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Banking system has a critical role in economic growth and development processes through two channels, investment fInancing and technological innovations. In this article through financial development indicators, it is examined that Iranian banking system does not completely perform such roles. Also, by applying institutional approach, The article explains how eliminating contractual interest rate following usury free transactions, leads to increase the banking transactions costs, and then shows that existing banking laws and regulation lacks required integrity and consistency for motivating specific forms of banking transactions (i.e. usury free transactiQns). In addition, the study reveals that, Iranian banking system suffers from weak governance structures, independent control system, and ruled by non-market adaptation mechanism. All these factors distort efficiency of Iranian banking system.
JEL Classification: B52, G21, G28, G38.