The Interaction between Money and Capital Markets in Iran

One important issue in the architecture of the Iranian financial system is the phenomenon of interaction between the money and capital markets per se. However, in consonance with global experiences observed both in the bank based and market based financial systems, the root of synergy of banks and capital market can be de facto construed in three dimensions: 1- Comprehensive relations, 2- Complementary links, and 3-Co-evolutionary relationships. The Co-evolutionary relationships are mainly hinged on the role manifested by capital market in reducing the cost of absorbing the capital for banks and also the role deployed by banks in securitization, Ipso facto. In this paper, an attempt is made to examine de jure the appropriate interaction between the money and capital markets in Iran. Besides the review of literature shows that the money and capital markets in most of the countries are not competing components of their financial systems and cannot be substituted for each other but, on the contrary each of these sectors are endowed with specific duties, Sui generis. Meanwhile, several studies indicate that development of capital market has instigated the banks to expand their financing activities viz-a-viz extension of facilities, which sine qua non may lead to prosperity of capital market and vice versa. Nonetheless, the larger the size of capital markets, the more possibility for banks to better screening the financial status of their borrowers, and to render supplementary effective supervision on their concerned investments and also optimally receiving the required signals of their risk conjectures, rather than resorting to mere capital to asset ratio calculation in toto. Hence, the results of this paper prima facie indicate that the performance of economic growth in Iran is highly correlated with apt and productive functioning of its financial institutions, and it does not bear a direct link with bank based or market based nature of financial markets pro rata. Concurrently, the coordination of supervisory agencies, in various spheres of financial system of Iran, and also establishment of certain infrastructures such as formation of credit rating agencies and deposit insurance system can augment the efficiency, depth and quiddity of services depicted in both money and capital markets and in turn could assist to attain the desirable amounts for financing the real sector of the economy, quid pro qua.