To reduce or avert short-term borrowing or overnight lending by banks, which are very risky, and curb their excesses when they get bigger, government should introduce a 1 percent tax on such borrowings, Dr. Sajid Chaudhry, a finance lecturer from the Birmingham Business School, University of Birmingham, UK, has said.
“A bank tax will provide Ghana a sustained source of revenue with attempts to move the country’s economy beyond dependence on aid, and will further reduce budget deficit. It will act as a catalyst for banks to reduce reliance on short-term funding sources and help reduce banks’ risk,” he said.
Speaking ahead of today’s roundtable discussion by the Institute of Economic Affairs (IEA) in Accra, on the theme ‘The Contribution of Banks in the Changing Tax Environment’, Dr. Chaudhry added that to urge banks to lend more to businesses and households, another 5 percent tax can be slapped on those that have been seen as not lending enough and rather investing customers’ deposits in government-backed securities.
“Big banks are making profit at the expense of the public. Ghana should keep the National Fiscal Stabilisation Levy for banks and other industries and introduce a 5 percent tax on profit before tax on the big six banks, which will yield approximately GH¢106million,” he said.
Dr. Chaudhry said that as Ghana moves toward a risk-based minimum regulatory capital regime, banks’ mergers and acquisitions are expected in the future as banks are required to hold more capital. “A tax on liabilities will be particularly helpful when banks are bigger, riskier and earning even more profit in the future.”
He noted that a tax of this nature exists everywhere in the world. “A bank levy or tax can be applied on liabilities, assets or capital. Most of the countries apply a levy on liabilities. For example, Austria, Belgium, Cyprus, Germany, Hungary, Iceland, Portugal, Romania, Slovakia, Sweden, the Netherlands and the United Kingdom.
“France applies levy on regulatory capital, Slovenia applies on assets. A few countries such as the Netherlands and United Kingdom seem to tax only bigger banks and liabilities if they are beyond a certain threshold,” he said.
He explained that a survey that compared Ghana’s banking sector to other countries with similar purchasing power parity – including Kenya, Nigeria, Sudan and Ivory Coast – shows that Ghana’s banking sector is too profitable.
“The net interest margin, which is the difference between the interest banks pay on deposits and interest paid on lending is the highest. This means they are earning a lot of interest income. The after-tax return on assets in Ghana is also the highest among these countries. If you look at the return on equity of all banks it is about 28 percent in Ghana, which is also the highest in the region,” he added.
These indicators, according to him, mean government can easily rake-in more revenue from the banking sector and still allow the sector to drive economic growth with the ongoing regulatory reforms.
The survey, he said, shows that the big six banks in 2017 – GCB Bank, Ecobank, Fidelity, Stanbic, Standard Chartered and Barclays – posted underlying profit that includes profit after tax, provision for bad and doubt debt, tax and others of GH¢4.9billion, which is a 77 percent rise from the 2016 data.
Meanwhile, comparing the rise in underlying profit to other alternative uses of capital shows that the 10-year average return on the GSE All Share Index posted 13.52 percent yield; that on 7-year government bonds posted 17.52 percent; while real GDP growth rate in 2017 was about 9 percent.
Dr. Ernest Addison, Governor of the Central Bank, recently said one of the major causes of the collapse of some banks in the country was the use of short-term liquidity support for long-term asset building.