This paper aims to examine whether adherence to Shariah principles enhances the resilience of Islamic banks’ (IBs) capital structure adjustments compared to conventional banks (CBs) during the COVID-19 pandemic. Specifically, it investigates whether risk-sharing mechanisms and asset-backed financing translate into differential speeds of adjustment (SOA) toward target leverage under systemic stress.
This study uses quarterly panel data from 34 Malaysian banks (2018–2023), with a dynamic partial adjustment model estimated via system generalized method of moments (GMM). The empirical design incorporates COVID-19 period dummies and Shariah-compliance interaction terms to isolate pandemic and compliance effects on capital structure dynamics.
IBs exhibited a higher and more stable SOA during the pandemic (increasing from 51% to 55.6%), while CBs experienced a marked decline (from 74.1% to 45.2%). IBs’ resilience is attributed to Shariah-compliant risk-sharing and asset-backed financing, which moderated adverse liquidity and risk shocks. CBs’ deterioration reflects heightened risk aversion and market friction.
The study focuses on the Malaysian banking sector, which may limit generalizability. Future research could extend the analysis to other dual banking economies and post-pandemic recovery periods.
Regulatory capital frameworks should recognize the differentiated crisis resilience of IBs. Policymakers are encouraged to refine the accounting treatment of profit-sharing investment accounts and institutionalize Islamic liquidity management tools to enhance systemic stability.
This study, to the best of the authors’ knowledge, provides among the first comparative evidence on capital structure adjustment speeds between IBs and CBs during a major systemic shock, offering new insights into the operationalization of risk-sharing principles for financial stability in dual banking systems.
