A Study on the Instability of Banking Sector in Iran Economy

It is well-known fact that any country's economic stability depends on financial issues. Among the various issues involved, the stability of banking sector as core of financial and monetary affairs is of prime importance. The present paper intends to study the factors affecting the stability of this sector of Iran economy in both state owned and private banks on the basis of already existing research on banking in Islamic countries. The study is done based on the assumption that the banking system of Iran has the features of Islamic banking and findings indicated that all banks in Iran had a low level of financial stability within the years 1380 to 1387. It must be noted that the factors affecting financial stability in the case of state owned and private banks are not identical. The macro-variables of net gross domestic product and national currency value have diverse impacts on banking sectors, as the development of the former leads to financial stability and reduction in the case of latter brings financial stability. The balance between the volume of loans and the net assets of the banks is also a variable to be considered, as the increase in loans causes financial instability. It is also found that private banks are prone to be affected by these variables more often when compared to state owned banks.