Are Islamic banks more resilient to the crises vis-à-vis conventional banks? Evidence from the COVID-19 shock using stock market data

The debate regarding the performance of Islamic banks vis-à-vis conventional counterparts has attracted growing attention recently. Exploiting the Covid-19 health and economic crisis as an exogenous shock, we extend this debate by examining the resilience of Islamic banks vis-à-vis conventional banks during this shock. Using data from the Gulf Cooperation Council member states, we find stock market investors have not assessed the Islamic banks to be superior to conventional ones during the Covid-19 market meltdown. Specifically, our findings show Covid-19 confirmed cases, government social distancing policies and feverish period (i.e., 24 February to 17 March 2020) have had negative impact on stock returns of both Islamic and conventional banks alike. Interestingly, the adverse impact of social distancing policies is stronger on Islamic banks due to their inherent higher cost structure. Additionally, we find the marginal adverse impact of Covid-19 shock is weaker on banks with higher liquid assets holdings on the onset of the Covid-19 shock. Moreover, larger banks were hit harder during the first quarter of 2020, however, they also recovered more quickly during the second quarter. Results are robust with alternative estimation methods, matched sample of Islamic and conventional banks, cross-sectional analysis with fever period and extended sample period. •Examines the resilience of Islamic banks (IBs) versus conventional banks (CBs) during Covid-19.•Stock prices of both IBs and CBs dropped alike in response to Covid-19 outbreak.•Stock markets haven't assessed the IBs to be superior to CBs.•IBs with inherent higher operating costs suffered more due to social distancing policies.•Stocks of banks with higher pre-pandemic liquid assets suffered less during Covid-19.