Covid-19's Impact on Credit Risk and Bank Profitability: Evidence from Palestine's Islamic and Conventional Banks

Credit risk represents one of the most substantial and significant risk exposures faced by banks. This study empirically assesses the influence of credit risk on the profitability of Islamic banks and conventional banks operating in Palestine. Additionally, it seeks to determine if there is a noteworthy disparity in the impact of credit risk on the profitability of Islamic and conventional banks. The study also investigates the interactive effect of the Covid-19 pandemic on credit risk factors to ascertain whether the pandemic has affected the profitability of both types of banks. The analysis draws on data from 13 banks, encompassing 11 conventional banks and two Islamic banks, spanning the period from 2011 to 2020. Secondary data have been gathered from the Palestinian Monetary Authority (PMA), the annual financial reports of individual banks, and information available from the Association of Palestinian Banks. Furthermore, macroeconomic data have been sourced from the World Bank Data Bank. Banks' profitability is assessed using two key indicators: Return on Assets (ROA) and Return on Equity (ROE). Credit risk variables are measured through the non-performing loan ratio, loan provision to gross loans, and capital adequacy ratio. Additionally, a set of macroeconomic and micro-control variables are examined. Employing panel regression analysis, the study reveals that credit risk significantly impacts the profitability of both Islamic and conventional banks. However, this impact varies depending on the profitability measure used. While credit risk notably influences ROA, it does not significantly affect ROE. Moreover, the study discerns that the influence of credit risk on the profitability of Islamic banks differs from that of conventional banks. Furthermore, the study finds that the heightened credit risk experienced during the Covid-19 pandemic has had an insignificant impact on the profitability of both types of banks.