Bank-Based vs. Market-Based Financing and Its Implications for Monetary Policy

Abstract

There has long been an intense debate among Iranian economic analysts regarding bank-based versus market-based financing. Specifically, there is considerable emphasis on the notion that bank-based financing in Iran's economy is an undesirable condition, and that policies should aim to promote a shift toward market-based financing. The findings of this study indicate the following: First, whether financing is bank-based or market-based only alters the degree of risk-sharing by capital providers and has no effect on the total volume of financial resources. Second, there is no strong empirical or theoretical evidence suggesting that bank-based or market-based financing leads to differing long-term economic growth outcomes. Third, from the perspective of financial and banking stability, there is also no conclusive theoretical or empirical support favoring either bank-based or market-based systems. Therefore, from the standpoint of monetary and supervisory policy, the structure of financial intermediation—whether bank-centered or market-oriented—is of secondary importance. What remains crucial is that monetary and regulatory policy continue to focus on inflation control and banking stability, rather than attempting to restructure the mode of financial intermediation.