Purpose This study investigates the asymmetric effects of monetary and fiscal policies on Islamic and conventional banks during the COVID-19 pandemic, examining differential transmission mechanisms within dual-banking systems. Design/methodology/approach Two-step System GMM (S-GMM) estimation on 635 banks (143 Islamic, 492 conventional) across 32 OIC countries over 2002–2023 is employed to analyze state-dependent policy transmission across stable and crisis regimes. Findings Islamic banks exhibit crisis-activated benchmark-rate sensitivity, suggesting Shariah-compliant contracts embed indirect market linkages that activate under liquidity stress. Islamic banks also exhibit persistent inflation sensitivity across all regimes, whereas conventional banks lose inflation responsiveness during the pandemic. Fiscal expansion supports conventional bank equity during crises through economy-wide rather than model-specific channels. Operational efficiency emerges as the strongest correlate of bank profitability, with cost-to-income ratio effects approximately three times as large as the largest policy coefficient in primary ROA specifications. Research limitations/implications Findings are confined to OIC dual-banking economies over 2002–2023. Exclusion of macroprudential instruments and reliance on structural fiscal indicators limit generalizability; stronger causal identification requires quasi-experimental designs or contract-level data. Practical implications These differential policy sensitivities suggest the value of differentiated stabilization frameworks. Policymakers may leverage Islamic banks' inflation responsiveness to achieve price-stability objectives; supervisory frameworks may consider cost-to-income ratios as leading indicators of crisis vulnerability, subject to validation beyond the OIC dual-banking context. Originality/value By documenting regime-dependent policy heterogeneity in dual-banking systems and providing evidence consistent with the dominance of operational efficiency over monetary and fiscal variables, this study provides empirical foundations for differentiated regulatory strategies in mixed financial systems.
Hersi et al. (Tue,) studied this question.