Economics and Financial Policymaking

There has long been an intense debate among Iranian economic analysts regarding bank-based versus market-based financing. Specifically, there is considerable emphasis on the notion that bank-based financing in Iran's economy is an undesirable condition, and that policies should aim to promote a shift toward market-based financing. The findings of this study indicate the following: First, whether financing is bank-based or market-based only alters the degree of risk-sharing by capital providers and has no effect on the total volume of financial resources. Second, there is no strong empirical or theoretical evidence suggesting that bank-based or market-based financing leads to differing long-term economic growth outcomes. Third, from the perspective of financial and banking stability, there is also no conclusive theoretical or empirical support favoring either bank-based or market-based systems. Therefore, from the standpoint of monetary and supervisory policy, the structure of financial intermediation—whether bank-centered or market-oriented—is of secondary importance. What remains crucial is that monetary and regulatory policy continue to focus on inflation control and banking stability, rather than attempting to restructure the mode of financial intermediation.

Enterprise formation by banks refers to their role in establishing, growing, and developing businesses, a process that is fundamentally dependent on enterprise financing. However, the global financial crisis of 2007–2008 profoundly transformed the landscape of financing, including enterprise finance. To clarify this issue and examine the direction of these changes based on global experiences, this article evaluates the developments and evolution of various business financing channels before and after the crisis in European Union countries (including bank-based, market-based, and Eastern European countries), the United States, and Japan. The findings indicate that even in bank-based economies, enterprise financing through banks has come under pressure, primarily due to the Basel III requirements implemented after the aforementioned crisis, which obligated banks to shrink their balance sheets. This credit tightening has been particularly severe for small businesses compared to large corporations. Meanwhile, in market-based economies, equity-based financing has declined due to market conditions and has been increasingly replaced by debt-based financing, such as corporate bonds. Furthermore, as both bank-based and equity-based financing channels face growing constraints, alternative financing—although still limited—is gradually increasing, offering a partial solution for the financial needs of small and medium-sized enterprises (SMEs). A more detailed analysis of Germany, the most bank-based economy in Europe, also reveals a shift from a purely bank-based financing system toward strengthening market-based financing. Therefore, although bank financing in Iran—as a bank-based economy—remains the primary option for enterprise creation and growth, it is recommended, based on international experience and the domestic credit constraints caused by quantitative balance sheet controls, that market-based financing should also be developed.

This article investigates the role and impact of banks in financing production in Iran and the associated challenges of bank-owned enterprises within the banking system. Banks, as pivotal institutions in providing capital for production and economic activities, bear significant responsibility in the national economy. Based on available data, changes in their share of production financing reflect both growth and challenges faced by banks in recent years. Despite their critical role, issues such as economic sanctions, international restrictions, and structural problems have had adverse effects on their performance. These factors have diminished banks' ability to attract new deposits and reduced their competitiveness in the market. The present article also analyzes the existing financing methods, such as bank loans, lease-to-own arrangements, and bond issuance, emphasizing the importance of selecting the most appropriate financing method considering the current conditions. In conclusion, several recommendations are proposed to improve the state of financing and enhance banks’ efficiency in supporting production. Among the suggested strategies are reducing credit constraints, developing innovative financial instruments, and enhancing interbank cooperation, all of which could contribute to improved economic conditions.

Imbalances in Iran’s banking system—especially in recent years—have become a critical issue in the process of financing economic enterprises. Banking imbalance refers to the disequilibrium between banks’ resources and expenditures, extreme volatility in deposits and customer withdrawals, administratively fixed interest rates, and capital shortages in banks. These factors result in serious constraints on banks’ lending capacity and lead to increased financing costs for businesses. The aim of this article is to analyze the effects of banking imbalances on business financing and to identify effective strategies for addressing these challenges. To achieve this objective, a descriptive-analytical method has been employed. The study examines the current condition of Iran’s banking system and analyzes the impact of these imbalances on the economic performance of enterprises. Moreover, through scenario analysis, the outcomes of each proposed solution for improving the financing situation are assessed. The findings of this research indicate that banking imbalances not only increase the cost of financing but also reduce banks’ lending power, limit enterprises’ access to financial resources, and undermine the country’s economic capacities. In this regard, reforming Article 8 of the Law on Interest-Free Banking, selling off non-productive bank assets, strengthening the capital market, and privatizing quasi-state banks are among the key strategies that could reduce banking imbalances, improve banks' liquidity, and facilitate the financing process for businesses.

One of the major reasons explaining the inefficiency and underdevelopment of Iran’s financial system—as well as its limited effectiveness in influencing macroeconomic variables in recent decades—may lie in the type of financial regulatory system in place. This issue has received little attention from researchers and policymakers in Iran, even though many countries have shifted their financial regulatory systems from traditional frameworks to more modern approaches such as the Twin Peaks model. Accordingly, this study seeks to explore Iran’s current situation by drawing on the experiences of successful countries and aims to answer the key question: What type of financial regulatory system should Iran adopt? In other words, which regulatory approach is best suited to enhance the effectiveness of Iran’s financial system? Findings from a covariance analysis conducted on 23 countries over the period from 1981 to 2020 indicate that changes in the financial regulatory authority’s approach (traditional, functional, integrated, and Twin Peaks) interacting with macro-financial characteristics (financial structure, interest rate repression, and generalized public trust) have, in most cases, led to changes in the performance of both the real sector (economic growth and inflation) and the financial sector (financial development and financial efficiency). The statistical results revealed the suboptimality of traditional and functional models, and confirmed the superiority of transitioning first to an integrated financial regulatory system, followed by the adoption of the Twin Peaks model. Due to the complexity of such systemic changes, it is recommended that an integrated financial regulatory system be implemented on a trial basis for a limited number of years before transitioning to the Twin Peaks model. From a broader perspective, it appears that Iran's economy is in need of a complete redesign of its socio-economic architecture.

Iran’s banking system, as one of the main pillars of financial intermediation and economic resource allocation, has faced numerous structural and functional challenges in recent decades. Using a thematic analysis approach and expert interviews with professionals in the banking and economic sectors, this study analyzes these challenges and proposes corrective strategies. Findings indicate that factors such as the traditional approach to banking, lack of diversity in funding sources, government pressure to grant mandatory loans, and banks’ involvement in non-banking commercial activities have significantly contributed to the sector’s imbalance. One of the central issues is banks’ entry into enterprise ownership and management, which diverts their focus from their core mission—optimal financial resource allocation—and leads to problems such as corruption, managerial inefficiency, and reduced transparency. Additionally, the government's dependence on banks and the emphasis on financing through them, instead of diversifying financial instruments, has led to a decline in efficiency and productivity within the banking system. Quantitative findings reveal that the capital adequacy ratio in some banks—such as Bank Melli, Parsian Bank, and Shahr Bank—has been negative, placing them in a critical situation, while banks such as Middle East Bank, Karafarin Bank, and Bank Mellat are in relatively better condition. Moreover, the accumulated losses of eleven banks exceeded 57,590 billion IRR (approximately 575.9 trillion IRR) in 2023. According to Article 141 of the Commercial Code, this level of accumulated loss indicates a potential risk of bankruptcy in these banks. To address these issues, the study proposes strategies such as revising and updating banking regulations, strengthening the Central Bank’s oversight using advanced technologies, increasing transparency in bank operations, and diversifying funding sources. Additionally, transitioning from a bank-centered to a production-centered approach and implementing genuine, targeted privatization could enhance banking performance. Establishing a credit rating system to reduce credit risks and optimize the loan allocation process is also essential. Implementing these reforms can not only reduce existing challenges but also pave the way for a more sustainable and effective role for the banking system in the country’s economic development. These reforms, alongside transparency and efficient supervision, can ensure the realization of Iran’s macroeconomic goals.