Bank Building Taking Flight

Banking on Change: How Economic Freedom Impacts Efficiency

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Mira Elwood in Business & Economy November 2026 • 4 min read.

"Unlock the secrets to boosting bank efficiency in emerging markets and discover how economic freedom can drive growth."


Globalization has transformed the financial landscape, creating interconnected markets that demand agility and efficiency. Financial institutions today navigate a dynamic and competitive environment, where survival depends on optimizing performance. In the Middle East and North Africa (MENA) region, this transformation presents unique challenges and opportunities.

For women and men alike, understanding the factors that drive financial efficiency is essential for economic empowerment. This article dives into the intricate relationship between economic freedom, regulatory frameworks, and the efficiency of commercial banks in selected MENA countries, specifically examining how these elements interact to shape the financial sector's performance.

Inspired by recent economic research, we'll explore how economic freedom and governance can either unlock or hinder bank efficiency. By analyzing data from Egypt, Jordan, Morocco, Tunisia, and Turkey, this study reveals key insights into the conditions that foster robust and effective banking systems. Discover how the right balance of regulation and openness can pave the way for financial prosperity in emerging markets.

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Why Efficiency Matters

Banking efficiency is closely tied to how effectively financial institutions convert resources into services and economic activity. Economic freedom may influence this process by shaping competition, regulation, ownership, and managerial discretion. The relationship is complex, however, and its effects can differ across countries, institutions, and regulatory environments.

Measuring Bank Efficiency

Technical efficiency in banking has been studied through a wide range of measurement techniques. A systematic review examined 305 studies published between 1989 and 2019 covering both Islamic and conventional banking sectors. Research also distinguishes among overall technical efficiency, pure technical efficiency, and scale efficiency when examining how limitations on economic freedom may affect conventional banks. These methods help identify relevant dimensions of economic freedom, but the review itself notes limitations in the available literature and in its own analysis.

From Grain Loans to National Banks

The history of banking is traced to prototype banks in Assyria, India, and Sumer around 2000 BCE, where merchants provided grain loans to farmers and traders. In the United States, Congress chartered the First Bank of the United States in 1791. That institution was jointly owned by the federal government and private stockholders, served as the federal government's bank, and operated as a commercial bank competing with state banks. Banking has since adapted from early financial transactions to modern digital systems.

Decoding Bank Efficiency: What Really Matters?

Bank Building Taking Flight

Efficiency isn't just a buzzword; it's the lifeblood of any successful financial institution. But how do we measure it, and what factors contribute to it? Technical efficiency, in simple terms, is about getting the most output from a given set of inputs. Think of it as a bank's ability to maximize its lending and other financial services while minimizing costs.

To understand this concept, researchers often use a method called Data Envelopment Analysis (DEA). DEA creates a "best practice" frontier by evaluating various banks and identifying those that are most efficient in their operations. By comparing banks to this benchmark, we can determine their relative efficiency scores.

  • Inputs: These include the resources a bank uses, such as labor, capital, and deposits.
  • Outputs: These are the products and services a bank provides, like loans and other earning assets.
  • Goal: The aim is to see how well banks transform inputs into outputs, identifying areas for improvement.
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An Evolving Evidence Base

Recent research continues to examine how economic freedom and governance affect the efficiency of banks. Studies commonly compare institutions across countries or economic systems while accounting for differences in regulation and market conditions. The evidence suggests that economic freedom can matter, but its effects should be interpreted alongside institutional and macroeconomic factors rather than as a single universal cause.

Freedom Is Not a Guarantee

Greater economic freedom does not automatically ensure efficient or stable banking systems. Reduced government interference may increase competition, but weak oversight or poor governance can create other risks. The relationship between freedom and efficiency is therefore conditional, and conclusions may vary across countries, periods, and banking structures.

Comparing Banking Environments

A 2024 study of U.S. banks used annual data from 2002 to 2022 and a generalized method of moments framework to examine capital, profitability, and economic freedom together. Its findings report that economic freedom positively moderates the relationship between bank capital and profitability. Other comparative work examines the influence of economic freedom on European Union banking efficiency during 2011–2014, while financial-freedom analysis argues that state ownership can reduce competition and the availability of services.

Now, imagine you're a bank manager. You'd want to know not only how efficient your bank is, but also what specific factors you can tweak to improve things. That's where the second part of the analysis comes in – examining the impact of various economic and regulatory variables on these efficiency scores. This approach helps policymakers and financial professionals alike in making informed decisions to foster a more productive and resilient banking sector.

The Path Forward: Balancing Freedom and Oversight

The insights gleaned from this analysis point towards a delicate balancing act: too much regulation can stifle innovation and efficiency, while too little can create instability. Banks operating in environments that promote economic freedom and good governance are more likely to thrive. As the financial landscape continues to evolve, policymakers and industry leaders must collaborate to create frameworks that foster both stability and growth, ensuring a vibrant and resilient banking sector for all.

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Institutions Shape Outcomes

Research on bank efficiency increasingly treats economic freedom as one factor within a broader institutional and macroeconomic setting. A study of developed G7 and other economies used economic growth, unemployment, inflation, and exchange rates as control variables in a comparative analysis. Evidence from China also used Data Envelopment Analysis to study the efficiency of the banking sector from 2000 to 2008. Together, these approaches support a cautious interpretation in which governance, economic conditions, and market freedom interact rather than operate independently.

Technology and Uncertainty Ahead

Banking's next phase will be shaped by technological change, shifting competition, and uncertain economic conditions. Accenture identifies agentic AI and smart money as trends that may reshape customer experience and growth in 2026. Deloitte expects U.S. banks to monitor tariffs, labor-market strength, and multiple possible economic scenarios, while KPMG emphasizes transformation amid economic, regulatory, and technological disruption. These developments suggest that future efficiency will depend on balancing innovation with resilience and oversight.

Capital, Freedom, and Systemic Conditions

A 2025 study examines whether bank capitalization moderates the relationship between economic freedom and banking performance. It compares advanced and emerging economies using an unbalanced panel of 213 countries covering 1993–2018. The study applies a two-step System Generalized Method of Moments approach to address dynamic effects and endogeneity. This design highlights why banking efficiency must be assessed within broader systemic and institutional conditions.

Efficiency Beyond the Balance Sheet

Banking efficiency ultimately affects how reliably people and businesses can access financial services. Competition, regulation, ownership, and technological change can influence the cost, availability, and quality of those services. The practical impact is likely to vary across communities and countries, so efficiency should be considered alongside stability, access, and public trust.

MENA bank efficiency, regulation, and institutional indicators

Populationcommercial banks in 5 MENA countries[1]
Setting5 MENA countries[1]
Duration2003-2011[1]
Main outcometechnical efficiency of commercial banks[1]
Times cited12[1]

What the findings say about restrictions and operating conditions

The reported result links strong restrictions with greater inefficiency, while the paper also says banks in conditions of economic freedom and governance are more likely to benefit from higher operating efficiency. Together, these findings point to a relationship shaped by both restrictions and institutional conditions, rather than a claim that one factor alone determines efficiency.[1]

The analysis separates measuring efficiency from examining possible influences on it: it calculates scores with DEA, then uses Tobit regression to consider bank characteristics, governance, regulation, and economic-freedom indexes. This can identify associations in the study setting, but the excerpts do not establish that changing any one factor would cause efficiency to change.[1]

Methods and measures in the paper

DEA
Data Envelopment Analysis[1]
Tobit regression
Tobit regression[1]

Questions about the result

Does the analysis establish that economic freedom causes higher efficiency?

The paper describes banks in conditions of economic freedom and governance as more likely to benefit from higher operating efficiency, but the excerpts do not establish a causal effect.[1]

Sources

  1. The Impact of Bank Regulations and Institutions on Efficiency in Selected MENA Banks (Canadian Center of Science and Education, 2013)

About this Article -

Written with AI assistance from published research, and reviewed by the Mystum team. See our About page for more information.

This article is based on research published under:

DOI-LINK: 10.5539/ijef.v5n8p84, Alternate LINK

Title: The Impact Of Bank Regulations And Institutions On Efficiency In Selected Mena Banks

Subject: Energy Engineering and Power Technology

Journal: International Journal of Economics and Finance

Publisher: Canadian Center of Science and Education

Authors: Houda Sassi

Published: 2013-07-26

Everything You Need To Know

1

What exactly does 'technical efficiency' mean when we talk about how well a bank is performing?

Technical efficiency, in the context of banking, refers to a bank's ability to maximize its outputs, such as loans and other financial services, from a given set of inputs like labor, capital, and deposits. It's about optimizing the conversion of resources into services, minimizing costs, and achieving the highest possible output level from available resources. It's a crucial measure of a bank's operational effectiveness, revealing how well it utilizes its resources compared to the 'best practice' frontier banks. Understanding technical efficiency is critical for banks aiming to improve their profitability and competitiveness.

2

How is 'Data Envelopment Analysis' (DEA) used to assess the efficiency of banks, and what insights does it offer?

Data Envelopment Analysis (DEA) is a method used to evaluate the relative efficiency of banks by creating a 'best practice' frontier. DEA assesses various banks and identifies those that are most efficient in their operations. It compares banks to this benchmark to determine their relative efficiency scores. DEA helps identify how well banks transform inputs (like labor, capital, and deposits) into outputs (like loans and other earning assets), highlighting areas for improvement. This analysis is important for policymakers and financial professionals in making informed decisions to foster a more productive and resilient banking sector. However, DEA focuses on relative efficiency and does not account for external factors or market conditions.

3

What is the impact of economic freedom on the efficiency of commercial banks, particularly in emerging markets like those in the MENA region?

Economic freedom plays a significant role in determining the efficiency of commercial banks. Banks operating in environments that promote economic freedom are more likely to thrive. This includes factors such as the ease of starting and running a business, the protection of property rights, and the absence of excessive regulation. Economic freedom encourages competition and innovation, which leads to increased efficiency. However, too much economic freedom without proper oversight can also create instability. Therefore, policymakers and industry leaders must collaborate to create frameworks that foster both stability and growth, ensuring a vibrant and resilient banking sector.

4

How do regulatory frameworks and governance structures affect bank efficiency in the Middle East and North Africa (MENA) region?

Regulatory frameworks and governance structures significantly impact bank efficiency. Too much regulation can stifle innovation and efficiency, while too little can create instability. Good governance ensures transparency, accountability, and the rule of law, which are essential for a well-functioning banking system. Effective regulatory frameworks should balance stability and growth, promoting competition while safeguarding against excessive risk-taking. The right balance of regulation and openness can pave the way for financial prosperity in emerging markets, making the banking sector more robust and effective. However, the specifics of these regulations must be tailored to the unique economic and social contexts of each country in the MENA region.

5

What steps can policymakers and industry leaders take to balance economic freedom and regulatory oversight to ensure a resilient banking sector?

Policymakers and industry leaders must collaborate to create frameworks that foster both stability and growth. This involves striking a delicate balance between promoting economic freedom and implementing effective regulatory oversight. They should focus on creating transparent and predictable regulatory environments that encourage innovation and competition while also safeguarding against excessive risk-taking. Regular evaluations of regulatory frameworks are necessary to ensure they remain relevant and effective. Policymakers need to create frameworks that foster both stability and growth, ensuring a vibrant and resilient banking sector for all, and that those frameworks are aligned with international standards and best practices.

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