Create risk capital through AfDB with banks’ windfall tax

VICTOR OGIEMWONYI

Victor Ogiemwonyi, a retired investment banker, is a former Governing Council member of the Nigerian Stock Exchange (NSE), now Nigerian Exchange Group (NGX Group). He sent this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com

In the past week, it has been reported that Nigerian banks will pay from their profits a total of N819 billion as income tax for the seven banks that have published their audited financial statements this year. About 27 percent (N223 billion) of this will be “Windfall Profits Tax” 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 criticised the extra tax as punitive, it is clear these earnings were largely a result of policy change and not operational performance.
Two things stand out from this. Those who did not agree with the government on this extraordinary tax levy, will now moderate their stand, given the blow-out profits the banks have reported for the year 2024.
The very loud criticism of the past few days after the banks released their results, where some claim that for an economy that is struggling as ours, these blow-out profits are scandalous; this extraordinary tax, levied on bank profits, for this year, should be sufficient to blunt the criticism.
The shareholders of these banks can also not complain, as the dividends declared so far have also matched expectations, given the blow-out profits.

Key strategy: Funding risk capital
The second issue should be how to put these extraordinary tax receipts to work for the Nigerian people. This tax is not recurring, that is why it is extraordinary. It should, therefore, also be used for extraordinary 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 the long term 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, many, many times, 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 purely ‘risk capital’, not loans or those politically motivated public field disbursements they call empowerment programmes, which cannot stand the test of time.
The enterprises to be supported, must be rigorously vetted and must pass a 50 percent chance of success.
The process must treat funding as a business decision, free of the usual political favours or corruption induced grants that make those who benefit, to 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, to AfDB’s own contribution, will make the 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, to be strictly 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 percent to the government, which can be bought back by the enterprise sponsors or sold to the Nigerian investing public, anytime they are ready to list as public companies.
AfDB president, 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 long term capital for projects. Merchant banks used to have long term multi-year deposits and loans. Everything is now short term. This near absence of long term deposits for banks in Nigeria also restricts their ability to adequately support high risk entrepreneurial undertakings.
Banks are actually not ideal for financing risky undertakings. I remember the genius banker, Atedo Peterside, telling us during 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 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 long term investments, support it with long term 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 the government to get involved and make a mess of trying to set up its 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 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 institution is today’s Nigeria’s Bank of Industry.
The best use for this windfall profits tax 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.