The Effect of Credit Risk and Liquidity of Qarz al-Hasane Facilities on the Stability of the Iranian Banking System Using Merton Distance to Default and Z-Score Indices and Econometric method of Structural Equations (Software EQS)

The main provision and allocation of credits in Iran’s economy is done by the banking system. The central bank implements monetary policies by granting credits in the form of various contracts. The present study has investigated the effect of credit risk and liquidity of QARZ AL-HASANE facilities on stability of Iran’s banking system using the econometrics model of structural equation and the data of 24 banks, during the period of 1390-1397. For this purpose, two indices, Merton distance to default and Z-score, have been used. In the analysis of banking stability, the effect all variables except the inefficiency ratio variable is significant on the stability indicators, which the inefficiency ratio variable is shown with red arrow. Using the Merton index, the QARZ AL-HASANEH facility variable has the greatest impact and the asset growth has the least positive impact on bank stability. Also, using the Z-score index, the QARZ AL HASANE facility variable has the greatest impact and asset growth variable has the least impact on IRAN’S banking stability.