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