Dividend policy and its association to firm value is still a concern for researchers. Empirical research provided evidence that it is relevant in various forms including signaling, pecking order, and agency. The aim of this study is to investigate the dividend policy of Islamic banks versus conventional banks in response to a major financial crisis. By studying the mixed banking industry of the Gulf Cooperation Council countries, known for negligible taxation systems, we provide evidence that conventional and Islamic banks use dividend payouts as a multi-purpose mechanism. At times of economic prosperity, conventional banks use them as signaling and pecking-order instruments, while it is used as an agency problem protection instrument during downturns. For Islamic banks, however, dividend policy is a pecking order mechanism before and after the crisis. Discussions on theoretical and empirical implications are provided.