A CRITICAL EXAMINATION OF DEPOSIT INSURANCE COVERAGE IN SUB-SAHARAN AFRICA

Abstract

Most deposit guarantee schemes limit their protection to small depositors and leave large proportion of bank deposits unprotected in a bid to curtail moral hazard. The unprotected deposits largely belong to big depositors who are presumed to possess the resources to discern between good and weak banks and are expected to participate in monitoring banks. Yet these unprotected depositors have proven to be a source of financial instability which deposit insurance also seeks to guard against. This article critically examines the rationale for limited coverage in Sub-Saharan Africa. It analyses the peculiarities of this Region and questions the suitability of limited coverage in the Region. The study observed coverage levels among various countries and found that coverage levels are higher in developed economies than middle income countries, including SSA. Countries in SSA have weak regulatory institutions, poor data quality and low financial literacy which do not support private monitoring of banks. Accordingly, the capacity of depositors in this Region to monitor banks is diminished. It is pertinent to extend full coverage to all eligible deposits in SSA. This can encourage the growth of small scale deposit taking institutions, boost financial inclusion and reduce poverty. It can also reduce the risk of financial instability in the Region which large volume of uninsured deposits constitutes a threat to.