Deposit Insurance and Financial System Stability: A Comprehensive Analysis of Theory, Practice, and the Nigerian Exp

This article aims to provide a comprehensive analysis of deposit insurance schemes (DIS) as a fundamental component of financial stability, with particular focus on their theoretical foundations, historical evolution, operational design, and the Nigerian experience. The study adopts a qualitative, document-based methodological approach, synthesising seminal theoretical literature (including Diamond & Dybvig, 1983), contemporary empirical evidence from African economies (notably Kgari et al., 2025), institutional publications from the Nigeria Deposit Insurance Corporation (NDIC), and global standards from the International Association of Deposit Insurers (IADI). The key findings reveal that well-designed explicit deposit insurance systems significantly enhance banking sector stability by reducing profit volatility, mitigating contagion risks, and promoting financial inclusion; however, they also present inherent moral hazard challenges that require mitigants such as coverage limits, riskadjusted premiums, and exclusions of certain deposit categories. The Nigerian case study demonstrates that a riskminimiser mandate encompassing deposit insurance, supervision, resolution, and liquidation functions—as operationalised by the NDIC since 1988—has achieved over 99 per cent depositor coverage following the May 2024 coverage increases, while maintaining systemic resilience. Based on these findings, the article recommends that developing economies integrate deposit insurance within a robust institutional framework of prudential regulation and effective bank supervision; implement risk-adjusted premium systems to curb moral hazard; strengthen public awareness campaigns to enhance depositor understanding; and align national schemes with IADI Core Principles to facilitate international cooperation. The primary limitation of this study is its reliance on aggregated country-level data and institutional publications, which may not capture institution-specific risk behaviours or informal banking sector dynamics. Consequently, suggestions for further studies include empirical investigations into the causal relationship between deposit insurance generosity and bank risk-taking at the individual bank level in African economies, comparative analyses of risk-adjusted versus flat premium systems in developing contexts, and research examining the interaction between deposit insurance, fintech innovation, and financial inclusion in underserved populations.