The recent global financial crisis has forced consumers, business, and voters to reconsider what are desirable features of a financial system. There is a feeling of unease with the dominance of very highly-leveraged institutions determined to maximize return on equity from quarter to quarter, focusing on high-volume own-account trading in complex instruments that are perceived to have little net social value.

One senses a yearning for a return to simpler, more client-oriented financial relationships that depend on underlying “real” activities.2 Moreover, those parts of the financial system that survived the crisis relatively well are worth studying for the more general lessons that they might offer.

Cooperative banks—including notably local credit unions—and Islamic banks are among those financial institutions that are generally more distant from “speculative” financial markets, and that survived the crisis with comparatively little strain; those that got into difficulties did so mainly because of “old fashioned” credit risk, not market risk or liquidity risk.

Therefore, they are worth considering as alternatives to conventional commercial banks. Yet, both have strengths and weaknesses, and face challenges. Hence, as part of the reassessment of the features and services they offer, each may benefit from looking at and learning from the practices of the other. To this end, one may then wonder how Islamic and cooperative banks work, and in particular, how do the operations of each differ from those of commercial banks and those of the other? Are there similarities between them? What can they learn from each other?

The following section describes the main characteristics of cooperative and Islamic banks, presents data on the size, growth, and recent performance of these two kinds of institution, and summarizes some issues that they face. Section III details their similarities and differences and Section IV ppresents what the institutions can learn from each other, before Section V concludes.

Click here to read full IMF Working Paper