The Effect of Banking System Imbalance on the Activities of Economic Enterprises in Different Sectors of Iran’s Economy

Abstract

The historical trend of Iran’s economy shows that the most important source of financing investment has essentially been borrowing from the banking system, while borrowing from the capital market and other sources has contributed minimally to the financing of enterprises. However, imbalance in the banking system, as an important factor, can play a destructive role in financing investment and enterprises, causing banks to have a lower lending capacity for investment and production. This study seeks to evaluate the effect of banking system imbalance on economic growth across different sectors of the economy within the framework of an econometric model using the simultaneous equations system method. For this purpose, data from various sectors of Iran’s economy during the period 2001–2022 were employed. The results indicate that banking system imbalance has a negative effect on the financing of different sectors of the economy by the banking system. Moreover, given the positive and significant effect of financing from the banking system on investment and the positive and significant effect of investment on value-added growth across different sectors of the economy, banking system imbalance exerts a negative impact on the level of activities in economic sectors and emerges as a constraint. In addition, the findings reveal that the real interest rate of granted facilities has no effect on credit demand, financing from the banking system, or investment in economic sectors, while it plays a role in eliminating banking system imbalance. Accordingly, monetary policymakers must take serious measures to eliminate banking system imbalance and to signal interest rates within the economic and monetary system.