The 20-year-old who was an unused substitute against Middlesbrough, has dropped in the pecking order in Arsene Wenger's team despite making 24 appearances this season, 11 more than the his debut season in the league.
Okocha praised the Nigerian forward for his achievements with the Gunners since his first team breakthrough last season, and admitted that Iwobi faces a stiff competition compared to the previous season when most players were out of action due to injuries.
"We can't forget that this is his first full season in the first team and Arsenal have all their players back now. There's a lot of competition, so it's not easy," Okocha told Sky Sports.
"He has had a good season. It's not easy to make it through from the academy into the first team at such a big club. He has achieved this and has been phenomenal; I am delighted with what he has achieved so far.
"I think it's better for him to stay at Arsenal, because the style of play suits him perfectly. It might not be easy for him to go on loan and adapt somewhere else. He needs to stay and fight for his shirt."