The impact of COVID-19 on financial structure and performance of Islamic banks: a comparative study with conventional banks in the GCC countries

Abstract

PurposeThe aim of this paper has twofold: (1) to explain and compare the financial evolution of Islamic and conventional banking sector in the Gulf Cooperative Council (GCC) countries before and during the COVID-19 pandemic and (2) to explore the key success factors that might affect Islamic and conventional banks performance before and mainly during COVID-19 pandemic period.Design/methodology/approachOrbis Bank Focus database and annual financial reports are used to collect financial information of Islamic and conventional banks in GCC countries over four years: 2017, 2018, 2019 and 2020. Descriptive statistics, T-test, multiple regression, and 2SLS and GMM models are employed to analyze the financial structure and performance of Islamic and conventional banks before and during the COVID-19 pandemic period.FindingsResults of this study reveal that (1) there is a significant difference between Islamic banks and conventional banks during the crisis of COVID-19, where the conventional banks have presented a higher level of financial performance and financial liquidity than their Islamic counterparts, (2) conventional banks have revealed higher capacity to manage their financial risk during the crisis period, and (3) a high level of non-performing loan, high inflation rate and high percentage of non-important cost have a negative impact on the financial performance of Islamic banks mainly during the pandemic period of COVID-19. However, the result indicates that a high level of liquidity risk increased the performance of Islamic banks but this impact falls sharply during the pandemic period.Originality/valueThis study provides information that supports investors, regulators and executive managers in GCC countries. A well-structured balance sheet would improve the financial performance and risk management of the banking sector in GCC countries, especially in times of crisis and pandemics.

The Impact of COVID-19 on the Performance of Islamic Banks in the MENA Region

“…Empirical studies assessing the risk and overall performance of IFIs have shown that these institutions have a high capacity of financial resistance during crises (Abdulle & Kassim, 2012;Rafiuddin & Alam, 2012;Mansor & Syed-Aun, 2017;Mihajat, 2021). They also revealed that IBs perform better than their conventional counterparts during periods of instability (Ftiti et al, 2013;El-Chaarani & Ragab, 2018;Almonifi et al, 2021). Mokhtar and Laldin (2009) argued that Islamic bankers can reduce the financial risk level because they work based on the 'assets market' principle whereas conventional banks operate based on the 'money market' principle.…”

“…Several studies have shown that Islamic financial institutions (IFIs) and IBs performed better than other banks during the global financial crisis of 2008(Beck et al, 2013Alqahtani et al, 2017;Nurfalah et al, 2018). El-Chaarani and Ragab (2018) also argued that IBs succeeded in controlling their liquidity risk and managing their profitability and financial structure during the Arab political crisis in several Middle East and North Africa (MENA) countries. For the authors, the conservative Islamic principles were the factors that led IBs to reduce the impact of uncertainty.…”

Financial Performance of Conventional and Islamic Banks: Evidence From Covid-19

“…Other studies focused on COVID-19's impact on Islamic banks (Candera, 2020;Ichsan, Suparmin, Yusuf, Ismal, & Sitompul, 2021). Furthermore, studies by Almutairi (2022) and El-Chaarani, Ismail, El-Abiad, and El-Deeb (2022) compared the effect of COVID-19 on Islamic banks to that of conventional banks in Kuwait during the pandemic. Most of these prior studies only focused on the short-term effects of the pandemic, i.e.…”

Are Islamic Banks Still Sound Amidst Pandemic?

“…Since the beginning of the emergence of Islamic banking, the industry has continued to increase. Islamic banking operates based on the prohibition of interest and the profit and loss sharing system (El-Chaarani et al, 2022). Unlike the conventional interest-based banking system, Islamic banking operates its entire operation freely from the interest system.…”

“…Our World in Data has recorded a total number of Covid-19 cases in Indonesia has reached 6.11 million, and deaths due to this virus have been recorded at 157 thousand people. Undoubtedly, the Covid-19 Pandemic has impacted all aspects of life in developed and developing countries, including the banking sector and Islamic banking (El-Chaarani et al, 2022). Moreover, the Islamic banking system across the country suffers the COVID-19 shock (Le et al, 2022).…”