Many studies have affirmed that financial liberalization leads to higher output growth, yet the effect of financial liberalization on prosperity is ambiguous. The most common measurement to study prosperity is the GINI index, which is a single-dimensional index based on GDP. WEF2018 reported that global income inequality has steadily widened with 82 percent of all wealth created by only one percent of the world's richest countries. Therefore, this study uses the Legatum Prosperity Index, which is more comprehensive based on additional factors such as wealth, education, well-being, and health. This study focuses on OIC countries considering their impressive growth in Islamic finance. Our first objective is to identify the impact of financial liberalization on prosperity in OIC countries. The second objective is to further analyze the different impacts between two groups of OIC countries, namely the high-income and the low-income OIC countries. The third objective is to examine the importance of institutional quality as a mediator or facilitator to sustain prosperity in OIC countries. This study adopts the fixed and random effects panel technique to evaluate the determinants of financial liberalization and to identify the relationship between financial liberalization and prosperity. This study also employs the static panel technique regression to study the role of institutions in affecting the relationship, on a dataset from 40 OIC countries for the 2007-2016 period. The results confirm that financial liberalization has a significant impact on prosperity in OIC countries. Income, female labour, government spending and institutional quality are factors that contribute positively to prosperity. In addition, financial liberalization has a higher impact in OIC-LOW countries than OIC-HIGH countries. Significant contributing factors are domestic credits, foreign direct investment net and trade openness, whereas capital account openness shows a neutral effect. Further, this study finds that the impact of financial liberalization on prosperity varies with the level of institutional quality. Optimal governance would be more conducive as stringent rules and regulations could hamper financial liberalization. These findings could also assist policymakers in narrowing the gap between other rich and poor countries towards better income equality and global prosperity.