Islamic Agricultural Finance and Growth

The objective of this study is to model and estimate the effect of financial services in the agricultural sector of Iran on the value added of this sector. Moreover, since as of 1984, the Interest Free Banking law was implemented, the effect of this change on the value added of the sector will be studied as the second objective. The model of the study consists of three tions. The volume of real investment in the first tion. is assumed to bethe function of value added, flow of finance, and last year’s capital stock. The second tion consists of a capital accumulation identity, and the third tion formulates value added as function of capital stock and labor force in the agricultural sector. The three tions are estimated simultaneously with co integration method and both long run and short run estimation of coefficients exhibit a positive and significant effect of credit on both the capital stock and output. Further, the results show application of Islamic tools of finance also contribute to the increase of agricultural sector’s value added significantly.These results reinforce the arguments of Islamic economists that Islamic finance is growth promoting.