Abstract

While some studies have documented differences in the performance of commercial and Islamic banks, we wonder whether these disparities make one banking model more resilient than the other in the face of an unpredicted shock. We examine the impact of the COVID-19 outbreak on banking performance and financial stability in both commercial and Islamic banks, as well as the determinants of their respective differences in performance. We find that while both types of banks experienced a reduction in stock market performance during the pandemic, the returns for Islamic banks were 11%–13% higher than those of commercial banks. In contrast, commercial banks performed better during the pre-COVID-19 period, as well as in the early recovery period. Additionally, banks that relied more heavily on non-traditional banking activities exhibited higher liquidity, lower insolvency and market risk and better stock market performance during the pandemic. Islamic banks were better capitalized than their commercial counterparts, relied more on long-term funding, were more involved in non-traditional banking loan businesses and were more profitable. Commercial banks performed better in terms of efficiency and had higher asset quality along with a lower risk of insolvency.