LIQUIDITY AND DEPOSIT INSURANCE: THE CASE OF DEPOSIT-TAKING MICROFINANCE INSTITUTIONS IN LOW INCOME SUB-SAHARAN AFRICA

Back to Page Authors: Zibusiso Moyo, Sophia Mukorera, Phocenah Nyatanga

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Keywords: liquidity, deposit insurance, DTMFIs, LISSA

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Abstract: Operating with adequate levels of liquidity in depository microfinance is essential because microdepositors are exposed to loss of their hard-earned, small and variable savings to Deposit-taking Microfinance Institutions (DTMFIs) when these financial intermediaries default in meeting their withdrawals on deposits, wholly or timeously. Adoption of explicit deposit insurance schemes that engulf depository microfinance products and services could be one of the plausible safeguards against unexpected and panic withdrawals, run-away depositors and contagion risk. Therefore, the objective of this paper is to investigate the relationship between the adoption of explicit deposit insurance and liquidity in the depository microfinance sector of the Low Income Sub-Saharan Africa (LISSA) countries. A 12-year panel dataset for the years 2006 to 2017 extracted from the Microfinance Information Exchange (MIX) of 64 DTMFIs selected across 18 LISSA countries was utilized. The estimated random effects model results revealed that explicit deposit insurance is significantly positive with liquidity. This signifies that in an attempt to minimize the oblivion of microdepositors’ savings by defaulting DTMFIs, the LISSA regulators ought to design and implement explicit deposit insurance schemes that embrace the deposit products of the DTMFIs operating within their jurisdictions. Furthermore, the study also found out that the adoption of the Basel’s framework on capital adequacy standards is significantly positive with liquidity. This implies that adherence to capital adequacy standards also helps to mitigate liquidity risk in depository microfinance.

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