Political Economy of Reforming Formal Banking Institutions in Iran after 1979 Revolution

Endogenous institutional reforms can be analyzed within the framework of political economy. This article focuses on institutional reforms in banking industry. The most important formal institution of banking system, which is regulation and supervision of banks, is carried out in Iran by its Central Bank and the Council of Money and Credit. In this article, the reforms in formal banking institutions in both de jure and de facto arrangements in the period after the 1979 revolution are analyzed. The main question of this article is that how the idea of North and others (2006 and 2009) on limited-access and open-access social order can apply only to the banking industry? Historical evidence and statistical analysis show that the institutional arrangement and enforcement characteristics of banking system in Iran is consistent with features of limited-access order. Especially in 1990s, although private banking was prohibited in Iran, but elites of the dominant coalition, achieved rent by establishing informal banks. These conditions resulted in increasing competition between members of dominant coalition and this led to amending the rules of entry in early 2000 in which private banks were allowed to be established formally. These newly established private banks had ties to another group of the dominant coalition. Then, numerous laws and regulations were adopted to improve supervision of banking activities. In late 2000, the interests of non-formal banks were damaged, and therefore, they tried to continue their activities in formal ways. Overall, the evidence suggests that the Iranian banking institutions still have features of natural state (limited-access order), but there has been a transition from the basic natural state before 2000s to some features of mature natural state.