Influence of COVID-19 on the Default risk of the banking sector: A Comparison between Conventional and Islamic Bank of Developing Countries


Purpose: The main purpose of the following research is to examine the influence of Covid-19 on the default risk of the banking sector while comparing it between conventional and Islamic banks

Methodology: Secondary data collection approach has been used in which data is gathered from banks from 2016 to 2020. The total banks comprise of 20 banks where 10 banks represents Islamic banks while the other 10 are the conventional banks. Therefore, these 20 banks are from 10 different countries. The statistical analysis software used for this type of data is STATA where the statistical tests that is applied in the dataset includes descriptive statics, correlation analysis and GLS.

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The COVID-19 pandemic is resulting in havoc among the international financial and economic sphere, as it develops as the massive test for financial systems across the globe after financial crisis of 2008 and 2009. It has been predicted by Asian Development Bank (ADB) that the international economic cost of the disease is probably to be amid $5.8 and USD8.8 trillion that is almost 6.4 to 7% of the total GDP of the World (Park et al., 2020). Above that, the unparalleled macroeconomic and health systems shocks are probably to have spill over impacts on the entire financial system of every country in a broader range of channels. As aggregate demand is pushed by pandemic, trade, production, and economic activities to become slow and rise in unemployment, baking sector in any nation fear a rising risk of fallout in terms of default risk (IMF, 2020). In the post-pandemic and pandemic ridden world, such losses and damage might threaten the sustainability and survival of banks, security, and financial stability and regulatory discipline across nations, whether they are developing or developed as stressed by (Stiller and Zink, 2020; Cecchetti and Schoenholtz, 2020). Above all, severest blow would be confronted by financial institutions. Financial institutions conventionally deal with a wide variety of risks and the disease might enhance severity of the banks in terms of credit squeeze, liquidity crunch, and upstage in non-performing assets and rates of defaults, decreasing returns from investments and loans, reducing market interest rates and causing transmissible bank-run as argued by (Stiller and Zink 2020).

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