Cooperative and Islamic Banks: What can they Learn from Each Other?

IMF Working Papers, August 26, 2013

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Islamic and cooperative banks (such as credit unions) both share some risk with savers.
The paper contrasts the institutional arrangements and risk-sharing mechanisms of cooperative banks and Islamic banks.
Key finding: Greater adoption of risk-sharing mechanisms embedded in Islamic financial products could strengthen cooperatives’ financial resilience.

Cooperative banks:
- Risk sharing goes along with ownership control.
- Stakeholders (members/owners) typically have governance rights linked to risk exposure.
Islamic banks:
- Share risk with borrowers and share downside risk with depositors.
- Islamic banking is consistent with mutual ownership, which may ease governance and efficiency concerns implied by Shari’ah constraints.

Islamic banking compatibility with mutual ownership:
- May address governance and efficiency concerns that arise from Shari’ah constraints.
For cooperative banks:
- Introducing greater risk sharing among stakeholders—by adapting mechanisms from Islamic financial products—could strengthen financial resilience.

Findings:
- Islamic and cooperative banks have broadly similar risk-sharing orientations toward savers.
- The pairing of risk sharing with ownership control differentiates cooperatives from Islamic banks.
- Islamic banks allocate risk differently: with borrowers and depositing parties bearing downside risk.
Policy/operational recommendations:
- Consider embedding Islamic-style profit-and-loss sharing mechanisms into cooperative bank products to enhance resilience.
- Explore mutual ownership structures in Islamic banking to mitigate governance and efficiency concerns linked to Shari’ah compliance.

Source: Cooperative and Islamic Banks: What can they Learn from Each Other? By Saeed Al-Muharrami and Daniel C Hardy, August 26, 2013.