This was a class project that we did for FIN 800 - Financial Statement Analysis class. It was an introduction to Islamic Finance and a comparison between a quick Tax and Zakah systems.

2. Overview
• Introduction
• Principles of Islamic Finance
• Capital Structure
• Islamic Banking Products
• Advantages and Disadvantages
• Taxation

3. Introduction
• History
– Introduced with Islam in year 622.
– Main source Islamic Finance is Muslim’s Holly book “Qur'an”
– Formally introduced to the world in 1960s (oil)
• Main Concept
– Money does not make money
– Investing in prohibited industries is not allowed
• Why the sudden global interest?
– 9/11 caused large amount of cash capital
to move to Europe and Asia.

4. What is Islamic Finance all about?
• Profit and Risk sharing.
• Avoidance of ambiguity and uncertainty.

5. Principles of Islamic Finance
• Prohibition of Interest “Ribah”
• Prohibition of ambiguity and uncertainty
– i.e. Gambling and Derivatives
• Prohibition of investing into prohibited items:
– Alcohol and drugs
– Weapons
– Adult entertainment
– Pig related products
– Traditional banks and insurance

6. Capital Structure

7. Capital Structure (Cont.)

8. Islamic Banking Products
1. “Murabaha” - Financing
2. “Mudarabah” – Investment management
3. “Musharakah” - Partnership
4. “Ijarah” - Leasing
5. “Sukuk” - Bonds
6. “Takaful” - Insurance
7. “Wakalh” - Agency
8. “Istisna’ ” – Future contracts

9. Sukuk
• The Islamic Equivalent of Bonds
– Avoid coupon payment
– Issuer rent back bonds for a RENT fee.
• Rent fee equal to LIBOR
– Issuer promise to buy back the bond at maturity.
• Bottom line:
Money is a tool to measure assets and not an asset.

10. Advantages and Disadvantages
Advantages Disadvantages
No speculative trading Limited legislation
Reduced uncertainty
Restriction on foreign ownership of assets and
enterprises
Reduced leverage Limited ability for Special Purpose Vehicle
No excessive profit There is no international agreement on Islamic Law
Equal bargaining power There is no standardized model for Islamic Finance

11. Taxation
• It is referred to as “Zakah”
• Zakah on income is equal 2.5% of previous year savings
• There are 8 beneficiaries of Zakah:
1. Those living in absolute poverty
2. Those who cannot meet their daily basic needs
3. The people who work in collecting the Zakah.
4. Those who are not Muslims yet are sympathetic to Islam and wish
to convert to it.
5. Those that want freedom from slavery and don’t have enough
money to buy themselves out of it
6. Those that have incurred a huge amount of debt and can't repay it
7. Those who are working in god’s way .
8. Children’s of the street or those travelling

12. Tax Vs. Zakah
• Assuming that we have two workers A & B,
both earn $100,000 per year.
• (A) is paying Income taxes at is 21%
• (B) is paying Zakah on total saving at 2.5%
– Case 1: (B) is saving 100% of income
– Case 2: (B) is Saving 50% of income.

13. Tax vs. Zakah (Cont.)
Case 1: 100%% Saving

14. Tax vs. Zakah (Cont.)
Case 2: 50% Saving

15. Islamic Finance