The impact of the COVID-19 pandemic on the financial performance and stability of Islamic banks

PurposeThe purpose of this paper is to investigate the impact of the COVID-19 pandemic on the financial performance and stability of Islamic banks (IBs) in the Middle East, North Africa and Southeast Asia (MENASA) region.Design/methodology/approachThe sample consists of 50 IBs across 13 MENASA countries. The data covers 11 quarters, starting in Q1 2019 and ending in Q3 2021, and are collected from banks' quarterly reports. The authors proxy financial performance by three measures, namely, return on assets (ROA), return on equity (ROE) and cost-to-income (Cost/Income). For financial stability, the authors use two indicators: insolvency risk (log Z-score) and asset risk (ROA/SDROA). The methodology is based on the generalized least squares method estimation.FindingsThe results showed a significant and negative impact of COVID-19 on two performance measures of IBs (ROA and ROE) suggesting that IBs were significantly affected during the earlier pandemic. As well, the authors found strong evidence of the impact of COVID-19 on the insolvency risk and asset risk of the studied banks.Practical implicationsThe study of COVID-19's impact on the performance and stability of IBs in MENASA countries permits the banks' regulators and policymakers to ameliorate the banks' financial performance and reinforce their supervisory actions. Also, it gives them assistance to guarantee the financial stability of these banks in times of crisis.Originality/valueThis study provides significant financial information and policy implications for stakeholders involved in the banking sector in MENASA countries. Consequently, IBs must guarantee their profits and stability to ensure their competitiveness versus conventional banks during the period of crisis.