An Investigation Into the Role of Deposit Insurance in Kenya's Banking Sector Stability

Abstract

This paper focuses on the relationship between deposit insurance and systemic stability in the banking system, drawing on the Kenyan experience. Specifically the paper seeks to establish whether the introduction of the Deposit Protection Fund (DPF) has had a positive or negative effect on Kenya's Banking Sector stability The study focused on two sets of time periods i.e. Pre-DPF (1969-1985) and Post-DPF (1986-2002) periods. A 2 group experiment design was used to compare the general levels of fragility for the two time periods. The study finds that the level of banking sector stability is higher in the Pre- DPF than during the Post-DPF period. Overall results indicate that banking sector fragility is very high - level IV - the class with the highest level of fragility.