Five Pillars of Islamic Finance Monem A Salam
- Slides: 9
Five Pillars of Islamic Finance Monem A. Salam Director of Islamic Investing Deputy Portfolio Manager Saturna Capital 1300 N. State St. Bellingham, WA 98225
Common Terminology Islamic Finance: Finance According to Islam Quran: Holy Book for Muslims; revelation of God given to Prophet Muhammed Sunnah/Hadith: actions and sayings of Prophet Muhammed Sharia: Islamic Law Riba
Terminology (cont’d) Gharar: speculation; deception Fatwa: legal opinion of a learned person Halal: permissable Haram: forbidden Muslim vs. Islamic countries
Pillar 1: Oath I promise that every transaction must be asset backed; commodity, real property, etc. markup allowed money is not a commodity (riba) I promise that I will think of debt in a new paradigm qard hasana; not business transaction
Pillar 2: 5 Contracts Mudarabah: agency contract Musharakah: partnership Ijara: lease Murabahah: cost plus Sukuk: Fixed Income Products Combination is allowed: GP/LP contract
Pillar 3: Zakah When I have investments, business, wealth, I will pay zakah yearly above the nisab Nisab: minimum to sustain oneself for one year 2. 5 % of static assets 10 % of productive assets
Pillar 4: Abstain from Haram Anything forbidden in Sharia is forbidden as business transaction or investment: alcohol, tobacco, gambling, pornography, pork, riba can’t do business in it; bank can’t partake in it; one cannot invest in it
Pillar 5: Encourage business activity not a socialist or communist economy prices are free to fluctuate with market supply and demand don’t hoard money, but spend it (charity, purchases) and invest it no excesses: miserliness, greed, extravagance, choose the middle road
Islamic Investing Guidelines Must pass business screen Purchases must qualify using financial ratios – Total Debt to 12 month trailing Market Cap – Accounts Receivable to Total Assets – ‘Impure’ Revenues to Total Revenues Sale required for consistent failure