In this paper, we evaluate stock performance of Islamic banks relative to their conventional counterparts during the initial phase of the COVID-19 crisis (from December 31, 2019 to March 31, 2020). Using a total of 426 banks from 48 countries, we find that stock returns of Islamic banks were about 10% – 13 % higher than those of conventional banks, after controlling for a host of bank- and country-level variables. We provide an explanation for the superior stock performance of Islamic banks by assigning a special role for the levels of efficiency. We show that pre-crisis levels of efficiency that are adjusted for bank risk can explain crisis stock returns for Islamic banks, but not for conventional banks. The evidence is robust to alternative measures of stock returns, efficiency models, and other empirical strategies. We finally present some insight on the importance of key bank characteristics in determining the stock returns of conventional banks during the crisis period.
Bank Stock Performance During the COVID-19 Crisis: Does Efficiency Explain Why Islamic Banks Fared Relatively Better?