OPINION: Putting Banks’ Windfall Profits Tax To Good Use
In the past week, it was reported that Nigerian Banks will pay from their profits a total of N819bn as Income Tax, for the 7 banks that have published their audited Financial statements, this year.
About 27 per cent( N223bn) of this, will be “Windfall profits Tax” as levied by the Government and passed into law by the National Assembly .
This tax applies specifically to foreign exchange gains made in 2023 and 2024 as a result of the floating of the Naira. While some have criticized the extra tax as punitive, it is clear these earnings were largely a result of policy change not operational performance.
Two things stand out from this, those who did not agree with the government on this extra ordinary tax levy, will moderate their stand, given the blow-out profits our Banks have reported for the year 2024.
The very loud criticism of the past few days, after Banks released their results, where, some claim, that for an economy, that is struggling as ours, these blow – out profits are scandalous. This extra – ordinary tax, levied on Bank’s profits, for this year, should be sufficient to blunt the criticism.
Shareholders of these Banks, can also not complain, as the dividends declared so far, has also matched expectations, given the blow-out profits.
Key Strategy- Funding Risk Capital.
The second issue should be how to put this extra ordinary tax receipts, to work for the Nigerian people. This tax is not recurring, that is why it is extra ordinary. It should also be used for extra ordinary things. It should not be lumped with our general tax revenues for this year.
To do this, will be to distort revenue figures for this year. Its use, should also be appropriated to do measurable things, that contribute to longterm growth of the economy. One such option would be to give this money to the African Development Bank’s( AfDB ) proposed “Investment Bank” for startups in Nigeria, to fund young entrepreneurs. This will make for meaningful use. It will also mean, planting a good seed for the future growth of our economy. The surviving companies from these startups ventures , to be funded, will in the future be generating returns far beyond the initial investment.
Using it this way, will avoid the way, we have used the unexpected recoveries from corruption, where Nigerians were left wondering where the money went. No one can point to any important project built from those large recovered proceeds of crime. We should do this differently this time, we should use it , as seed money, to plant seeds of future growth, that has a potential to grow the economy, create jobs for young people, allow them to put their innovation to work and in the future, contribute meaningfully to the Tax base, and make the windfall Tax, a fountain that will keep giving.
Missing Link – To Entrepreneurial Ventures Here.
It has been said, times without number, that the difference between aspiring enterprise startups in Africa, and other climes, particularly in the USA, is the availability of Capital to back up the ideas of young people. There is no doubt that our young people here, have talent but the capital to back them up is lacking.
To do this, we will need meaningful startup capital that is pure risk capital, not loans or those politically motivated public field disbursements, they call empowerment programs, which cannot stand the test of time.
The enterprises to be supported, must be rigorously vetted and must pass a 50 per cent chance of success.
The process, must treat funding, as a business decision, free, of the usual political favors or corruption induced grants , that make those who benefit, see it, as their share of the National cake. This is why channeling this windfall Tax to the African Development Bank, makes sense , as additional seed capital, to add to their proposed funding.
Adding this money, that has no strings tied to it, with AfDB’s own contribution, will make this capital outlay, for this venture, meaningful. It will greatly expand the funding base for many entrepreneurial ideas from young Nigerians. Because it is the African Development Bank, it will be expected to have all the hallmarks of high standards, good governance, and credibility that will produce excellent results. It frees the Government from the attempt to start another institution , where the supervising Ministries’ first priority, will be to buy many SUVs they will claim, is for supervision , and the contracts they will give, just to set up this institution.
Giving the money to an established institution like the AfDB, that has already expressed its desire to set up a Bank like this, that will strictly be used to support young people, who need risk capital, will be the right thing to do.
The only hold on the enterprises to be funded, will be an equity stake of not more than 30 per cent to the Government, that can be bought back by the enterprise sponsors or sold to the Nigerian investing public, anytime they are ready to publicly list as a public company.
AfDB president Dr. Akinwumi Adesina recently talked about the importance of Risk capital to support Entrepreneurship… he correctly situated the fact that our Banks, especially ( Commercial Banks ) are not adequately structured to provide risk capital …the earlier Merchant Banks had some tilting to project Finance in their earlier incarnation, the current variants, are just smaller commercial Banks.
The present day Merchant Banks in Nigeria, are conveniently avoiding the higher Capital requirement for Commercial Banks. They do exactly what commercial Banks do, and no longer provide Longterm capital for projects. Merchant Banks use to have Longterm multi – year deposits and loans. Everything, is now short term . This near absence of Longterm deposits for Banks here, also restricts their ability to adequately support high risk entrepreneurial undertakings.
Banks are actually not ideal for financing risky undertakings. I remember Mr Atedo Peterside, that genius Banker , once told us in one of our credit meetings when we worked at the then NAL Merchant Bank, where he was head of the credit and marketing department, that he is always amused, when people complain that our Banks don’t like to take risks, he said Banks are set up to avoid risks, not take it, because they manage deposits for the public.
They cannot be taking risks, that can potentially lose depositors money. That quip stayed with me . Those Monday morning Credit meetings, where some of the best brains in the Bank, gathered every Monday morning to evaluate credits, that the Bank will give, was one of the best learning environments I ever experienced.
Today, specialised financial institutions like Venture capital companies, have now taken on that aspect of financing. They seek Longterm investments, support it with Longterm debt, so they can provide the patient capital, that will allow entrepreneurial ideas to sprout and develop properly, allowing for the required time frame to realise the goal. We do not need Government to get involved and make a mess of trying to set up it’s own Venture capital companies … we all saw what happened with NEFUND… a venture financing institution, set up and funded by the Government to finance new enterprises .
The idea was good but making it a loan program, was unrealistic, and it became a disaster, that neither created any meaningful companies nor were the loans given out, recovered. It was later merged into the old Nigeria Industrial Development Bank (NIDB) which was a more focused institution and did well because of the quality of those who ran it, before it became another political play. The combined institutions, is today’s Nigeria’s Bank of Industry.
The best use for this windfall profits, is not to fold it, in the general budget, but to invest, in pure risk capital to support young people and their ideas, through the Africa Development Bank – to fuel the next wave of Nigerian innovation and growth.
– Victor Ogiemwonyi is a retired Investment Banker and writes from Ikoyi Lagos, Nigeria.
OPINION: Putting Banks’ Windfall Profits Tax To Good Use is first published on The Whistler Newspaper
