2.Saving Conduct- Investment and Participation

8/3/2019 2.Saving Conduct- Investment and Participation

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Course Instructor : Yousuf Ibnul Hasan

Saving

Investment

Participation

Chapter : 4


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Saving & Saving Conduct

Goal in the Islamic financialSystem in spreading the

saving awareness anddeveloping it.


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Individual Decision

Saving deposit is a decision that istaken by an individual.

Saving is a part of income that is keptaside for spending to a later time.

Islamic Finance give particularimportance and care to saving deposits..


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Reasons that encourage to take decisionfor avoiding un-necessary spending ofincome and use saving for better purpose.

Saving distinguish a commitment thatdefine individual of realizing his own

interest and the betterment of economicactivities.


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Islamic Financial System define a way

to saving funds.

Saving are employed according to therequirements and means of incentives that giveindividual to practice saving application.

It do not neglect individual and guided to leadhis saving motives as a caution to ensure safetyfor himself for future.

It raise to the individual standard of living.

They caution towards wastage and guide tomake profit.


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The cross road

Saving is one of the qualities of themember of healthy and welfare community.

Saverdo not spend wastefully in regards towhat he receive funds in his hand.Saving Conduct is the saving for future of

community for common goals.


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To apply the directives Islam called for in

Holy Quran what meansIX, 34 Chapter the Regret

And as for those who storeup gold and silver and donot spend those in Allahs

cause announce to them apainful destiny


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Islamic Financial System do not neglectsaving motives of saving.

It does not stick on to Islam and natureof human beings and their character.

It make clear to individual step by step

as when he makes his saving interest . It exercises a practical devotion of

worshipping.


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Savings operationsinIslamic Finance

Do not differ with conventional that systemfocus all efforts on class of savings.

It does not care about size of savings that is

conventional system practice of discouragesavings which are below a minimum limit.

It stress on the continuous and timely

investment savings that are collected in anysize of amount.


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Islamic System emphasis on benefit for thecommunity and does not remain to make profitat all ways through funds colleted.

It care saving conduct and not the individualinterest by guiding the ways and benefits ofsaving.

Saving and Spending is the social conduct andun-necessary saving is discourage andmoderate spending is encourage.


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Saving is a part of broad Islamic FinancialSystem and provide individual to take part inshaping its individual character to adaptshimself for welfare of Community as a whole.

More saving activity becomes a habit, itexpands large number of community balance

to community requirements and increasescommunity in becoming strong and number ofneedy persons decreases.


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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 interestRisk free investment

Easy to investment in any form and in

any product and services.


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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 detailsof saving results.

BUT ..


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Islamic Financial System

Restrict saving to be invested in illegal

form.

Compounding of saving return areprohibited.

Savings are invested on Profit & LossBasis.

Restricted saving products available .


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Limited number of financial institutions.

Saving cannot be invested in prohibitedproducts and practices.

Savings results are transparent, shorttenure and with clear understanding ofProfit & Loss.

Human ego avoid pain whenever it findsthe way to that.


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Conventionally it is found that savers havehigher participation in investment and

lesser in receiving in return. Savers are less important in in saving

operation whereas the savings are the realplayers that generate the interest.

Conventional system restrict higher ratio ofsaver on the saving return and allow higherreturn to the saving fund operators.


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Besides social and educational effects forspreading saving conduct, are there areeconomic reasons in which Islamic Financialplay great notice to spread the saving conduct.

Voluntary individual savings as a part ofindividual income for which he temporarily

postpones his spending. The saving he made help in financing the

economic activities for socio economicdevelopment .


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INVESTMENTINVESTMENT

There are common apprehension &economic principles which can be takenas guiding rules of the Islamic Financial

System for investment

There are common apprehension &economic principles which can be takenas guiding rules of the Islamic Financial

System for investment


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Saving leads to InvestmentSaving 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 capitaland obtaining profit.

Expenditure is deducted from profit and not fromcapital.

Profit which can be distributed is net profit and notgross profit.


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Islamic Financial System allow participationin Joint Stock Companies or Limited

Liability Companies from its accounts orcan participate in a part of the capital ofexisting companies

Financing working capital in projects atshort term financing with participationwhich is not lent at interest.


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Legitimate participation is a way of seeking profitthrough money from the money owner and workclose of participator at a common purpose amongeach participant for earning profit.

Riba Free Financial House can may be the moneyowner and saver the participator or vice versa.


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The Riba Free Financial Houses arepermitted to be a participator from

employer to re-participate with theprevious participated funds on a Profit& Loss basis.

The Riba Free Financial Houses can bethe second participator if it receives

participation from the firstparticipator.


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The Riba Free Bank may be the secondparticipator if it receives participation from thefirst participator.

The Riba Free Finance House as money ownerbears loss alone as long as the participator doesnot exceed his role.

If the Riba Free Finance House works as aparticipator it does not bear loss as is sufficientthat the Riba Free Finance Houses effort andwork are of no return.


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It is allowed that the profit between money ownerand participator is pre agreed. But if it isdetermined sum of principal amount of money

with the condition of no loss then participationbecomes null and void.

Riba Free Finance House can trade its funding

precious stone and in foreign currencies on itsconditions written down in the exchange contract.

Investment in financial securities is only valid inshares and not in debentures.


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In Conventional System traditions donot approve the Finance Houses or the

lenders to perform investments by

itself whereas Riba Free Finance

House break the tradition in three

stages.


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FirstlyFirstly

Rule known to us that every person is takenby his words.

Allahs word revealed in written form and by

traditions of Prophet (May Peace be upon him) as

considering Riba Free Finance Houses andtheir systems are the blessings and in puritywhich cannot be break, provided these are

followed in according to its pure soul.


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SecondlySecondlyWith no doubt Finance Houses with their

present forms and existing functions rose upin response to different environments andnon Islamic philosophies in their presentform and they serve these environments

which are not necessarily convenient forserving Islamic communities in achieving theRules approved by Almighty Allah


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ThirdlyThirdly

Riba Free Financial System guide to perform directinvestments or financing by participation and stopall practices of other nature that deviate to itssystem.

In case if continues its operations in style ofusurious banks and follow the lending of savingfunds by covering its administrative expenses fromthese funds, this damage the investment and createa difference between the two system.


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Financing by participation means sharing Investor(banks) capital of productive project becomes a

partner in the ownership project, partner inmanagement, running and supervision and partner inall what it yields from profit or loss according toproportions agreed upon.

The Investor (bank) can sell its share to a limit restoreonly the price agreed upon in the selling contracteither it is less or more than its capital.


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Justice must be secured and there should not beexploitation as in the case of loan at interest

where the lender obtains all its capitalcompletely with an increase in its capital equalto the mount of interest either the project whichborrowed makes a loss or profit.

Participation should exist on joint liabilitybetween the financier and the financing in caseof loss and in case of profit.

Financier or Islamic Bank is a partner in the


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Financier or Islamic Bank is a partner in thefinancing on the condition to accept loss orprofit as the condition of participation.

From here comes the glorious reference andgreat wisdom, thus this participation in the twocases (loss and profit) obliges the two partners(every of them) to make the project prosper,and to do every effort to supervise it toparticipate in its success and therefore theefforts of the two partners should be faithfullydirected to its development


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PARTICIPATION

Participation operations lead at theend to an ownership that is

applied in projects ortransactions. Islamic Financial

System through its Banking

System contribute in solving theproblems.


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Diminishing participation or participationleading at the end to ownership.

In participation were the financer or bank givesthe 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 organizedarrangement by keeping a part of income as aninstallment to repay financing.


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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 entrepreneuraccording to the proportions agreed upon.

.


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In case entrepreneur pay the financing either atonce or in installments financier has no right toobtain any privilege because of the increase inprices.

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 anychange 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.


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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 finallybecome an ownership to its hirer after a period of time.

Rent installment includes a calculated part of costing.


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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 forthe business operation.

The Second: The accounts of the participation

transaction should be checked by the expertaccountant to approve their results.

Islamic Finance has a social target


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Islamic Finance has a social target.

Participation through financing for the purpose toenlarge 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 impossibleact which could makes him reject financing.

Keeping accounting books and auditing exceed thevalue of the financing.

The expense of this checks are treated as the cost of

the transaction.


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How financier determine profits on

investment

The First stage: Every participation determine theshare according to the rules of participation contract.

The Second Stage: By preparing Profit & Lossaccount of investment operations and determining theportion resulting from participation transactions andfrom the results of investment projects which thefinancier operates alone.


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The Third Stage: The distribution of net

profit and loss of investments among thegroup of investors and the financier or bankand everyone according to his share ininvestment, as the shares with a sum of its

funds in transactions.

After that it is distributed among every one ofinvestors.


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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.


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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 keepinvestors secure and in banking provisions are made

for the purpose of safeguarding such possibilities by

way of .

Technical pre- study of the investment


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Technical pre- study of the investmentprojects before their execution.

The qualitative and geographicaldistribution of investments.

The refusal of conditional investment in acertain project that have whole operations of

is a distribution of risk.

Formation of appropriate provisions andreserves


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Forming appropriated provisions & reserves.

Provision or reserve is a part of profit that is put aside toencounter probable loss or to strengthen the financialstanding.

The reserve is of the right of the profit owner fromwhich the reserve is deducted.

Reserve or provision made to encounter losses and arededucted 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


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Investor is not a permanent and may finish hisparticipation is a natural matter.

Casual problem is seen on withdrawal

In order to investment operations without disputes, thebank make a reserve or an investment provision fromthe proportion the bank charges in return for its effortsand for managing investments.

Therefore this reserve is employed to encounter anyemergency and the balance is still be owned by thebank.

Documents

2.Saving Conduct- Investment and Participation