How capital structure affects Islamic and conventional bank profitability: the role of diversification

Purpose This study examines whether diversification moderates the relationship between capital structure and bank profitability in Islamic and conventional banks in the Middle East and North Africa (MENA) region. Design/methodology/approach A sample of 82 MENA banks covering the period 2006–2021 is employed. The generalized method of moments technique is applied to test the hypothesis that diversification moderates the relationship between capital structure and the profitability of Islamic and conventional banks, with particular attention to the COVID-19 pandemic. Findings The results indicate that both diversification and capital structure enhance profitability within both banking systems during the pandemic. Furthermore, the findings reveal that diversification moderates the relationship between capital structure and bank profitability. The COVID-19 pandemic exerted a negative impact on the profitability of both Islamic and conventional banks. Practical implications This study provides important insights for policymakers, bank managers and regulators, highlighting the importance of designing strategies and regulatory frameworks that promote sound capital structures and income diversification to strengthen bank profitability, especially during crises like COVID-19. Originality/value This study contributes to the existing literature by emphasizing the moderating role of diversification, providing a comparative analysis of Islamic and conventional banking systems in the MENA region and capturing the effects of these dynamics during the COVID-19 crisis.