The Procyclicality of Credit Cycle of Islamic and Conventional Banks During COVID-19: Measuring Amplitude and Frequency Indicators

Abstract Procyclicality in the banking sector is one of the important indicators that may encourage the systemic risk in the banking system. This study examines banking behavior of the economy during the COVID-19 pandemic and analyze the amplitude and frequency of the credit cycle of Islamic and conventional banks. This study is primarily focused on the credit property of Islamic and conventional banks from 2014 to 2020 with application of Ordinary Least Square (OLS), Frequency Base Filter Analysis (FBF) and Turning Point Analysis. Our study finds that the size of Islamic bank’s amplitude is larger than the size of conventional bank’s amplitude. This is characteristic of Islamic banks based on the pattern of financing of the real sector. Meanwhile, conventional banks encourage the creation of bubble capital because it is related to the credit pattern grounded in speculative activities based on the interest system. Therefore, conventional banks need to encourage credit patterns based on capital. Meanwhile, the size of the frequency of Islamic banks has a longer frequency measure than conventional banks, but the number of cycles formed is the same as a perfect cycle.