Role of rate of return on loans in the Islamic banking system of Iran

Since 1984 Iranian banks has been operating under Islamic principles. This paper investigates dynamics of loans and the difficulties that this banking system is facing. During the period of Islamic banking in Iran, banks experienced a significant increase in the supply of loans. Many factors could affect the behaviour of lending activities including rate of return, inflation, and government intervention. In this paper, a statistical model is developed to investigate the behaviour of supply of loans in Iranian banks in terms of the causal relationship between the main factors, which affect the supply of loans. The results indicate that government intervention which aims managing of funds has played a more important role than that of economic factors.