By Victor Ogiemwonyi
In the past week it was reported that seven Nigerian banks that had published their audited Financial statements this year will pay from their profits a total of N819bn as Income Tax.
About 27% ( N223bn) of this represents what is described as “Windfall profits Tax” levied by the Federal 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 that 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 extraordinary tax will moderate their stand, given the blow-out profits the nation’s banks have reported for the year 2024.
The criticism have been very loud in the past few days after the banks released their financial reports, with some claiming that for an economy that is struggling as ours, these blow-out profits are scandalous. This extraordinary tax, levied on the profit of banks this year, should be sufficient to blunt the criticism.
Shareholders of these banks, can also not complain as the dividends declared so far have also matched expectations due to the blow-out profits.
Key Strategy: Funding Risk Capital
The second issue should be how to put this extraordinary tax receipts to work for the Nigerian people, since it is not recurring, which is why it is aptly termed “extraordinary.”
It should also, thereofe, be used for extraordinary things, rather than being lumped with our general tax revenues for this year, because this will ultimately distort revenue figures for this year. It is also appropriate to advocate that this extraordinary income be appropriated to measurable things that contribute to the long-term growth of the economy.
One such option would be to invest this fund in the proposed African Development Bank (AfDB) “Investment Bank” for startups in Nigeria as seed capital 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. It is our belief that the surviving companies from these startups ventures to be funded will in future generate returns far beyond the initial investment in them.
Deploying the fund in this way will be a marked departure from the way we have always deployed funds recovered from corrupt government officials, where Nigerians have always been left to wonder where the money disappeared into. No one can point to any important project built from those huge recovered proceeds of crime.
It is thereofe important that we utilise this windfall differently, this time to plant seeds that have potentials to grow the economy, and create jobs for young people, thereby allowing them to put their innovative minds to work, with the potential to contribute meaningfully to the tax base and make the windfall tax, a fountain that will keep flowing.
Missing Link – To Entrepreneurial Ventures Here
It has been said again and again that the difference between aspiring enterprise startups in Africa, and other climes, particularly in the U.S is the availability of capital to backup ideas generated by 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 need meaningful startup capital that is pure risk capital rather than loans, or those politically motivated public field disbursements called empowerment programme that have hardly stood the test of time.
The enterprises to be supported, must be rigorously vetted and made to pass a 50% chance of success, just as the process must treat funding as a business decision, free of the usual political favours, or corruption induced grants that beneficiaries see as their own share of the proverbial National Cake.
This is why channeling such windfall tax through the African Development Bank as additional seed capital which beneficiaries add to their proposed funding makes so much sense.
Making this capital which no strings attached a counterpart funding to that of the AfDB will make this capital outlay meaningful for this venture, just as it will greatly expand the funding base for many entrepreneurial ideas by young Nigerians.
Because the AfDB is involved, the initiative is expected to have all the hallmarks of global standards such as good corporate governance, and the credibility expected to produce excellent results. It frees the government from the temptation to start another phantom agency where the supervising Ministries’ first priority will be to buy many SUVs for supposed supervision work, and the contracts that will go into just setting up the institution.
Giving the money to an established institution like the AfDB that has already expressed its desire to set up a bank for a similar purpose that will strictly be used to support young people in need of 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% by the government, which can be repurchased by the enterprise sponsors or sold to the Nigerian investing public anytime they are ready to list as a public company.
AfDB President, Dr. Akinwumi Adesina recently talked about the importance of risk capital to support entrepreneurship, where he correctly situated the fact that traditional banks (particularly commercial banks) are not adequately structured to provide risk capital. It is noteworthy that the ancestors of today’s merchant banks had some tilting towards project finance, while the current variants are just miniature commercial banks. There is no doubt that present day Merchant Banks in Nigeria are only conveniently avoiding the higher capital requirement for commercial banks. They do exactly what commercial Banks do, and no longer provide long-term capital for projects. Merchant Banks use to have long-term multi-year deposits and loans. Everything, is now short-term. This near absence of long-term 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 while at the then NAL Merchant Bank, where he was Head, the Credit and Marketing Department that he is always amused when people complain that our banks don’t like to take risks. He had argued that banks are set up to avoid risks not take them because they manage deposits for the public. They cannot be taking risks that can potentially lead to the loss of customer deposits. That quip stayed with me. Those were Monday morning Credit Meetings where some of the best brains in the bank gathered to evaluate credits that the bank is considering. It was, indeed, one of the best learning environments I ever experienced.
Today, specialised financial institutions like Venture Capital Companies have taken on that aspect of financing.
They seek long-term investments which they support with long-term debts and then provide the capital that will allow entrepreneurial ideas to sprout and develop properly, allowing for the required time frame for them to realise their 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 NERFUND- a venture financing institution set up and funded by the government to finance new enterprises. The idea was good, but making it a loan programme was unrealistic and it eventually became a disaster that neither created any meaningful companies, nor recovered loans it gave out. 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 and renamed Bank of Industry. The combined institutions also soon became another political chessboard.
The best use for this windfall profits is not to fold it in the general budget but to invest it in pure risk capital that would be used to support young people and their ideas through the Africa Development Bank. This will fuel the next wave of Nigerian innovation and growth.
Ogiemwonyi is a retired Investment Banker and writes from Ikoyi Lagos, Nigeria.
