Can Economic Freedoms Drive the Profitability of Islamic Rural Bank? Evidence From Indonesia

Abstract

This paper aims to examine the relationship between economic freedom and Islamic rural banks' performance (BPRS) in the case of Indonesia. The study covers 40 Islamic rural banks in 34 Indonesian regions from 2014 to 2021. The Generalized Method of Moments (GMM) is employed to demonstrate the effect of economic freedom on the performance of Islamic rural banks. The results indicate that business freedom and investment freedom have a substantial favorable effect on the profitability of BPRS. In contrast, monetary freedom has a detrimental effect, and all signs support past research in this regard. This study can serve as a guidance for the administration of BPRS in sustaining financial performance. The findings show that governments should consider the repercussions of liberalization and reform of the banking sector. When financial intermediaries operate in a less limited business and investment environment, they are more likely to pursue competitive activities that boost financial success. Lastly, academics might use this data to examine the economic flexibility of BPRS. Although the model has explored a significant share of external factors in BPRS performance, further studies may use other institutional control variables.