Transition from Banking Enterprise to Effective Support for Production: Pathologies and Solutions in the Iranian Banking System

In the Iranian banking system, the focus of banks, instead of providing sustainable financing for productive sectors, has shifted toward quick-return activities such as services and commerce. This deviation, resulting from legal weaknesses and inappropriate prioritization in the allocation of credit facilities, has reduced support for productive sectors such as industry, mining, and agriculture, thereby adding to the structural problems of the banking system. According to Article 8 of the Law on Usury-Free Banking Operations, banks are permitted to invest directly in productive and developmental projects; however, this has practically pushed banks toward enterprise ownership and the accumulation of unproductive assets. At present, approximately 87 percent of the country’s financing burden rests on the banking network. This high concentration has exerted significant pressure on banks, leading to the accumulation of non-performing loans and retained losses in some of them. Furthermore, under Article 141 of the Commercial Code, when accumulated losses reach 50 percent of base capital, the board of directors is obligated to either increase capital or declare bankruptcy. Nevertheless, the absence of a specific mechanism for bank bankruptcy has resulted in the application of general corporate laws to them. The fundamental question of this study has been: What factors within the financial system and the structure of banks prevent effective financing of the productive sector, and how can structural and regulatory reforms guide banking resources toward productive sectors? In this regard, through the analysis of financial and economic data of banks, the study pathologically examines the reasons for the declining role of banks in financing productive sectors and their inclination toward non-productive domains. The findings of this study indicate that the approval of investment programs in the annual budget bill by the Parliament can contribute to the allocation of financial resources toward productive and developmental projects and prevent the diversion of banks toward quick-return activities. Moreover, the establishment of specific mechanisms for bank bankruptcy and the reform of laws related to banking activities can reduce the pressure on banks and improve their financial condition. Ultimately, strengthening oversight in guiding credit allocation properly leads to the improvement of the structure of the banking system and the enhancement of financial sustainability.