Challenges of Islamic Banking in Iran’s Economy: Focusing on Financial Inclusion

More than four decades have passed since the enactment of the “Law on Usury-Free Banking Operations” within Iran’s economy, requiring all Iranian banks to adhere to Islamic principles in their operations. This regulatory framework has created a unique banking environment in Iran, distinct from other (both Islamic and non-Islamic) countries. The restrictions imposed by this law are likely to impact financial inclusion within Iran’s economy. Additionally, over four decades of experience in implementing a usury-free banking system allows for a more comprehensive analysis of the challenges that have emerged over this extended period. Accordingly, the present study aims to examine the challenges facing Islamic banking in Iran’s economy, with a particular focus on financial inclusion. Through an examination of existing studies in this field, challenges were identified, and those feasible for quantitative analysis were selected. Seven challenges, including “Belief in the Banking System,” “Distributive Justice in Granting Facilities,” “Interest in Profit and Loss Sharing,” “Moral Hazard,” “Adverse Selection,” “Payment of Real Returns to Depositors,” and “Central Bank Supervision” were chosen. Analysis of these challenges revealed that belief in the banking system and adverse selection are not significant concerns in Iran’s economy and, therefore, do not harm financial inclusion. However, the remaining five challenges present unfavorable conditions in Iran’s banking system, negatively impacting financial inclusion. For policymaking, considering the interrelations among these challenges, a gradual resolution within an integrated system is recommended.