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How do financial regulations and economic freedoms affect bank profitability? Empirical Evidence from the OIC Region

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  • Ousman Mohammed Yimam

    (Faculty of Economics and Administrative Science, Ondokuz Mayis University, Samsun, Turkey)

Abstract

Banks operating within a free economic environment and with constructive regulatory frameworks can function with enhanced efficiency, augmenting their profitability. This study aimed to examine the influence of economic freedom and financial restrictions on banks' profitability within the Organization of Islamic Cooperation member nations. The study used a sample of 1453 banks, collecting panel data spanning 13 years. The System-GMM methodology was justified based on the enduring characteristics of the data and the profitability metrics. The dependent variables, namely the Net Income Margin, Return on Average Assets, and Return on Average Equity were individually examined. The research findings indicate that most economic freedom indicators, except for investment freedom, harm bank profitability. The influence of the rule of law on profitability indicators is mostly adverse, although regulatory quality within the financial system has a comparatively favorable effect on profitability. Furthermore, bank-specific performance indicators had a negative impact on profitability, except for bank size. Moreover, country-specific variables substantially impact banks' profitability, including inflation, tax, and interest rates. The presence of Islamic banking has been shown to substantially impact the profitability performance of banks within the Organization of Islamic Cooperation. OIC banks' profitability is adversely impacted by the ongoing health crises, including the Covid-19 pandemic.

Suggested Citation

  • Ousman Mohammed Yimam, 2024. "How do financial regulations and economic freedoms affect bank profitability? Empirical Evidence from the OIC Region," Financial Economics Letters, Anser Press, vol. 3(1), pages 1-27, January.
    • Handle: RePEc:bba:j00007:v:3:y:2024:i:1:p:1-27:d:289
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    References listed on IDEAS

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    1. repec:eme:ijlma0:ijlma-11-2016-0142 is not listed on IDEAS
    2. Demirgüç-Kunt, Asli & Pedraza, Alvaro & Ruiz-Ortega, Claudia, 2021. "Banking sector performance during the COVID-19 crisis," Journal of Banking & Finance, Elsevier, vol. 133(C).
    3. Dietrich, Andreas & Wanzenried, Gabrielle, 2011. "Determinants of bank profitability before and during the crisis: Evidence from Switzerland," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(3), pages 307-327, July.
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