Financial Structure and Income Inequality in Iran

This paper investigates the effect of the banking structure on income inequality in Iran. For the banking structure, three indicators of assets, credits, and foreign sector have been calculated and a regression model has been estimated with the Auto-Regressive Distributed Lags approach for the period of 1979-2016. The findings reveal that Iran's undeveloped financial system, which is relationship-oriented like other bank-based financial systems, has often had a counter-development function. So that among the three investigated indicators, the effect of two indicators of the structure of assets and credits of the banking system on income inequality is significantly positive and has caused an increase in income inequality. In contrast, the effect of the structure of the international transactions index of the banking system is significantly negative, which supports the positive effects of the international integration of Iran's financial system. In this way, the increase in international banking transactions can strengthen the development function of “relationship orientation” in the banking system and subsequently reduce income inequality. In contrast, the effect of the structure of the international transactions index of the banking system is significantly negative, which supports the positive effects of the international integration of Iran's financial system. In this way, the increase in international banking transactions can strengthen the development function of “relationship orientation” in the banking system and subsequently reduce income inequality.