University of Khartoum

Pricing Deposit Insurance Premium in Islamic Banks

Pricing Deposit Insurance Premium in Islamic Banks

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Title: Pricing Deposit Insurance Premium in Islamic Banks
Author: Onour, Ibrahim A.
Abstract: Due to frequent global fnancial crisis in the past 15 years, deposit insurance system attracted increasing attention of policy makers in the global banking industry. Deposit insurance aims to assure depositors that if their banks fail for any reason, their funds will be protected up to the limits on coverage. Demirguc-Kunt et al. (2005) show that most countries provide deposit insurance. The design of this part of the fnancial safety net differs across countries, especially in account coverage. Despite criticism, the usefulness of option pricing models based on Merton (1977) model for evaluating deposit insurance is the basis for many studies and application for pricing deposit insurance Most of the empirical literature on deposit insurance has focused either on the issue of over- or underpricing of deposit insurance or on how different design features affect the effectiveness of deposit insurance. Deposit insurance is considered overpriced (underpriced) if the deposit insurer charges more (less) for its insurance service than the cost of these services. Moreover, a growing number of studies have considered various factors such as dividend payout, interest rate risk, bankruptcy cost, regulatory forbearance, or closure policies based on the original Merton (1977) model; among others are Marcus and Shaked (1984), Ronn and Verma (1986), Duan et al. (1995), So and Wei (2004), Hwang et al. (2009), and Duan and Yu (1994, 1999). Islamic deposit insurance is an arrangement to protect insured depositors against the loss of their insured Islamic deposits placed with Islamic banking institutions. The research on Islamic deposit insurance is still very primary as published research in this area up till now is confned to conceptual framework and its permissibility from Shari’ah perspective.1 As to the best of my knowledge, the current paper is the frst in its kind dealing with empirical aspect of deposit insurance system in Islamic banks.2 The aim of this paper is to extend the empirical literature of pricing deposit insurance to Islamic banking system, which differ from the conventional banking system, in vulnerability to credit risk. As a result, the paper aims to fll part of this void by assessing empirically the deposit insurance premium of Islamic banking system of different environments. This paper aims to determine the cost of deposit insurance premiums in a number of Islamic banks operating in GCC, Malaysia, and Bangladesh to assess the appropriate insurance policy in each country with regard to risk-based versus flat rate premium policy. As further extension of this research it is possible to utilize the fndings of this research, the cost of deposit insurance premium, to assess moral hazard behavior in Islamic banks. The remaining parts of this chapter are structured as follows. Section 7.2 highlights models of Islamic deposit insurance. Section 7.3 illustrates the methodology of the research as well as the empirical analysis. Section 7.4 provides the conclusion.
URI: http://khartoumspace.uofk.edu/123456789/27614
Date: 2019


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