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Totowa credit union's financing follows Islamic law [The Record, Hackensack, N.J.]

June 29--A Totowa-based credit union recently opened an Islamic finance division so northern New Jersey Muslims can buy a home with a clear conscience.

North Jersey Federal Credit Union, which has branches in Paterson and Newark, says it is the first credit union in the nation to offer mortgages that comply with Islamic sharia law, which prohibits paying or receiving interest.

"Now everyone who wants to be compliant can be," said credit union member Isa Suqi, a print-shop owner in Paterson, who suggested about a year ago to the credit union's management the idea of expanding into Islamic finance.

Lack of access to sharia-compliant financing is a serious problem for many Bergen and Passaic Muslims, he said. Some have taken conventional home, car and credit card loans from banks and suffer from guilt as a result, while others believe they have no option but to rent, said Suqi.

The establishment of an Islamic finance division -- which also offers mutual funds that avoid investments in pork, alcohol, gambling and pornography -- is one of the ways the credit union is fulfilling its mission as a non-profit cooperative, said James Giffin, its vice president of marketing. "We have to serve the under-served," he said.

The mortgage loans, which are offered through third-party underwriter Guidance Residential in Reston, Va., and approved by an independent board of sharia scholars, also comply with federal truth-in-lending laws, but they are different from conventional mortgage loans.

Sharia-compliant mortgages can be structured in several ways, but in the method used by Guidance Residential, the buyer and the lender form a partnership to buy a house and over time the borrower buys out the lender's share, with the lender taking a previously agreed-upon profit.

The buyers end up paying about as much for the financial assistance as they would if they had taken a conventional mortgage, Giffin said.

Sharia-compliant financing is widely available in the Middle East and Europe where international giants HSBC Group and Citigroup are among the players. But in the United States, only a few comparatively small lenders -- such as Guidance Financial, parent company of Guidance Residential; University Bank in Michigan; and Devon Bank in Chicago -- offer it.

To comply with sharia law, no interest payments can be involved and risk and rewards must be clearly shared by the lender and the borrower, said Imam Mohammed Qatanani, who heads the Islamic Center of Passaic County in Paterson, where about 1,500 pray on Fridays.

Islam equates paying or receiving interest with usury, which is "one of the major sins in Islam, a greater sin than adultery," he said.

A Muslim must get a special dispensation from a cleric to take a conventional loan, he said.

"Every day I get the question, 'Can I buy a house through the bank?' " he said. "Most of the time it is forbidden."

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But of the credit union's new offer, Qatanani said: "With this, we don't have a problem."

Guidance Financial has provided $1.9 billion in sharia-compliant financing to more that 6,000 Islamic households since the company was started a little more than eight years ago, said Hussam Qutub, spokesman for the company. Guidance Financial operates in 22 states -- including New Jersey -- and sells the loans to Freddie Mac.

'Pent-up demand'

"There's been pent-up demand over the years," Qutub said. "For a very long time, devout American Muslims just didn't have an option and they didn't participate in the real estate market," he said.

North Jersey Federal Credit Union is the only credit union it partners with, although the company might work with other credit unions and banks if asked, Qutub said.

The credit union, which has more than $180 million in assets, about 30,000 members and is open to anyone who lives, works or worships in Passaic and Bergen counties and certain areas of Essex and Union, is awaiting regulators' approval of plans to offer deposit accounts for Islamic customers so that they could be paid in dividends instead of interest.

The credit union has to respond to the National Credit Union Association's questions on the proposal by Sept. 30, and Giffin said he expects a decision before the end of the year.

"I'm pretty positive it won't be a problem," he said.

At least 10 percent of the profits from the sharia-compliant home financing operation would be distributed to those savings deposit accounts, Giffin said. The credit union's sharia-compliant mutual funds are provided through New England Financial, part of MetLife Inc., he said.

"We're working on a program for credit cards," Giffin said. "Hopefully, we'll have that by the end of the year. Giffin is not sure exactly how the cards will work. Sharia cards typically charge fixed monthly fees instead of interest, and the financier requires some collateral.

Giffin said he doesn't expect to have sharia-compliant auto loans anytime soon.

"The compliance people haven't yet figured out how to do car loans," Giffin said.

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