NJBIZ.com
ISLAMIC BANKING
But
lender facing complications in catering to Muslim Sharia law
By Ken Tarbous
January 16. 2012 3:00AM
About two years ago, observant Muslims and local religious leaders in Paterson approached NJFCU, asking the institution to provide banking products — loan and savings vehicles — formed in compliance with their religious beliefs.
NJFCU already has accepted deposits topping $1 million for Islamic banking products, all of which are noninterest-bearing accounts, and the credit union is in the development stages on car and student loans, as well as home mortgages. But the structures of such banking products present challenges in meeting interpretations of Islamic law, which may differ from congregation to congregation.
"We thought this would be a perfect opportunity for us to serve an unbanked group," said Lourdes Cortez, NJFCU president and CEO, a Catholic who grew up in heavily Muslim south Paterson. "It has been a challenge to serve this community. We haven't been able to fully offer them all of the consumer loan products, because of the fact that it is difficult to have programs that will be able to calculate the interest on the consumer loans in the ways they need to have it reflected on their note and disclosure."
Some non-Islamic NJFCU members said they would yank their deposits, and the credit union faced outspoken critics of Islamic finance who say the system is designed to co-opt and displace Western capitalism, culture and democracy. But NJFCU and Cortez have continued to serve businesses and consumers in their membership field, which includes people who worship, go to school or conduct business in Bergen or Passaic counties, or underserved areas of Essex or Union counties.
NJFCU touts itself as the first credit union to offer products based on Sharia law, and state and national banking experts, including regulators, said they are not aware of another federal credit union that offers Islamic banking products to the degree that NJFCU does. However, those experts said it is difficult to say NJFCU is the first or only such institution offering these products, because examiners look at the structure of investments for adherence to regulations, not at religious motivations or rules for the products.
To be Sharia compliant, Islamic banking products need to be segregated from other accounts, and must be noninterest-bearing investments anchored in a moral and ethical system detailed in the Koran. But NJFCU has been having difficulty bringing their Islamic savings deposit account into strict compliance with religious law because of an inability to segregate funds, track them in a separate internal accounting system, and still adhere to federal regulations.
NJFCU is regulated by the National Credit Union Administration. The regulatory body confirmed that NJFCU has requested permission to set up banking services that conform to Sharia law, but the federal regulator did not provide further information or comment, saying the approval process is still in progress.
Cortez said even though her credit union is awaiting federal regulatory approval, members care more about the religious implications of the way their money is used, with the more orthodox Muslims eligible for the credit union shying from depositing their money because the funds are not segregated, and therefore not in strict adherence to Sharia law.
Global Islamic banking and finance is estimated to be a $1 trillion industry. With the Pew Forum on Religion & Public Life, a project of the Pew Research Center, estimating the U.S. Muslim population at 2.6 million in 2010, and growing, there's little doubt the subsector will continue to grow, as financial institutions capitalize on profit-making opportunities.
But few U.S. bankers understand the complexities of Islamic finance — a large part of why more financial institutions have not yet established products serving potential new customers and clients, according to Abed Awad, an attorney with Awad & Khoury LLP, in Hasbrouck Heights, and an adjunct faculty member who teaches Islamic banking and finance at the Rutgers School of Law and Seton Hall Law School.
Awad likened Islamic finance, which he said shares many ethical principles with Christianity and Judaism, to socially responsible mutual funds and investment products that support green technology or refrain from investing in companies that sell alcohol, tobacco or sexually tinged products.
"Among these ethical principles is economic equity, redistribution in wealth, fair dealings in business, transparency, honesty, fair profits — no excessive profit," Awad said.
The establishment of Sharia-based finance products could entice capital held offshore or overseas into the United States and New Jersey banking systems, Awad said.
