The Impact of Economic Growth on the Credit Risk of Iranian Banks: Evidence from a Nonlinear Smooth Transition Regression Approach
Keywords:
: Credit Risk, Banking System, Economic GrowthAbstract
This study aimed to investigate the nonlinear effect of economic growth on the credit risk of Iranian public and private banks. This applied analytical study employed panel data obtained from Iranian public and private banks over the period 2011–2023. The required data were collected through documentary and library-based methods from financial statements published by the Securities and Exchange Organization, the Comprehensive Database of All Listed Companies, and the Central Bank of the Islamic Republic of Iran. Credit risk was measured using the ratio of non-performing and overdue claims to total bank assets. Economic growth was considered the principal explanatory variable, while capital adequacy, liquidity, capital quality, and total bank assets were incorporated as control variables. A Panel Smooth Transition Regression model was used to capture potential nonlinearities. The presence of a threshold effect was examined using a Lagrange Multiplier test with 1,000 bootstrap replications. Data analyses were performed using EViews, Stata, and Excel. The Lagrange Multiplier test rejected the null hypothesis of linearity and confirmed a significant threshold structure in the relationship between economic growth and bank credit risk (LM=426.37, p<0.001). The estimated economic growth threshold was −1.3402. Capital adequacy had a positive and significant effect on credit risk (β=0.1391, p=0.001). Liquidity (β=0.0117, p<0.001) and capital quality (β=0.6342, p<0.001) also positively and significantly affected credit risk. Conversely, total bank assets exerted a negative and significant effect on credit risk (β=−0.2139, p<0.001). Economic growth significantly reduced bank credit risk in both the first regime (β=−2.8765, p=0.002) and the second regime (β=−2.9632, p=0.002). The relationship between economic growth and the credit risk of Iranian banks is nonlinear and regime-dependent. Higher economic growth reduces credit risk under both identified regimes. Accordingly, aligning economic growth policies with macroprudential supervision, prudent liquidity management, effective capital management, and improvements in banks’ asset structures may reduce non-performing claims and strengthen banking-system stability.
Downloads
References
Ahmadi, K., & Kazemi, M. (2025). Analysis of the Effect of Financing Structure and Credit Risk on the Performance of Iranian Banks. Islamic Banking Studies Quarterly, 18(1), 55-78.
Dang, V. D. (2022). Bank Liquidity Creation under Micro Uncertainty: The Conditioning Role of Income Structure. Economic Modelling, 112, 105852. https://doi.org/10.1016/j.econmod.2022.105852
Deng, A. S., Rono, L., & Sang, J. (2020). Credit Risk Management and the Performance of Financial Institutions in South Sudan. Modern Economy, 11(3).
Esna-Ashari Amiri, G., Abolhasani Hastiani, A., Ranjbar Fallah, M., Shayegan, A., & Alizadeh Kolahgar, G. (2019). The Effect of Liquidity Volume on Economic Growth in Iran Using a Time-Varying Parameter Model Approach. Scientific-Research Quarterly of Growth and Financial Economy Research, 35(2), 15-34.
Farahikia, M., Yarmohammadi, M., Hasani, H., & Shadrokh, A. (2021). The Sensitivity of Non-Current Claims to Economic Growth in Iran Using Singular Spectrum Analysis and Regression Approaches. Quarterly Journal of Growth and Financial Economy Research, 11(44), 163-184.
Heydari, H., Haghighat, J., Karimi Takanlou, Z., & Ranjpour, R. (2020). Presenting a Strategy for Managing Iran's Bank Interest Rate within the Framework of Financial Development and Financial Repression Theories. Scientific-Research Quarterly of Economic Growth and Development Research, 10(38), 31-44.
Jiang, L., Levine, R., & Lin, C. (2019). Competition and Bank Liquidity Creation. Journal of Financial and Quantitative Analysis, 54(2), 513-538. https://doi.org/10.1017/S0022109018000820
Kanas, A., Vasiliou, D., & Eriotis, N. (2025). Credit risk and profitability in banking: Evidence from international banks. Research in International Business and Finance, 72, 102260. https://doi.org/10.1016/j.ribaf.2024.102260
Kohzadi Tahneh, A. (2020). Study of the Relationship between Credit Risk and Profitability of Iranian Commercial Banks. Sixth International Conference on Management and Accounting, Tehran.
Le, T. D., & Pham, X. T. (2021). The Inter-Relationships among Liquidity Creation, Bank Capital and Credit Risk: Evidence from Emerging Asia-Pacific Economies. Managerial Finance, 47(8), 1149-1167. https://doi.org/10.1108/MF-04-2020-0189
Mousavi Ivanki, S. M., Fallah Shams, M., & Hanifi, F. (2025). Presenting a Risk-Based Supervision Model for Banks and Credit Institutions Using Structural Equation Modeling. Scientific Quarterly Journal of Islamic Economics and Banking(50), 165-206.
Nedumparambil, E., & KumarBhandar, A. (2020). Credit Risk-Return Puzzle: Evidence from India. Economic Modelling, 92(4), 195-206. https://doi.org/10.1016/j.econmod.2019.12.021
Ovi, O., Bose, S., Gunasekarage, A., & Shams, S. (2020). Do the Business Cycle and Revenue Diversification Matter for Banks' Capital Buffer and Credit Risk: Evidence from ASEAN Banks. Journal of Contemporary Accounting & Economics, 16(1). https://doi.org/10.1016/j.jcae.2020.100186
Plikas, J. H., & Kenourgios, D. (2026). Renewable Energy and Bank Credit Risk: The Mediating Role of Economic Growth. Economic Modelling, 107576. https://doi.org/10.1016/j.econmod.2026.107576
Pourmehr, M., Sepahdoust, H., Naziri, M. K., & Mehregan, N. (2018). The Effect of Macroeconomic Variables and Management Quality on the Profitability of Private Banks: A Structural Vector Autoregression Approach. Economic Modeling Research Quarterly, 9(34), 201-254.
Pournajati, M., & Houshmand Neghabi, Z. (2021). The Effects of Shadow Banking on Bank Risk and Capital Adequacy in Banks Listed on the Tehran Stock Exchange. Accounting and Management Perspective, 4(41), 13-28.
Qwader, A. (2019). Relationship between Macroeconomic Variables and Their Impact on Nonperforming Loans in Jordanian Banks. Asian Economic and Financial Review, 9(2), 166-175. https://doi.org/10.18488/journal.aefr.2019.92.166.175
Singh, A. (2020). Using Commercial Mortgage Loans to Assess Risk and Return in the Lodging Sector. Tourism Management, 78(2). https://doi.org/10.1016/j.tourman.2019.104068
Song, M., Zheng, H., Chen, J., & Shen, Z. (2023). Alternative Risk Measurement for the Banking System and Its Nexus with Economic Growth. Computers & Industrial Engineering, 176(2), 1-10. https://doi.org/10.1016/j.cie.2022.108946
Temba, G. I., Kasoga, P. S., & Keregero, C. M. (2024). Impact of the quality of credit risk management practices on financial performance of commercial banks in Tanzania. SN Business & Economics, 4(3), 38. https://doi.org/10.1007/s43546-024-00636-3
Wojewodzki, M., Boateng, A., & Brahma, S. (2020). Credit Rating, Banks' Capital Structure and Speed of Adjustment: A Cross-Country Analysis. Journal of International Financial Markets, Institutions and Money, 69(4). https://doi.org/10.1016/j.intfin.2020.101260
Yāvarī, A., Jabbārī, H., & Panāhiyān, H. (2025). Designing a Credit Risk Management Model with a Pathological Approach to Guarantees and Collaterals of Bank Facilities. Technology in Entrepreneurship and Strategic Management Quarterly, 4(2), 1-22. https://doi.org/10.61838/kman.jtesm.4.2.11
Zaligi Darastani, H. (2018). Factors Affecting Stability in Iran's Banking Network. Monetary and Banking Research Quarterly, 20(2), 307-327.
Zolghadr, H., Asgharpour, H., Pourabdollahan, M., Salmani, B., & Farzinvash, A. (2019). Examining the Role of Bank Ownership in the Effect of Bank Credits on Economic Growth with Regard to Provincial Income Levels. Scientific-Research Quarterly of Economic Growth and Development Research, 9(32), 15-33.
Downloads
Published
Submitted
Revised
Accepted
Issue
Section
License
Copyright (c) 2025 Hojat Talebi (Author); Habib Aghajani (Corresponding author); Zahra Karimi (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
