Effects of Competitiveness and Financial Development on the Iranian Banking System

This study has examined the relationship between profitability of Iran’s banking system and its main determinants including competitiveness, financial development indicators and other macroeconomic variables such as inflation and income per capita. To this end, the study has specified an econometric profitability model and estimated it by the panel data approach using data of the Iran’s banking system over the period 1996-2005. The investigation has focused particularly on two groups of Iranian banks: 1) private banks such as Eghtesad Novien Bank, Parsian Bank, Karafarin Bank, and Saman Bank, and 2) non-specialized public banks such as Iran Melli Bank, Saderat Bank, Sepah Bank, Tejarat Bank and Mellat Bank. The empirical results for both groups of banks have shown that financial development indicators and other explanatory variables have had different effects on profitability. A various indicators of financial development as well as bank competitiveness have not had significant effect on the profitability of the non-specialized public banks, while income per capita has affected significantly. This result is similar to the private banks where financial development does not play a significant role in their profitability enhancement. These findings point out the structural problems of the banking system performance in the country. The implication relies on reforming the banking system toward a more efficient performance of financial institutions.