What if you couldn’t charge interest on a loan?

That’s the dilemma facing any financial institution that wants to serve the growing Muslim population. The Quran and Shariah law have strict rules against charging interest, but North Jersey FCU in Totowa, N.J., has found a way to serve this group.

James Giffin, chief marketing officer at the $230-million credit union, noted that New Jersey has a sizable Islamic population. According to the New Jersey Almanac, the Garden State has the second largest percentage of Muslims in its population (after Michigan).

"In 2009, we were approached by the members of our local mosque" — Islamic Center of Passaic County, Patterson, N.J. — "about how we might serve this community," Giffin said. "After meeting with the imam, we began our research — including talking to banks in Europe that also serve this segment. We developed lending relationships and investment relationships with Sharia-compliant companies."

Islamic Center of Passaic County, Patterson, N.J.
The Islamic Center of Passaic County, Patterson, N.J., approached North Jersey FCU to see if the credit union would be willing to offer Shariah-compliant loans to its devout members.

North Jersey FCU launched its Islamic banking products in 2010 — making it the first credit union in the U.S. to do so.

"We have members of the Muslim community using our Islamic checking and Islamic savings products," Giffin said.

But how does the credit union make money on these products? It is tricky.

"[For example,] we make origination fees for home loans," Giffin said. "We partnered with a Sharia-compliant mortgage company that is able to make mortgages where we can’t. We could not make Shariah-compliant loans because of the federal regulation [in] the Truth in Lending Act that requires us to list the interest rate on the disclosure."

Indeed, it is very difficult for U.S.-based financial institutions to make loans that don’t disclose the underlying interest rates. As such, offering Sharia-compliant financial products raises some unique problems.

Giffin explained that the Islamic loans offered here in the U.S. by European banks and foreign companies offer are not "traditional loans," but rather comprise a "lease-to-own" program, hence, no interest.

"That’s why at the end of a fixed time period the borrower buys the property for a fixed price," he said. "We are not in the leasing business. For us to originate our own loans we would have to buy the property on behalf of the member then lease it to them for 20 years. The same principles work with car loans where you are leasing the car to the member with a $1 buy-out at the end of the lease period."

Mosque in Clifton, NJ
This mosque in Clifton, N.J., serves the burgeoning Muslim population in the area.

Of North Jersey FCU's approximately 27,000 members, about 1,500 are estimated to be Muslims — and not all are observant of Sharia law, Giffin noted. "It is the devout that [follow] the stricter rules," he said.

In order to promote and advertise these Islamic banking products, North Jersey FCU has a mobile branch it takes to the local mosque and park outside on Fridays so it will be visible when Muslims came out from afternoon prayers. "We are able to open accounts on the spot," Giffin said.

North Jersey FCU also plans to expand its Islamic banking division, he added.

At least one other U.S. credit union offers Islamic-compliant loan products — the $770,000 Jafari No-Interest Credit Union of Houston, Texas, which was designed for Jafari community members across the United States. (Jafari is one the five schools of Islamic thought.)

Launched in February 2016, this credit union has about 210 members.

Jafari No-Interest CU explains on its website that it can operate without charging interest because its operating expenses and net worth (capital) are funded by member account fees (which amount to $3 per month), as well as additional voluntary fees paid by members, and donations.

Operating expenses are kept at a minimum by using donated office space and volunteer staff. Jafari No-Interest CU said its annual expenses total about $36,000, primarily for IT systems ($15,000) and ACH ($7,000).

As of September 2017, Jafari No-Interest CU had $560,000 in deposits; and $167,000 in loans issued. A total of $56,700 in interest payments have been avoided on these products, it added.

However, some restrictions do apply: deposits and withdrawals are allowed only by ACH; and Jafari No-Interest CU offers no ATM services, no debit/credit card, and no checking services.

Imran Dhanji, president and CEO of the credit union, told Credit Union Journal by email that it currently it only offers “refinancing of car loans and student loans. Most of our loans are for student loans.”

Still, according to its website, Jafari No-Interest CU plans to eventually expand its product portfolio to “include no-interest loans for small business and college tuition, small loans for community members in financial hardship to avoid high interest payday/title loans, and leasing for cars and equipment.”

A number of credit unions in other western countries also offer Sharia-compliant loans.

Assiniboine Credit Union Canada of Winnipeg, Manitoba, has been offering “Islamic” mortgages since 2010.

The credit union explained that this loan is based on a shared ownership concept called “musharaka” and is available for the purchase of an existing property for use as a primary residence within Manitoba. The borrower enters into a partnership agreement with Assiniboine called “The Declining Partnership Agreement.” Under this deal, the borrower agrees to make regular payments to increase his or her share of the property and for the right to occupy the home.

"During this time, the family has exclusive rights to live in the home and in exchange they agree to pay [Assiniboine] a profit. At the end of the contract the Muslim family is the sole owner of the home," Assiniboine said in a press release.

Craig Peel, vice president, sales and service at Assiniboine Credit Union told Credit Union Journal the credit union has some approximately 40 Islamic mortgages to date. “We do not have any other Shariah-compliant products,” he added.

Across the Atlantic in Great Britain, London Community Credit Union, which is based in the heavily Muslim East End of London, said on its website that it is “currently investigating the prospect of offering an Islamic type loan based on Shariah law.”

Brian Branch, WCOCU
Brian Branch, the president and CEO of WCOCU

In the summer of 2013, the World Council of Credit Unions published a document called “Islamic Finance Manual: Operating Policies and Procedures for Credit Unions,” as a guide to establishing Shariah-compliant credit unions in the developing world, starting in Afghanistan.

“We have worked with or are aware of Islamic banking-based, Shariah-compliant credit unions in Iran, Indonesia, Malaysia, Kenya, United Kingdom and Australia in addition to Afghanistan and the U.S.,” Brian Branch, the president and CEO of WCOCU, told Credit Union Journal. “In the international context we have found that Islamic banking principles are applied well to the cooperative structure of credit unions."

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