Abstract
PurposeThis paper aims to assess the probable impact of COVID-19 on the Islamic banking system in Bangladesh. More specifically, it attempts to test the hypothesis that Islamic banks are exposed to increased risk because of their role as a provider of “merchant capital” including financing for trade, commerce and working capital, which are believed to be severely disrupted by the COVID-19.Design/methodology/approachThe paper draws upon the Marxian tradition on the identification of the circuit of “merchant capital” separated from the circuit of “interest-bearing capital.” Moreover, the research adopts the balance sheet approach to trace the sectoral distribution of investment as well as sources of income of Islamic banks.FindingsThe research supports the hypothesis that the investment pattern of Islamic banks is skewed toward the trade and merchant’s financing. More than two-third of Islamic banks’ investment, and income thereof, is concentrated on working capital and trade finance. As these sectors are largely vulnerable to the economic shock resulting from COVID-19, Islamic banks in Bangladesh are likely to be affected through this channel.Research limitations/implicationsThe research focuses only on Islamic banks in Bangladesh. Further study can assess the impact of COVID-19 on conventional and Islamic banks in other countries to find similarities and differences with the findings of the current research.Practical implicationsThe finding of this research will be useful for bank managers, policymakers and users of financial services. In particular, this study provides important information useful for regulators in devising appropriate policies which aim to mitigate the adverse impact of COVID-19.Originality/valueTo the best of the authors’ knowledge, this is the first study that attempts to examine the impact of COVID-19 on Islamic banking system in Bangladesh, a country where Islamic banks occupy one-third of the total banking system’s assets.
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