The development in financial and banking sectors is an integral part of economic growth and development. The experiences of many developing countries show that reform driven policy in finance and banking system enhances economic prosperity and removes the macro investment impediment. This Paper evaluates the impact of Linearization policies (or financial restriction) and also changes in real interest rate on deposit and credit of financial sector development in Iran, over the period 1969-2003. The results show that there is a significant and negative relationship between restriction (and reserves control) and financial development. Also, there is significant relationship between changes in banking real interest rate (credit and deposit) and financial development. While the increase in real interest rate on informal markets leads to demand transfer from informal market to formal market and consequently towards the expansion of financial market in Iran. Therefore, low real interest rate, with regard to other policy considerations, would cause increase in potential investment and will improve the proper use of resources in the economy.

Keywords: Iran, Financial Development, Interest Rate, Financial Linearization

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