Adding to the challenges, the CBN has issued a directive that all funds in dormant accounts must be transferred to the CBN for safekeeping. Faced with multiple policies that could harm the financial services sector, bankers suspect malice from ex-bankers now leading the Ministry of Finance and the CBN, specifically Wale Edun, Minister of Finance, and Yemi Cardoso, CBN governor. These policies are seen as stripping banks of idle funds in dormant accounts and windfall money that could have supported their recapitalization efforts.
This suspicion is intriguing, especially since the CBN allowed banks to report their FX windfall in their 2023 annual accounts before implementing the FX gains tax policy. It feels like a trap, particularly because banks had no warning, despite two of the four deputy governors, Philip Ikeazor and Emem Usoro, coming from the banking sector. It seems the era of a secretive CBN governor, where financial institutions must closely watch for signals, has returned.
This secretiveness, common in the U.S., where understanding the Federal Reserve Bank governor’s next move is an art, appears to have taken hold in Nigeria. A host of financial analysts is now trying to decipher the CBN’s actions.
Given these circumstances, the windfall FX gains tax can be seen as a strategic, albeit controversial move that could have a significant impact if fully implemented.
Notably, windfall profit taxes on certain sectors due to extraordinary profits from favorable policy changes are not unprecedented. For instance, in 1981, British Prime Minister Margaret Thatcher’s finance minister, Geoffrey Howe, imposed a windfall tax on banks that made excess profits, raising about £400 million through a 2.5% surcharge on non-interest-bearing current account deposits. Similarly, in 2020, Chancellor Rishi Sunak imposed a bank profits surcharge to raise £2.1 billion for the UK government.
Despite resistance from banks, Thatcher defended the policy, arguing that the banks’ large profits were due to government policy, not improved efficiency or service.
In Nigeria, a similar tax on banks is expected to generate about N6.2 trillion, contributing to the increase of the 2024 appropriation to N35.055 trillion after the National Assembly’s amendment of the Act. European countries like Spain and Italy have also imposed windfall taxes on oil companies following a 40% increase in prices due to the ongoing Russia-Ukraine war.
In the United States, the Windfall Profit Tax (WPT) was enacted in 1980 as part of a compromise between the Carter administration and Congress over the decontrol of crude oil prices, following price controls implemented by President Nixon from 1971 to 1980.
The bottom-line is that the banking sector may become sturdier and more robust if the capital base for international licence is increased to N500 billion and N200 billion for national licence as directed by the CBN. That would enhance the capacity of Nigerian economy to grow to become a one-trillion-dollar one as envisaged by the incumbent administration.
The last time bank consolidation occurred in Nigeria was in 2005, and the number reduced from 87 to 25 after undergoing consolidation via mergers and acquisition.
Will the number of banks shrink further after the ongoing consolidation exercise?
Already, the CBN has approved the gobbling up of an old generation financial institution, Unity Bank Plc, by a start-up Providus Bank even as Hallmark Bank was wound down by the apex financial institution.
The Providus/Unity merge mimics the manner that Titan Bank, a very young bank acquired Union Bank, which is one of the oldest regional financial institution whose origin predates independence and which is in the same age range with Wema Bank, First Bank and UBA.
Incidentally, UBA had also been acquired by a relatively new Standard Trust Bank in the manner that Titan and now Providus deemed to be babies in banking, acquired grandees such as Union Bank and Unity Bank.
Although, the Titan/Union Bank acquisition/merger is currently caught up in controversy, the Standard Trust Bank/ UBA deal merger has worked out well for the shareholders who have received more value since the combination.
Is it not amazing that one bank which has remained unchanged in terms of ownership is FirstBank? Despite remaining intact and not having been acquired or receiving new funding from new owners, so no dramatic change of management has been forced, it has been pulling its weight by growing organically. As such, it has remained amongst the tier 1 banks in Nigeria.
The bottom-line is that with banks being better capitalized would the high interest rates charges synonymous with Nigerian banks be reduced any time soon?
Is the CBN strategizing on how to achieve that objective of a regime of interest charges dropping from its present high of 30% to single digits?
That is perhaps the question that is uppermost in the mind of the banking public in Nigeria.