Five Pillars of Five Pillars of Islamic FinanceIslamic FinanceFive Pillars of Five Pillars of

Islamic FinanceIslamic FinanceMonem A. SalamMonem A. Salam

Director of Islamic InvestingDirector of Islamic Investing

Deputy Portfolio Manager Deputy Portfolio Manager

Saturna CapitalSaturna Capital

1300 N. State St.1300 N. State St.

Bellingham, WA 98225Bellingham, WA 98225

Monem A. SalamMonem A. Salam

Director of Islamic InvestingDirector of Islamic Investing

Deputy Portfolio Manager Deputy Portfolio Manager

Saturna CapitalSaturna Capital

1300 N. State St.1300 N. State St.

Bellingham, WA 98225Bellingham, WA 98225

Common Common TerminologyTerminology

Common Common TerminologyTerminology

Islamic Finance:Finance According to IslamIslamic Finance:Finance According to Islam

Quran: Holy Book for Muslims; revelation of Quran: Holy Book for Muslims; revelation of

God given to Prophet MuhammedGod given to Prophet Muhammed

Sunnah/Hadith: actions and sayings of Sunnah/Hadith: actions and sayings of

Prophet MuhammedProphet Muhammed

Sharia: Islamic LawSharia: Islamic Law

RibaRiba

Terminology (cont’d)Terminology (cont’d)Terminology (cont’d)Terminology (cont’d)

Gharar: speculation; deceptionGharar: speculation; deception

Fatwa: legal opinion of a learned personFatwa: legal opinion of a learned person

Halal: permissableHalal: permissable

Haram: forbiddenHaram: forbidden

Muslim vs. Islamic countriesMuslim vs. Islamic countries

Pillar 1: OathPillar 1: OathPillar 1: OathPillar 1: Oath

I promise that every transaction must be asset I promise that every transaction must be asset

backed; backed;

commodity, real property, etc. markup allowedcommodity, real property, etc. markup allowed

money is not a commodity (riba)money is not a commodity (riba)

I promise that I will think of debt in a new I promise that I will think of debt in a new

paradigmparadigm

qard hasana; not business transactionqard hasana; not business transaction

Pillar 2: 5 ContractsPillar 2: 5 ContractsPillar 2: 5 ContractsPillar 2: 5 Contracts

Mudarabah: agency contractMudarabah: agency contract

Musharakah: partnershipMusharakah: partnership

Ijara: leaseIjara: lease

Murabahah: cost plus Murabahah: cost plus

Sukuk: Fixed Income ProductsSukuk: Fixed Income Products

Combination is allowed: GP/LP contractCombination is allowed: GP/LP contract

Pillar 3: ZakahPillar 3: ZakahPillar 3: ZakahPillar 3: Zakah

When I have investments, business, When I have investments, business,

wealth, I will pay zakah yearly above the wealth, I will pay zakah yearly above the

nisabnisab

Nisab: minimum to sustain oneself for Nisab: minimum to sustain oneself for

one yearone year

2.5 % of static assets2.5 % of static assets

10 % of productive assets10 % of productive assets

Pillar 4: Abstain from Pillar 4: Abstain from HaramHaram

Pillar 4: Abstain from Pillar 4: Abstain from HaramHaram

Anything forbidden in Sharia is forbidden Anything forbidden in Sharia is forbidden

as business transaction or investment:as business transaction or investment:

alcohol, tobacco, gambling, alcohol, tobacco, gambling,

pornography, pork, ribapornography, pork, riba

can’t do business in it; bank can’t partake can’t do business in it; bank can’t partake

in it; one cannot invest in itin it; one cannot invest in it

Pillar 5: Encourage business Pillar 5: Encourage business activityactivity

Pillar 5: Encourage business Pillar 5: Encourage business activityactivity

not a socialist or communist economynot a socialist or communist economy

prices are free to fluctuate with market prices are free to fluctuate with market

supply and demandsupply and demand

don’t hoard money, but spend it (charity, don’t hoard money, but spend it (charity,

purchases) and invest itpurchases) and invest it

no excesses: miserliness, greed, no excesses: miserliness, greed,

extravagance, choose the middle roadextravagance, choose the middle road

Islamic Investing GuidelinesIslamic Investing GuidelinesIslamic Investing GuidelinesIslamic Investing Guidelines

Must pass business screenMust pass business screen

Purchases must qualify using financial Purchases must qualify using financial ratiosratios

– Total Debt to 12 month trailing Market Total Debt to 12 month trailing Market CapCap

– Accounts Receivable to Total AssetsAccounts Receivable to Total Assets

– ‘‘Impure’ Revenues to Total RevenuesImpure’ Revenues to Total Revenues

Sale required for consistent failureSale required for consistent failure