Why windfall tax on Nigerian banks is economic justice – Experts

The introduction of windfall tax in the banking sector has sparked a significant conversation about fairness, economic equity and the role of financial institutions in the broader socio-economic fabric of the nation.

The windfall tax, essentially a tax on unexpected or unusually high profits, is a step towards ensuring that the banking sector, which has reaped substantial benefits from favourable economic conditions, contributes its fair share to the national revenue.

The move, experts say, is more than just a fiscal measure; that it is a strategic initiative aimed at reducing income inequality and promoting economic justice in Nigeria.

The case for economic equity

Economic equity refers to a fair distribution of wealth, resources and opportunities within a society. In Nigeria, a country marked by stark income inequality, the need for economic equity has never been more pressing.

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The wealth gap between the rich and the poor continues to widen, with a small percentage of the population controlling a significant portion of the country’s wealth. The banking sector, with its outsized profits, is symbolic of this inequality.

Forensic accountant, Sunday Enenche, said: “The argument for the windfall tax on banks is grounded in the idea that these financial institutions have a social responsibility to contribute to the well-being of the society in which they operate. Imagine banks contributing to funding (via the tax) masses-led programmes like fertilisers to farmers, the importation of foods directly to wholesalers to crash food prices.

“While banks are profit-driven entities, they also benefit from a stable and functioning society. They rely on public infrastructure, a legal system that enforces contracts, and a monetary system regulated by the government. In essence, banks do not operate in a vacuum; their success is interlinked with the health of the broader economy.

“By contributing a portion of their windfall profits back to the public purse, banks can help address some of the systemic inequalities that exist in Nigeria. This could take the form of increased funding for social programmes, infrastructure development, or initiatives aimed at reducing poverty and unemployment. In doing so, the windfall tax not only promotes economic equity but also helps to create a more stable and prosperous society, which in turn benefits the banking sector itself.”

Addressing income inequality

The experts further argued that one of the most pressing challenges facing Nigeria today was income inequality as the country’s wealth was concentrated in the hands of a few while a significant portion of the population lived in poverty; the so-called Champagne Glass Distribution of Wealth.

This disparity is not only a moral issue but also a significant barrier to sustainable economic growth. High levels of inequality can lead to social unrest, reduced economic mobility, and a lack of trust in public institutions and effectively the collapse of the social contract between the people and the government.

The windfall tax on banks is a direct response to this challenge. By targeting a sector that has seen significant profit growth, the tax helps to redistribute wealth more equitably. This redistribution is not about penalising success but about ensuring that the benefits of economic growth are shared more broadly across society (we will look at some international examples in the next article).

Moreover, the revenue generated from the windfall tax can be used to fund initiatives that directly address the root causes of income inequality. For example, investments in education and healthcare can provide more opportunities for the poor to improve their economic standing. Similarly, funding for infrastructure projects can create jobs and stimulate economic activity in underserved areas.

Promoting a fairer financial system

Enenche further argued that the windfall tax also served as a mechanism to promote a fairer financial system in Nigeria. The banking sector plays a critical role in the economy, not just as a facilitator of transactions, but as a gatekeeper of credit and capital. However, the sector has often been criticised for prioritising short-term profits over long-term economic stability and for engaging in practices that exacerbate inequality.

He said: “By imposing a windfall tax, the government is sending a clear message that banks have a responsibility to contribute to the broader economic good. This could encourage more responsible lending practices, where banks take into consideration the long-term impact of their activities on the economy and society. For instance, instead of focusing solely on high-yield government bonds, banks might be incentivised to increase lending to small and medium-sized enterprises (SMEs), which are crucial for job creation and economic diversification.

“Furthermore, the windfall tax could prompt banks to reconsider their fee structures and interest rates, making financial services more accessible to a larger segment of the population. In a country where a significant percentage of the population is unbanked or under-banked, this could have a profound impact on economic inclusion and mobility.”

Counter arguments, concerns

Despite its potential benefits, the windfall tax on Nigerian banks is not without its critics. Some argue that the tax could discourage investment in the banking sector, leading to reduced profitability and a potential slowdown in economic growth.

There are also concerns that banks might pass on the cost of the tax to consumers in the form of higher fees or interest rates, which could exacerbate financial exclusion rather than alleviate it.

However, these concerns need to be weighed against the broader benefits of promoting economic equity and reducing income inequality.

Professor of capital market, Uche Uwalake, said: “I do not think the windfall levy will have any significant adverse impact on banks’ quest to attract foreign investors.

“The levy is on the banks’ realised forex gain. It is also a one-off levy arising from the devaluation of the naira by the CBN in the wake of exchange rates unification. To the extent that it is not a normal feature of the banking sector in Nigeria, I do not see it as one that will discourage foreign investors.”

Enenche also argued that the government could mitigate potential negative impacts by carefully designing the tax to target only excessive profits and by ensuring that the revenue generated is used effectively.

Another concern is that the windfall tax could be seen as a one-time fix rather than a long-term solution to Nigeria’s economic challenges.

The experts contended that while the tax could provide immediate relief, it was essential that it was part of a broader strategy to address structural issues in the economy. This includes reforms to improve tax collection, enhance public spending efficiency, and promote inclusive economic growth, which the government is currently tackling with the Presidential Committee on Tax Reforms inaugurated by the president on August 8, 2023.