Economic freedom and its subcomponents: effects on Islamic bank performance

Abstract

PurposeThis paper aims to examine the profitability of Islamic banks benefits from economic freedom and its subcomponents.Design/methodology/approachThis study uses a sample of 41 Islamic banks from the Organization of Islamic Cooperation (OIC) Countries selected from 2010–2020. It conducts an empirical approach based on the System Generalized Method of Moments (SGMM).FindingsOverall, economic freedom has a substantial impact on the profitability of Islamic banks. We then investigate the relationship between the subcomponents of economic freedom and the profitability of Islamic banks. The study’s breakdown components suggest that financial and investment freedoms are favorable indicators, while business and monetary freedoms have a negative effect.Practical implicationsThis research can serve as a guideline for Islamic bank management in terms of maintaining performance. The results of this study provide policy implications for the government to offer friendly regulations for economic actors to engage in financial transactions by looking at the economic freedom sub-component.Originality/valueTo the best of the authors' knowledge, the study of the role of economic freedom in Islamic banking performance is limited, particularly in the context of OIC Countries.