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Saving leads to Investment
through participation
Goal in the Islamic financial
System in spreading the
saving awareness and
developing it.
Individual Decision
 Saving deposit is a decision that is
taken by an individual.
 Saving is a part of income that is

kept aside for spending to a later
 Islamic Finance give particular

importance and care to saving
deposits. .
 Reasons 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 Financial System define a
way to saving funds.
 Saving are employed according to the
requirements and means of incentives
that give individual to practice saving
 It do not neglect individual and guided to
lead his saving motives as a caution to
ensure safety for himself for future.
 It raise to the individual standard of
 They caution towards wastage and guide
to make profit.
The cross road
 Saving is one of the qualities of the
member of healthy and welfare
Saver do not spend wastefully in
regards to what he receive funds in
his hand.
Saving Conduct is the saving for
future of community for common
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 of saving.
 It does not stick on to Islam and

nature of human beings and their
 It make clear to individual step by

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

Savings operations in Islamic Finance
 Do not differ with conventional that system
focus all efforts on class of savings.
 It does not care about size of savings that is

conventional system practice of discourage
savings which are below a minimum limit.
 It stress on the continuous and timely

investment savings that are collected in any
size of amount.
 Islamic System emphasis on benefit for
the community and does not remain to
make profit at all ways through funds
 It care saving conduct and not the

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
 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
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
 Risk free investment
 Easy to investment in any form and
in any product and services.
 Verity of saving products that give a
 Inter-lending support in investment
of savings
 Multi currency conversion of saving
 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
 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
 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
 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
 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
 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
 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
 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
 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
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
 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
 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
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
 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
 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
 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 &
 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.