The Determinants of the Number of Banks in an Economy: How Many Banks Does Iranian Economy Need?

Abstract The Iranian banking sector is experiencing changes such as the expansion of private banks, the merge of several banks and non-bank credit institutions, and the bankruptcy of a number of non-bank credit institutions. Thus addressing the changes in the number of banks, by taking into account the size of the country's economy compared to other countries, can help policymakers and the banking system planners to provide structural reforms and help to design better monetary policy. In this research, an index for the number of banks has been introduced and is calculated for the 27 selected countries considering the heterogeneity of banks and the importance of the size of the economy, therefore, it is appropriate for comparing the number of banks in different countries. The result shows that the size of the Iranian banking sector is increasing in the period of study, and given the size of the country's economy, the number of banks in Iran is less than the average of the selected countries. Furthermore, the factors affecting the number of banks by using the panel data model for the 11 selected MENA countries for the period 2015-2011 were investigated. It seems that considering the average of MENA countries, the number of Iranian banks should be more than the current one.