The consequence of the credit risk on the financial performance in light of COVID-19: Evidence from Islamic versus conventional banks across MEA region

Abstract

Abstract Purpose The increased number of nonperforming loans (NPLs) during COVID-19 pandemic has interrogated the robustness of banks and stability of the whole banking segment. We examine the impact of credit risk (CR) on financial performance (FP) by comparing Islamic banks (IBs) to conventional banks (CBs). We also investigate the influence of COVID-19 on this association. Design/methodology/approach Our sample includes the largest 200 banks across 15 countries from the Middle East and the Africa (MEA) region over a four-year period (2018–2021). Panel ordinary least squares (OLS) with fixed and random effects were used. Findings We find a negative association between NPLs and FP for IBs and CBs. We reveal that COVID-19 is partially mediated the association between NPLs and FP in case of the whole sample and separated sample of CBs while not in case of IBs. Originality The evidence of CR and FP on samples of financial sector across MEA region has not been studied in the era of COVID-19 as far as we know. Research limitations/implications This study contributes to the knowledge of the risk and financial performance during the crisis nexus and provides information that is valued to bankers, academics, managers and regulators for policy formulation.