Banking Sector Policies and Financial Development: The Case of Iran

In this paper we empirically examine the effect of various banking policies on financial sector development. To this end, an econometric model in the context of Co-integrated VAR is employed. The results show that financial liberalization and reforms have a significant and positive effect on the banking sector development while inflation rate has a negative effect. Furthermore, the high GDP per capita as a measure of economic development has a positive effect on financial development indicating that the more developed the economy, the more incentive for policy makers to implement financial reforms and thus develop financial sector. This finding is consistent with demand following view. However, since the current structure of Iranian banking system is not competitive, in order to implement financial liberalization policy, the policy makers should be careful and consider some prudential regulations, supervision and other macroeconomic conditions.