of
net profit and loss of investments
among the group of investors and the
financier or bank and everyone
according to his share in investment, as
the shares with a sum of its funds in
transactions.
 After that it is distributed among every

one of investors.
 Profit portion of every investor from
the profit determined
 Every investor obtains his portion of profit
according to agreed terms as regards to investing
operations.
 By mixing of total fund participated or deposited by
the investor in the bank to the time:
 For the period in which the fund has being invested.
 Mixing leads to a fair distribution as regards the
share of investors from profits distributor.
 Is it possible that the result of
investment is a loss
 Chance may be there that the Islamic Bank for the
sake of eliminating the possibility of loss from
investment operations.
 Keeping such possibility there are ways to keep
investors secure and in banking provisions are made
for the purpose of safeguarding such possibilities by
way of .
 Technical pre- study of the investment
projects before their execution.
 The qualitative and geographical
distribution of investments.
 The refusal of conditional investment
in a certain project that have whole
operations of is a distribution of risk.
 Formation of appropriate provisions
and reserves
 Forming appropriated provisions &
reserves.
 Provision or reserve is a part of profit that is put
aside to encounter probable loss or to
strengthen the financial standing.
 The reserve is of the right of the profit owner
from which the reserve is deducted.
 Reserve or provision made to encounter losses
and are deducted from investment profits
before distribution.
 Reserve are the right of investors and the bank
(participators) together.
 Investor is not a permanent and may finish his
participation is a natural matter.
 Casual problem is seen on withdrawal
 In order to investment operations without
disputes, the bank make a reserve or an
investment provision from the proportion the
bank charges in return for its efforts and for
managing investments.
 Therefore this reserve is employed to encounter
any emergency and the balance is still be owned
by the bank.