Pricing Deposit Insurance and Assessing Moral Hazard Behavior: Evidence from Banking Sector in Sudan

Abstract

The purpose of this paper to evaluate the cost of deposit insurance premium and assess moral hazard behavior 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 indicates credit risk is positively associated with deposit insurance coverage, and technical efficiency performance is negatively associated with deposit insurance coverage. Also indicated that banks whose risk-based insurance premium is less than the fixed rate insurance premium (over-priced) are those banks with pure technical efficiency performance. These results imply when banks characterized with managerial inefficiency deposit insurance system can incite moral hazard behavior. Additional finding of the paper includes when banking sector is classified into homogenous groups (national, foreign, and mixed ownership) risk-based average deposit insurance premium is close estimate to the average credit default risk for each group.