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

Eunice Egbuna, Moses Oduh, Augustine Ujunwa () and Chinwe Okoyeuzu

International Journal of Managerial Finance, 2018, vol. 14, issue 2, 150-169

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.

Keywords: Adverse selection; Moral hazard; Deposit insurance; Stereotype logit (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-10-2016-0196

DOI: 10.1108/IJMF-10-2016-0196

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