This paper examines the bidirectional relationship between competition and systemic risk in dual financial systems where Islamic and conventional financial institutions operate side by side. Using a sample of publicly listed financial institutions from the Asia-Pacific, Gulf Cooperation Council (GCC), and Middle East and North Africa (MENA) regions from 2000 to 2019, we estimate systemic risk through ΔCoVaR and competition using the Lerner index. Employing a panel vector autoregressive framework, we analyse how this relationship evolves across different economic phases, with particular focus on the Global Financial Crisis (GFC). We find that lower competition is consistently associated with reduced systemic risk, with this effect being stronger—by

approximately 25%—in conventional financial institutions. Notably, the competition–risk relationship is asymmetric and time-varying. Put simply, competition enhances stability pre-crisis; it amplifies systemic risk during the GFC, especially in the conventional sector. Post-crisis, this fragility effect persists in conventional institutions but dissipates in Islamic ones. Our findings contribute to the literature on competition, systemic risk, and comparative banking by highlighting how alternative financial models and economic conditions jointly shape financial stability.