Five Pillars of Islamic Finance Monem A. Salam Director of Islamic Investing Deputy Portfolio Manager Saturna Capital 1300 N. State St. Bellingham, WA 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