Examining the Draft to Rationalize the Profit Rates in Bank

Investment is one of the key variables in any economy. It’s adversely related to interest rate. Therefore, to reduce the production costs and promote investment a draft is presented by representative of Islamic parliament of Iran to rationalize the current profit rates for bank facilities. It is argued that in view of the above theoretical foundations and a high bank spread, extravagancies and unnecessary spending in the Iranian commercial banks, the profit rates of bank facilities can be reduced to foster a higher economic growth. In 1970s as McKinnon and Shaw’s theories were raised and the weakness of financial repression became clear the need for financial liberalization policies gained ground. However the experiences of countries who adopted liberalizing policies showed that the success of these polices depend on other prerequisites. Therefore, the proposal to rationalize bank profits rates lacks the due theoretical basis. In addition, as a result of high risk of investment and policy instability in Iran the sensitivity of investment to banking profit rates is relatively low.Eventually, although it seems that there is a large bank spread in Iranian banking, but the root of problem lies in the deferred debt payments, high inflation rates and high bank costs. To reduce these three variables proper policies must be adopted and normative measures should be avoided.