ENTREPRENEURS:

INVESTMENT
DEFINITION OF SAVINGS: AN ISLAMIC APPRAISAL

Legitimacy Of Savings In Islam:

• Savings is derived by deducting total consumption
expenditure from the total income for a given period
of time.
• The Quranic Documents:

There are verses in the Qur'an which rightly imply the validity of
savings in Islam.
Allah says;
“Make not thy hand tied to thy neck, nor stretch it forth to its
utmost reach, so that you become blameworthy and destitutes”
(Al-Israa’:29).
ASSUMPTIONS OF THE ANALYSIS
• The following assumptions are made to support an
analysis of savings behavior in Islamic framework.

• i) The entire economy operates within the Islamic

framework.
• ii) The savers are Muslims and their chances of
practicing Islamic norms and values in its totality are
very possible.
• iii) They desire to save for their own and social
betterment
Continue….
• iv) They are moderate in their spending.
• v) They spend for altruistic purposes to achieve
Falah in human life.
• vi) Usury is eliminated from the economy
• vii) The institution of Zakah is introduced in the
economy which aims at redistribution and
recirculation of wealth from the rich to the poor
MOTIVES FOR SAVINGS: AN ISLAMIC PERSPECTIVE

• The motives of a Muslim for savings relate to both:

• the intention of being able to perform religious obligations
which require financial backing, and
• the wish to be economically better off which would enable him
to increase the estate of his heirs (better to leave them rich
then leave them poor and begging others).

• Nevertheless, this motive is normally practiced in the

contemporary savings behavior of Muslims in various parts of the
world.
• A Muslim may experience irregularities in income and
consumption in life. Therefore he should allocate part of his
income as a precautionary savings.
Continue….
• The Quran urges Muslims not to spend whatever they
presently have. The precautionary motive for savings is
evident in the prophet's (pbuh) life since he used to save
resources for at least one year.

• The above discussion indicates that a Muslim behaving within

the Islamic framework has strong motives to save resources to
improve the quality of future life.
 INVESTMENT
• Islamic Investment Fund means a joint pool wherein the
investors contribute their surplus money for the purpose
of its investment to earn halal profits in strict conformity
with the precepts of Islamic Shariah.
Definition of the concept of investment
according to Islamic perspective -see video
• The prohibition on riba, gharar and maisir
• Risk sharing/loss sharing/profit sharing
• Time value of moner Islamic interpreted
• Prohibition of speculation
• Sancity of contract
• Shariah approved activities
• In terms of Shariah, Islamic investment will always be
subject to two basic conditions:

(1) First, instead of a fixed return tied up with their face

value, they must carry a pro-rated profit actually earned
by the Fund. Therefore, neither the principal nor a rate
of profit can be guaranteed. The subscribers must enter
into the fund with a clear understanding that the return
on their subscription is tied up with the actual profit
earned or loss suffered by the Fund.

(2) The amounts pooled together must be invested in a

business acceptable to Shariah. It means that not only
the channels of investment, but also the terms agreed
with them must conform to the Islamic principles.
Prohibitions element of Islamic investment in
Islamic economics system. – see video
• Prohibitions element of Islamic investment

• Riba (interest)– riba means increase, excess, expansion, addition

or growth

• Gharar (uncertainty) – means uncertainty hazard, chance or risk

• Maysir (gambling)-literally means getting something too easily

or getting a profit without working for it.
Investment
• The Islamic Investment Funds may accommodate a variety of
modes of investment which are discussed briefly in the
following:

• Equity Fund
• Investment in Shares
• Ijarah Fund
• Commodity Fund
• Murabahah Fund
• Mixed Fund
1. Equity Fund
• Stock mutual funds are principally categorized according to
company size, the investment style of the holdings in the portfolio
and geography

Size is determined by a company's market capitalization, while the

investment style, reflected in the fund's stock holdings, is also used
to categorize equity mutual funds.

Stock funds are also categorized by whether they are domestic or

international. These can be broad market, regional or single-country
funds.

There are so-called "specialty" stock funds that target business

sectors such as healthcare, commodities and real estate.
2. Investment in Shares
• Share means any equity of a corporation, whether with voting
or non-voting rights.

• Interest-in-share means any right to purchase or receive shares

of an entity, whether actual, prospective or contingent.

• Collective Investment schemes (CIS) means any arrangement

made for the purpose, or having the effect, of providing
facilities for persons to participate in or receive profits or
income arising from the acquisition, holding, management or
disposal of securities, futures contracts or any other property,
or sums paid out of such profits or income. In such schemes,
participants do not have day-to-day control over the
management of the schemes’ assets.
 3. Ijarah Fund

• Ijarah is a means of facilitating life by helping people to get

the usufructs of assets which they do not own, and the need
for usufructs is similar to the need for assets themselves i.e.
the poor needs the wealth of the rich while the rich needs the
poor's labor, and consideration of the people's need is a basic
principle in contract legislation where contracts are legislated
to fulfill such needs and requirements in conformity with
Shariah which is considered the rationale behind such
legislation.
• No doubt, all people need such transactions because not
every one has a house and not every traveller is able to own
means of transportation as well as craftsmen work for hire
and since most people can not do such type of jobs or find
volunteers they should hire or rent others to do such jobs on
their behalf.
4. Commodity Fund
• Commodity fund actually captures several distinct types of
investments. These include:

• Commodity Funds
These funds are true commodity funds in that they have direct holdings
in commodities. For example, a gold fund that holds gold bullion would
be a true commodity fund.
• Natural Resource Funds
Funds that invested in companies that are engaged in businesses that
operate in commodity-related fields, such as energy, mining, oil drilling
and agricultural businesses, are often referred to as natural resource
funds. While they often hold neither actual commodities nor
commodity futures, they provide exposure to the commodities markets
by proxy.
• Combination Funds
Some funds invest in a combination of actual commodities and
commodity futures. Gold funds, for example, may have underlying
holdings that include both bullion and futures contracts.
• Commodities offer portfolio diversification. Investing in futures
contracts or actual commodities provides a portfolio component
that is not a traditional stock, bond, or a mutual fund that invests
in stocks and/or bonds. Historically, commodities have had a low
correlation to traditional equity markets, meaning that they do
not always fluctuate in tandem with market movements. For
many investors, achieving this low correlation is the primary
objective when seeking to add diversification to a portfolio.

• Commodities also offer upside potential. The raw materials used

in construction, agriculture and many other industries are
subject to the laws of supply and demand. When demand rises,
prices generally follow, resulting in a profit for investors.
Conditions to make commodity
fund acceptable to Shariah.
• The commodity must be owned by the seller at the time of
sale, because short sales in which a person sells a commodity
before he owns it are not allowed in Shariah.
• Forward sales are not allowed except in the case of salam
and istisna
• The commodities must be halal. Therefore, it is not allowed
to deal in wines, pork or other prohibited materials.
• The seller must have physical or constructive possession over
the commodity he wants to sell. (Constructive possession
includes any act by which the risk of the commodity is passed
on to the purchaser).
• The price of the commodity must be fixed and known to the
parties. Any price which is uncertain or is tied up with an
uncertain event renders the sale invalid.
5. Murabahah Fund
Murabahah Fund
• The word “Murabahah” has been derived from the Arabic word
“Ribah”, which has literary meaning of profit. The Murabahah can be
denoted as “Sale With Profit”.
• Murabahah is a particular kind of sale where Seller expressly
mentions the cost it has incurred on purchase of the Asset(s) to be
sold and sells it to another person by adding some profit, which is
known to Buyer.
• Murabahah finance is not a loan given on interest, it is a sale of
Asset(s) for cash/deferred price.
• It is the obligation of the Seller to disclose the Cost and Profit to the
Buyer.
• Murabahah Finance can only be used for the purchase of fresh
Asset(s) only.
• Murabahah Transaction can either be a cash sale (Spot Payment
Murabahah) or a credit sale (Deferred Payment Murabahah) or a
combination of both.
• Payment of Murabahah Price can be made in lump sum or in
installments or combination of both.
 6. Mixed Fund

• Mixed fund means money or other property which,

immediately before the transfer, contains or derives from
more than one of the kinds of income and capital for more
than one tax year.
• Mixed funds include:
• An asset (property) that is, or is acquired with or otherwise
derives from the foreign income or gains
• Assets acquired using mixed funds - for example, houses, cars,
works of art and shares in companies
• An overseas account that was set-up using funds from money
or property that is or was a mixed fund
Investment & Saving
S=I
Means:
• The financial system must not allow individuals
and business to hold idle balances (S>I).
• The system must prevent over investment (S<I)
as this fuel inflationary pressure and push up the
cost of living and the cost of running businesses.
LECTURE ENDS!!!
THANK YOU!!!