Deposit insurance and credit risk of Nigeria banking system: a time series analysis

Abstract

This study examined the relationship between deposit insurance and nonperforming loans ratio of Nigeria banking system. Time series data were sourced from the publications of Nigeria deposit Insurance Corporation, Central Bank of Nigeria, and Stock Exchange Factsheet. Nonperforming loan ratio was measure for dependent variable while deposit in insurance was proxied by insured deposits and risk based premium. Ordinary Least Square (OLS), Augmented Dickey Fuller Test, Johansen Co-integration test, normalized Co-integrating equations, parsimonious vector error correction model and pair-wise causality tests were used to conduct the investigations and analysis.  The study found that 63.5 percent of variation in the level of nonperforming loan ratio is explained by variations in insured deposits and risk-based premium. Insured deposits and risk-based premium have a negative relationship with the level of bank distress. From the findings, we conclude that Nigeria deposit insurance has a moderate relationship with commercial banks stability. From the findings, we recommend that role of deposit insurance in eliminating costly bank runs should be is widely recognized. Nigeria Deposit Insurance Corporation should adopt the more sophisticated differential premium assessment system (DPAS) where risk is explicitly considered in assessing premium payable by insured institutions, and Nigeria Deposit Insurance Corporation should protect bank deposits in Nigeria and improve to a large extent insured deposit of the deposit money banks deposit in the short run and long run to avert the cases of bank failure.