"Islamic Finance Researches" (IFR)

Investigating the Relationship between State Ownership and the Performance of Interest-Free Banking in Iran

Document Type : Resear Paper (Islamic Banking)

Authors

1 M.A in Financial Management, Department of Islamic Financial Management, Faculty of Management and Economics, Imam Hussein University, Tehran, Iran

2 Associate Professor, Department of Islamic Financial Management, Faculty of Management, Imam Hussein University, Tehran, Iran

3 Assistant Professor, Department of Islamic Financial Management, Faculty of Management, Imam Hussein University, Tehran, Iran

Abstract

1. Introduction and Objective
Evaluating banks’ performance is critical due to their fundamental role in ensuring financial stability and promoting economic development. In Islamic banking, operations are governed by Sharia principles, making performance assessments particularly important in Muslim-majority countries such as Iran. The Iranian banking system is characterized by a significant share of state ownership, which may affect efficiency, profitability, and risk-taking behavior. This study aims to examine the relationship between state ownership and the financial performance of Islamic banks in Iran, focusing on whether government-owned banks underperform relative to private banks and identifying the financial indicators most affected by ownership structure.
 
2. Methods and Materials
This research is applied in nature and adopts a correlational, ex post facto design. The study analyzes 15 banks listed on the Tehran Stock Exchange (TSE) over the period 2015–2021 (1395–1400 SH). Financial performance is measured using four key indicators:
- Return on Assets (ROA) – an indicator of profitability,
- Return on Equity (ROE) – a measure of shareholders’ return,
- Capital Adequacy Ratio (CAR) – reflecting financial stability and regulatory compliance, and
- Bank Overdrafts (BD) – representing liquidity dependence and short-term funding stress.

       Panel data regression analysis with a fixed-effects approach is employed. The models are estimated using EViews econometric software, and diagnostic tests are conducted to ensure the validity of the models (including checks for autocorrelation and heteroskedasticity). The study also reports the explanatory power (R²) for each performance measure to highlight model fit.
 
3. Research Findings
The findings, significant at the 5% error level, demonstrate that state ownership significantly influences banks’ financial performance. Specifically:
- State ownership has a negative relationship with ROA, ROE, and CAR, suggesting that state-controlled banks tend to exhibit lower profitability and weaker capital positions.
- Conversely, state ownership has a positive relationship with bank overdrafts, indicating a higher reliance on overdraft facilities among state-owned banks.
       The explanatory power of the models varies across indicators: 53% for ROA, 11% for ROE, 12% for CAR, and 64% for bank overdrafts, with the strongest effect observed for overdraft dependency.

4. Discussion
The results align with agency theory and prior research, which argue that state ownership can reduce efficiency due to political interference, weaker governance mechanisms, and soft budget constraints. The negative impact on profitability and capital adequacy suggests that government-owned banks may prioritize political and social objectives over shareholder value maximization. The high reliance on overdraft facilities reflects potential liquidity mismanagement and overdependence on government support.
 
5. Conclusion and Policy Implications
The study concludes that ownership structure is a critical determinant of Islamic banks’ performance in Iran. Policy implications include:
- Enhancing corporate governance frameworks and transparency in state-owned banks,
- Reducing excessive state ownership to encourage competition and efficiency,
- Strengthening regulatory oversight to mitigate liquidity risk and improve capital adequacy.

        These measures can improve the overall efficiency of Iran’s Islamic banking system and contribute to economic stability.

Keywords

Main Subjects

  1. اسعدی، عبدالرضا؛ و ابری، محمدعلی (1399). اثر ساختار مالکیت و حاکمیت شرکتی بر عملکرد بانک‌ها. اقتصاد پولی. 5(19)، 223-248.
  2. تقی‎نتاج، غلامحسین؛ بحری ثالث، جمال؛ و قادری، قدرت (1397) تأثیر کیفیت حاکمیت شرکتی بر عملکرد مالی بانک‌ها با نقش تعدیلی کیفیت افشا. مطالعات مالی و بانکداری اسلامی، 1(۴)، 127-151.
  3. رجبی، مریم (1398). تأثیر حاکمیت شرکتی بر عملکرد شرکت با در نظر گرفتن مدیریت ریسک به‌عنوان متغیر میانجی در شرکت‌های پذیرفته‌شده بورس اوراق بهادار تهران. ایران، تهران: نهمین کنفرانس بین المللی اقتصاد، مدیریت و حسابداری با رویکرد ارزش آفرینی.
  4. رسفیجانی، سعید؛ و دهقان، عبدالمجید (۱۴۰۰) بررسی تأثیر حاکمیت شرکتی بر عملکرد مالی با توجه به نقش میانجی پایداری شرکت در بانک‌های خصوصی. مهندسی مالی و مدیریت اوراق بهادار، 12(47)، 188-209.
  5. سعدی، یاسر (۱۳۹۵) تأثیر حاکمیت شرکتی بر عملکرد بانک‌های پذیرفته‌شده در بورس اوراق بهادار تهران (پایان‌نامه کارشناسی ارشد). مؤسسه آموزش عالی روزبهان، تهران، ایران.
  6. کمیجانی، اکبر (1382). ارزیابی عملکرد سیاست خصوصی‌سازی در ایران. ایران، تهران: وزارت ‌امور اقتصادی ‌و دارایی.
  7. مازندرانی، شیدا (۱۳۹۶). بررسی تأثیر ارتباطات سیاسی بر عملکرد مالی و ریسک در بانک‌های پذیرفته‌شده بورس اوراق بهادار تهران (پایان‌نامه کارشناسی ارشد). مؤسسه آموزش عالى لامعی گرگانی، تهران، ایران.
  8. نخعی، حبیب؛ و زهرایی، مریم (۱۳۹۶). بررسی رابطه بین ساختار مالکیت و عملکرد واسطه‌های مالی پذیرفته‌شده در بورس اوراق بهادار تهران. مطالعات کاربردی در علوم مدیریت و توسعه. 1(2)، 119-134.

 

Reference

  1. Asʿadī, ʿ-Reżā, & Abrī, M.-ʿA. (1399 SH/2020). Aṯar-e Sāḵtār-e Mālekīyat va Ḥākemīyat-e Šerkatī bar ʿAmalkard-e Bānk-hā [Effect of Ownership Structure and Corporate Governance on Banks’ Performance]. Eqteṣād-e Polī [Monetary Economics], 5(19), 223–248 [in Persian].
  2. Al-Amarneh, A.)2014), Corporate Governance, Ownership Structure And Bank Performance In Jordan, International Journal of Economics & Finance, 6(6).
  3. Chen, H, Liao, Y, Lin, C, &Yen,J(2018)The Effect of the Political Connections of Government Bank CEOs on Bank Performance during the Financial Crisis.Journal of Financial Stability https://doi.org/10.1016/j.jfs.2018.02.010.
  4. Dagnaw D, Y and Wang, M. (2017), Ownership and profitablitiy: Evidence from Ethipian banking sector, Journal of Scientific and Research Publications, 7(2), Feb. 2017.
  5. Komījānī, A. (1382 SH/2003). Arzyābī-ye ʿAmalkard-e Sīāsat-e Ḵoṣūṣī-Sāzī dar Īrān [Evaluation of Privatization Policy Performance in Iran]. Iran, Tehran: Wezārat-e Omūr-e Eqteṣādī va Dārāʾī [Ministry of Economic Affairs & Finance] [in Persian].
  6. Raǧabī, M. (1398 SH/2019). Taʾṯīr-e Ḥākemīyat-e Šerkatī bar ʿAmalkard-e Šerkat bā Dar Nazar Gereftan-e Modīrīyat-e Risk be-ʿOnvān-e Mottaḡayyer-e Miyānjī dar Šerkat-hā-ye Pazīrafte Šode dar Būrs-e Orāq-e Bahādār-e Tehrān [Effect of Corporate Governance on Firm Performance Considering Risk Management as a Mediator Variable in TSE Listed Companies]. Iran, Tehran: Nohemīn Konferāns-e Beynolmelalī-ye Eqteṣād, Modīrīyat va Ḥesābdārī bā Rūykard-e Arzeš Āfarīnī [9th Int. Conference on Economics, Management & Accounting with Value-Creation Approach] [in Persian].
  7. Rasfīǰānī, S., & Dehqān, ʿ-M. (1400 SH/2021). Barrasī-ye Taʾṯīr-e Ḥākemīyat-e Šerkatī bar ʿAmalkard-e Mālī bā Tavaǰǰoh be Naqš-e Miyānjī-ye Pāydārī-ye Šerkat dar Bānk-hā-ye Ḵoṣūṣī [Effect of Corporate Governance on Financial Performance Considering Firm Sustainability as a Mediator in Private Banks]. Mohandesī-ye Mālī va Modīrīyat-e Orāq-e Bahādār [Financial Engineering & Securities Management], 12(47), 188–209 [in Persian].
  8. Saʿdī, Y. (1395 SH/2016). Taʾṯīr-e Ḥākemīyat-e Šerkatī bar ʿAmalkard-e Bānk-hā-ye Pazīrafte Šode dar Būrs-e Orāq-e Bahādār-e Tehrān [Effect of Corporate Governance on Performance of TSE Listed Banks] (Master’s thesis). Moʾassese-ye Āmūzeš-e ʿĀlī-ye Rozbehān, Tehran, Iran [in Persian].
  9. A. (2021). State ownership and bank performance: conventional vs Islamic banks. https://www.emerald.com/insight/1759-0817.htm
  10. Taqī-Neǰāt, Ḡ., Baḥrī S̱āleṯ, Ǧ., & Qāderī, Q. (1397 SH/2018). Taʾṯīr-e Keyfīyat-e Ḥākemīyat-e Šerkatī bar ʿAmalkard-e Mālī-ye Bānk-hā bā Naqš-e Taʿdīlī-ye Keyfīyat-e Efšā [Effect of Corporate Governance Quality on Banks’ Financial Performance with Moderating Role of Disclosure Quality]. Moṭāleʿāt-e Mālī va Bānkedārī-ye Eslāmī [Islamic Finance and Banking Studies], 1(4), 127–151 [in Persian].
  11. Māzandarānī, Š. (1396 SH/2017). Barrasī-ye Taʾṯīr-e Ertebāṭāt-e Sīāsī bar ʿAmalkard-e Mālī va Risk dar Bānk-hā-ye Pazīrafte Šode dar Būrs-e Orāq-e Bahādār-e Tehrān [Effect of Political Connections on Financial Performance and Risk in TSE Listed Banks] (Master’s thesis). Moʾassese-ye Āmūzeš-e ʿĀlī-ye Lāmeʿī-ye Gorgānī, Tehran, Iran [in Persian].
  12. Naḵaʿī, Ḥ., & Zahrāʾī, M. (1396 SH/2017). Barrasī-ye Rabṭeh beyn-e Sāḵtār-e Mālekīyat va ʿAmalkard-e Vāseṭeh-hā-ye Mālī-ye Pazīrafte Šode dar Būrs-e Orāq-e Bahādār-e Tehrān [Ownership Structure and Financial Intermediaries’ Performance in TSE Listed Firms]. Moṭāleʿāt-e Kārبردī dar ʿOlūm-e Modīrīyat va Toseʿe [Applied Studies in Management & Development Sciences], 1(2), 119–134 [in Persian].
Volume 14, Issue 3 - Serial Number 33
February 2025
Pages 503-532
  • Receive Date: 11 October 2024
  • Revise Date: 12 January 2025
  • Accept Date: 12 January 2025