Okocha said this against the backdrop of claims linking the Nigerian international with a loan move away from Emirates following his recent relegation to the U23 team by Arsene Wenger.
After regularly starting earlier in the season, Iwobi, 20, has found opportunities harder to come by in 2017.
“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,” he 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.”
But former Bolton midfielder Okocha, who will be playing for Nigeria at the Star Sixes tournament at The O2 in July, thinks staying at Arsenal would be best for Iwobi.
Okocha will be one of a host of former Premier League stars competing at Star Sixes in July.
Steven Gerrard, Carles Puyol, Michael Ballack, Deco and Robert Pires will also be in action at the indoor six-a-side tournament.
“I’m very excited for it,” said Okocha. “I think I will be in my comfort zone.
“Everybody is looking forward to showing that we can still play a little bit. There are a lot of good players and it will be interesting.
“It’s all about meeting old colleagues, having fun and competing again without too much pressure. It’s going to be fun.”