The Impact of Financial and Banking Structure on Real Sector Growth in Iran

In recent decades, the effect of financial development on real sector growth has been discussed from different aspects. This paper focuses on financial structure and explains the role of bank-based and market-based financial structures on economic growth by classifying the literature. Using the FMOLS method for the period 1979-2016, the effects of financial structure and banking structure on per capita GDP and sectors’ growth (agriculture, industry, and services) in Iran are estimated. Empirical findings indicate that discriminating policies and bias in financial structure in favor of a specific sector has a negative effect on real sector growth, especially agriculture and industry. Therefore, in support of the design of a balanced financial structure, it is recommended that the state should avoid any intervention or discrimination in favor of a specific sector. In the case of banking structure, the findings show that increasing the financial strength of banks encourages economic growth.