Abstract We explore how banks’ income and stock prices respond to the COVID-19 policy measures in countries with the dual-banking system, and whether Islamic banks over- or underperform compared to conventional banks. Applying two-way fixed-effect regressions, we document that the changes in Islamic banks’ finance income as well as net income decline as much during the COVID-19 pandemic as the changes in interest and net income of conventional banks. Event-study tests show that the stock prices of Islamic banks respond as negatively as the ones of conventional banks to workplace closures. We do, however, document that the two types of banks respond differently to income support schemes. The change in Islamic banks’ finance income and net income increase significantly more compared to that of their conventional peers when governments install income support initiatives. Also, Islamic banks’ stock prices respond more positively to the income support programs than the ones of conventional banks. Because we control for investment banking activities and services to large clients, our findings on the stronger response of Islamic banks to income support programs seem to result from Islamic banks’ focus on private customers who are supported during the pandemic. Overall, we conclude that theShariahcompliance does not limit the adverse impact of the COVID-19 crisis on Islamic banking, but that Islamic banks’ performance responds more positively to income support initiatives than the one of conventional banks.
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