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Does deposit insurance promote moral hazards and adverse selection? Evidence from Sub-Saharan Africa

Author

Listed:
  • Eunice Egbuna
  • Moses Oduh
  • Augustine Ujunwa
  • Chinwe Okoyeuzu

Abstract

Purpose - The purpose of this paper is to examine the likelihood that the presence of the deposit insurance policy encourages risk appetite behavior of banks in Sub-Saharan African (SSA). It argues that financial system stability is not a function of the choice of a deposit insurance scheme, but countries' peculiarities such as quality of institutions and the macroeconomic environment. Design/methodology/approach - The study used the stereotype logit regression model and covers 47 SSA countries. Countries are categorized into two: explicit and implicit DIP scheme. Findings - The study found that corrupt countries are more likely to adopt the implicit policy, while the explicit policy exposes them to credit risk, insolvency, and negative macroeconomic shocks, a reflection of weak institutions and unhealthy competition. Research limitations/implications - Paucity of substantial local literature on institutional perspective of deposit insurance (DI) constitutes the major limitation of this study. Practical implications - The sub-region, therefore, faces a conundrum - desiring a deposit insurance scheme, but lacking the required institutions to maintain either a publicly owned regulatory system or the ability to transplant the private club model. Originality/value - This study contributes to the institutional perspective of DI from SSA institutional perspective.

Suggested Citation

  • Eunice Egbuna & Moses Oduh & Augustine Ujunwa & Chinwe Okoyeuzu, 2018. "Does deposit insurance promote moral hazards and adverse selection? Evidence from Sub-Saharan Africa," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 14(2), pages 150-169, March.
  • Handle: RePEc:eme:ijmfpp:ijmf-10-2016-0196
    DOI: 10.1108/IJMF-10-2016-0196
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