Capital of Alternative Financial institutions and Basel II: Credit Cooperatives and Islamic Banks

This paper highlights the inadequacy of Basel II in evolving an appropriate legal and regulatory framework for alternative financial institutions like Islamic Banking and credit cooperatives.The paper argues that:

• The rules of Basel II apply to conventional financial institutions;
• Alternative financial institutions operate under different rules and principles;
• The European Commission aims to bring alternative credit institutions under the ambit of the regulatory regime of conventional financial institutions;
• It believes that a standardized set of rules should apply through the region's single financial market to facilitate cross-border supervisory cooperation;
• Basel II is accompanied by the re-examination of the legal and regulatory framework for Islamic Banking, especially those parts related to risk management and the role played by capital;
• However, there is pressure for the regulation applying to Islamic banks to be as compatible as possible with that for conventional banks.

The paper discusses the main features of:

• Cooperative credit unions in the European Union;
• Islamic banking.

The paper concludes that:

• Basel II refers to items such as callable capital, which are difficult to measure in the case of cooperative credit unions;
• Islamic banking contains principles that are not a part of conventional banking, one of them being the focus on ethics.