The impact of new millennium crises on the power of Islamic banks in deposit markets

We investigate the impact of three crises on the power of Islamic banks in deposit markets: the Global Financial Crisis, 2007–2009 (GFC), the Arab Spring political crisis, 2011–2013, and the COVID-19 health crisis, 2020–2022. Applying difference-in-difference (DID) and GMM techniques to panel data for 2004–2022, we find that the power of Islamic banks increased in countries most affected by the GFC, but only for oil-exporters, as elevated oil prices inflated deposited liquidity. In contrast to the GFC, the market power of countries highly affected by the Arab Spring decreased as depositors withdrew en masse. For these countries, oil export status was irrelevant, and whilst government integrity is significant, it accounts for a small amount of heterogeneity in the country-level cross-section due to widely held public attitudes towards institutions during the crisis. For COVID-19, the market power of Islamic banks initially increased at the outset of the pandemic due to a surge in precautionary deposits, but later decreased due to economic activity constraints. The stringency of lockdowns had little effect on market power in countries that suffered the highest COVID-19 death rates. These and other findings specific to each crisis provide a rich array of private and public policy implications relevant to crises of different types for bank liquidity crisis management, financial conduct policies, and state-backed lending stimulus packages.