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

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.

Citation

Egbuna, E., Oduh, M., Ujunwa, A. and Okoyeuzu, C. (2018), "Does deposit insurance promote moral hazards and adverse selection? Evidence from Sub-Saharan Africa", International Journal of Managerial Finance, Vol. 14 No. 2, pp. 150-169. https://doi.org/10.1108/IJMF-10-2016-0196