Islamic Banking System in Iran: Experience in Lending Operations

Abstract

Since 1984 Iranian banks has been operating under Islamic principles. This paper investigates dynamics of loans and the difficulties that Iranian banking system was facing. During the period of Islamic banking in Iran, banks experienced a significant increase in the supply of loans. Many factors have affected the behavior of banks in lending operations, the most important of which include rate of return, inflation, and government intervention. In this paper, a descriptive analysis and an error- correction model are carried out to investigate the behavior of lending activities in Iranian banks. The results indicate that government intervention, which aims managing of funds, has played the more important role than that of economic factors.