The Nexus between Economic Freedom and Islamic Bank Performance: Empirical Evidence from the MENA Banking Sectors

Abstract

The present study provides new empirical evidence on the impact of economic freedom on Islamic banks’ performance. The empirical analysis focuses on Islamic banks operating in the MENA banking sectors during the period 2000–2008. We find that the larger, more diversified, and better capitalized Islamic banks tend to be relatively more profitable, while credit risk and expense preference behavior seem to exert negative impact. The findings suggest that greater financial freedom positively influence the profitability of Islamic banks operating in the MENA banking sectors. Interestingly, the impact of monetary freedom is negative implying that higher (lower) monetary policy independence reduces (increases) Islamic banks’ profitability, providing support to the benefits of government interventions.