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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.
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.
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 .
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.
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.
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
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 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.
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