Does economic freedom foster Islamic banks efficiency?

Purpose The purpose of this paper is to examine the relationship between economic freedom and Islamic banks’ efficiency. Design/methodology/approach This study covers 18 Islamic banks in seven countries from 2010 to 2020. Tobit regression is used to expose the impact of economic freedom on Islamic banks’ efficiency, and non-parametric frontier Data Envelopment Analysis is used to acquire banks’ technical efficiency. Findings The findings of this study reveal that overall economic freedom has a substantial and favorable impact on the efficiency of Islamic banks. The breakdown components suggest that business freedom, monetary freedom, government integrity and property rights are favorable indicators. All indicators agree with previous studies. Practical implications This research can serve as a guideline for Islamic bank management to maintain financial efficiency. According to these findings, the government should consider the ramifications of financial sector liberalization and reforms. Financial intermediaries are more likely to pursue competitive practices that increase their operating rate and other efficiency metrics when they operate in a less constrained environment. Finally, academics might use this information to investigate the economic flexibility of Islamic banks. Originality/value The novelty of this study lies in the use of Data Envelopment Analysis and Tobit regression to identify economic freedom and the efficiency of Islamic banks. To the best of the authors’ knowledge, studies on the role of economic freedom in the efficiency of Islamic banks are still limited. This research seeks to fill the existing gap in the literature.