Title: Assessing the cost of deposit insurance and moral hazard effect: evidence from banking sector in Sudan

Authors: Ibrahim A. Onour

Addresses: School of Management Studies, University of Khartoum, P.O. Box 321, Khartoum, Sudan

Abstract: The purpose of this paper is to evaluate the cost of deposit insurance premium and assess moral hazard behaviour in the banking sector in Sudan. The analysis of moral hazard in this paper is based on two types of risks, credit risk, and technical efficiency risk (managerial efficiency). The findings of the paper indicate credit risk is positively associated with deposit insurance coverage, and technical efficiency performance is negatively associated with deposit insurance coverage. Also indicated is that risk-based insurance premium is less than the fixed rate insurance premium (over-priced) for banks with pure technical efficiency performance. These results imply that when banks are characterised with managerial inefficiency the deposit insurance system can incite moral hazard behaviour. An additional finding of the paper indicates that, when banking sector is classified into national, foreign, and mixed ownership classifications, risk-based average deposit insurance premium is close to the average credit risk in each group.

Keywords: deposit insurance; moral hazard; credit risk; technical efficiency risk; managerial efficiency; Sudan; banking sector; insurance premium.

DOI: 10.1504/AAJFA.2014.064175

Afro-Asian Journal of Finance and Accounting, 2014 Vol.4 No.3, pp.339 - 348

Received: 12 Aug 2013
Accepted: 28 Apr 2014

Published online: 01 Aug 2014 *

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