THE IMPACT OF DEPOSIT INSURANCE SCHEME ON BANK INTERMEDIATION IN NIGERIA

TABLE OF CONTENTS

Title Page

Declaration

Approval Page

Dedication

Acknowledgments

Abstract

Table of Contents

List of Tables

List of Figures

Chapter One: Introduction

1.1       Background of the Study

1.2       Statement of the Problem

1.3       Objectives of the Study

1.4       Research Questions

1.5       Research Hypotheses

1.6       Scope of the Study

1.7       Significance of the Study References

Chapter Two: Review of Related Literature

2.1       Theoretical Review

2.1.1    Economic Theory of the Financial System

2.1.2    Theoretical Basis for Deposit Insurance

2.1.3    Theoretical Nexus of Growth and Financial Structure of Banks

2.1.4    Theoretical Rationale for Deposit Insurance in an Economy

2.1.5    Agency Theory of Financial Intermediaries

2.1.6    The Cost Implication of Banking System Crises

2.2       Empirical Review

2.2.1    The Role of Institutions in the Financial Sector

2.2.2    Banking Sector Instability and Deposit Insurance

2.2.3    Deposit Insurance and Market Discipline

2.2.4    Deposit Insurance and the Financial Safety Net

2.2.5    Deposit Insurance and Private Investors’ Perception

2.2.6    Deposit Insurance and Financial System Development

2.2.7    Moral Hazard and Deposit Insurance

2.2.8    Deposit Insurance and Bank Risk Taking

2.3       Review Summary

References

Chapter Three: Research Methodology

3.1       Research Design

3.2       Nature and Sources of Data

3.3       Model Specification

3.4       Explanatory Variables

3.4.1    Dependent Variables

3.4.2    Independent Variable

3.4.3    Control Variables

3.5       Techniques of Analysis

References

Chapter Four: Presentation and Analysis of Data

4.1       Presentation of Data

4.2       Test of Hypotheses

4.2.1    Test of Hypothesis One

4.2.2    Test of Hypothesis Two

4.2.3    Test of Hypothesis Three

4.3       Implication of Results References

Chapter Five: Summary of Findings, Conclusion and Recommendations

5.1       Summary of Findings

5.2       Conclusion

5.3       Recommendations

5.4       Contribution to Knowledge

5.5       Recommendation for Further Studies Bibliography

Appendix

ABSTRACT

The impact of the 2008 global financial crisis on many economies has re-affirmed the need to protect the financial system from shocks, both from endogenous and exogenous sources. Consequently, policymakers and regulators in many countries have implemented various drastic regulatory measures to prevent their financial systems from meltdowns, and to avert deep economic downturns. Measures adopted include government takeover of banks or capital injections, interest rate cuts, subsidies to ailing sectors, and bank deposit guarantees. Among all these, the deposit insurance scheme has generated much interest among the academia and policy makers. Literature abounds with studies conducted on the implications of deposit insurance scheme for different economies. However, most of these works have been concentrated on the developed world, such as the United States of America and the Eurozone economies. It is, therefore, against this background that this study determined whether the presence of a deposit insurance scheme improves the quality of bank deposits in Nigeria, assessed if the presence of a deposit insurance scheme has any significant impact on the quality of bank assets in Nigeria, and examined if the presence of a deposit insurance scheme exacerbates systemic risk in the Nigerian banking industry. The study adopted the ex-post facto research design. Annual time series data were collated from Central Bank of Nigeria (CBN) Statistical Bulletins and Nigeria Deposit Insurance Corporation (NDIC) annual reports for the period, 1990 - 2012. Three (3) hypotheses, which state that (i) the presence of a deposit insurance scheme does not have a positive and significant impact on the quality of bank deposits in Nigeria, (ii) the existence of a deposit insurance scheme has no positive and significant impact on the quality of bank assets in Nigeria, and (iii) the presence of a deposit insurance scheme has no positive and significant impact on systemic risk in the Nigerian banking industry; were formulated and tested using the Ordinary Least Squares (OLS) regression model where total bank insured premium (TBIP) was adopted as the independent variable and total banking sector deposit (TBD), total bank assets (TBA) and bank systemic risk (BSR) were the dependent variables. Growth rate of gross domestic product (gdpgr), inflation rate (Infr), interest rates (intr), exchange rate depreciation (xrdepr) and ratio of M₂ to foreign reserves (M₂fr) were used as control variables. Descriptive statistics on the dependent, independent and control variables were also computed and graphed to complement the regression results. Findings from the study revealed that the presence of deposit insurance scheme had positive and significant impact on bank deposits and total bank assets of deposit money banks in Nigeria. However, the presence of deposit insurance scheme had positive but non-significant impact on the systemic risk of deposit money banks in Nigeria. The study thus concludes that the presence of deposit insurance scheme in Nigeria is a major boost to financial institutions in Nigeria and should be supported by government through the enhanced powers of the regulatory authorities. This will ensure increased confidence in the Nigerian Banking sector by all stakeholders, especially depositors. We recommend, amongst others, that there should be a risk (cost) minimizer mandate for the Nigerian Deposit Insurance Corporation. This will contribute to the stability of the financial sector thereby reducing systemic risk.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The impact of the 2008 global financial crisis on many economies re-affirmed the need to protect the financial system from shocks, both endogenous and exogenous. Consequently, policymakers and regulators in many countries implemented various drastic regulatory measures to rescue their financial systems from meltdowns, and to avert deep economic downturns (Dermiguc-Kunt & Kane, 2003; Cobbinah & Okpalaobieri, 2009; Massa & Willem te Velde, 2008; Berkmen et al, 2009). Measures adopted include government takeover of banks or capital injections, interest rate cuts, subsidies to ailing sectors, and bank deposit guarantees. Among all these, the deposit insurance scheme has generated much interest among scholars and policy makers (Campbell et al, 2009; Mbarek & Dorra, 2011; Chu, 2011).

In every economy, the financial sector occupies a strategic position because of the important function it plays in the flow of funds. Economists have long recognised that financial markets in general, and banks in particular, play a vital role in the efficient functioning and development of any economy (Guzman, 2000).Finance is relevant for growth and development because efficient financial systems resolve agency problems better, thus enabling firms to borrow at cheaper rates and invest more. In addition, finance also plays a major role in the structural transformation of less developed economies characterised by moderate industrialisation, and where small-to-medium scale enterprises dominate (Chakraborty & Ray, 2006).

As a rule, economic activities increase when savings-surplus units are able to channel funds to the savings-deficit units. This intermediation role of the financial sector actually provides the basis for capital formation and other activities necessary for economic growth. Literature is replete with studies carried out in the finance-growth nexus. Levine (1997) suggests that finance promotes growth principally by the efficiency of capital allocation, and not necessarily by increasing investment. Chandrasekhar (2002) emphasises this by pointing out that financial structures and financial institutions have been acknowledged in literature as having assisted disadvantaged economies to leverage on existing productive capacities. The consensus view of......

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