As societies increasingly grapple with challenges to social cohesion, forgiveness, and the restoration of interpersonal trust, understanding the factors that shape ethical behavior has gained significant importance. Within this context, the role of religious structures and Islamic institutions, as norm-setting entities in Iranian society, represents a critical axis for social policy-making. Accordingly, this study investigates the non-linear effects of institutional Islamicity on the propensity to forgive in Iran from 2012 to 2023, utilizing quarterly data and employing the Non-Linear Autoregressive Distributed Lag (NARDL) approach for analysis. The results indicate that the impact of increases and decreases in institutional Islamicity on forgiveness is asymmetric, meaning society reacts differently to these two types of changes. The Wald test confirms these asymmetric effects in both the short and long run. In the short term, an increase in institutional Islamicity has a positive effect on forgiveness, while a decrease has a negative effect. In the long term, the positive increasing component exerts a stronger influence than the negative decreasing component. These findings suggest that strengthening the religious components within formal institutions plays an effective role in promoting a spirit of forgiveness and sustaining social capital, thereby providing a foundation for social policy-making in Iran.