Study of the Effect of Using the Participation Contracts in Non-Usury Banking of Iran in Two Bust and Boom Regimes

In this study, we set out to account for the question to what extent participation-based (civil participation, legal participation, Mudaraba) facilities during boom and bust periods have managed to steer national economy to production, employment, and investment in production segment in the face of highly volatile and crises and inflation-affected market. To do so, by using Markov-Switching Models of regime change, we explore the effect of participation-based facilities on production, employment, and investment. The study period of the research starts from 1984, i.e. the start of usury-free banking in Iran, and ends by 2012. The results of the estimation of Markov Model for bust and boom phases indicate that in the second regime namely boom and by an increase in participation-based contracts the rate of real interest, investment, and production increase, but the important issue in Iran’s economy is the enduring level of boom and bust phases, in that the extent to which the economy faces bust phase for the study period is 15 periods in contrast with 9 periods of boom according to the results of model estimation; as a result, the risk of using participation-based contracts will go up under such circumstances. Furthermore, since expectations play an important role in making decision on investment, any form of economic instability can have a negative impact on investment, production, and employment, as the results of the estimation of the two regimes confirm this.