“…for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself by the handle,” Winston S. Churchill.
The Nigerian government has been making tremendous efforts to expand and diversify its tax revenue from oil, especially following the shocks recently experienced in the global crude oil market and the projected decline in the global crude oil demand in the face of threats of substitutes caused by Shale, electric vehicles e.t.c. According to the IMF, Nigeria’s tax to GDP ratio is among the lowest in the world and the Bretton woods institution has called for an urgent and comprehensive economic reform to expand the non-oil tax revenue in Nigeria.
In October 2019, President Muhammadu Buhari submitted the Finance Bill 2019 to the National Assembly. The bill seeks to implement wide fiscal reforms and transform the government approach to tax administration. While some components introduce increments, several others are aimed at reducing taxes, especially for SMEs, thereby stimulating economic activities. This is the first time that the Nigerian Government is making an attempt at effecting a holistic change to its entire fiscal laws at one sweep.
The bill, if passed into law, will make an overwhelming change to the administration of tax in Nigeria and further support SMEs in line with the ease of doing business reforms of government. Some of the proposed changes are examined below with a specific focus on their effects on SMEs, insurance and other businesses in Nigeria.
Value-Added Tax Increase
This bill seeks to increase the value-added tax from the present 5% to 7.5%. The Federal Government argues that Nigeria’s VAT ranks among the lowest in the world. I have, however, argued that this perspective is a bit narrow as the challenge with VAT or any other tax in Nigeria is not so much about rates, but more about the poor collection, income levels, and citizens’ trust in the government’s ability to effectively utilize tax proceeds. For example, according to the IMF, the informal sector accounted for 65% of Nigeria’s 2017 GDP, and this sector is largely excluded from the tax net as they are unstructured and largely unregulated. In my earlier article titled, Nigeria’s VAT increase: Penny-wise, Pound Foolish, I posited that the proposed VAT increase might further impoverish the citizens and ultimately fail to meet its objectives of revenue increase.
It is therefore refreshing to see other provisions of the Finance Bill, some of which may cushion the effect of the proposed VAT increase.
The proposed amendment to Section 16 of the Company Income Tax (CIT) Act
This section has over the years been a pain and an inhibitor of growth to the insurance business in Nigeria. In tax practice, all expenses wholly and reasonably incurred to generate a particular amount of revenue are allowable for tax purposes in their entirety. This is not the case under section 16 as it limits allowable claims expense, commission, and other direct expenses to 25% of the total premium. Operators in the Insurance Industry have been calling for a review of this section to no avail.
With the newly proposed Finance Bill 2019 however, if passed into law, insurance companies will be assessed and taxed like other sectors in the economy. Besides, the limitation of losses carried forward to four years of assessment has been abolished. Insurance companies can now carry forward losses indefinitely, deduct reserve for unexpired risks on time apportionment bases while special minimum tax for insurance has been abolished. This is laudable and is expected to catalyze the improved profitability of insurance companies.
The proposed amendment to Section 33 of CITA – Minimum Tax
The proposed amendment to this section limits minimum tax computation to 0.5% of turnover and companies with turnover of less than ₦25 million will be exempted from minimum tax payment. Furthermore, a tax rate of 20% will apply to small businesses with a turnover between ₦25 million and ₦100 million. These amendments are laudable, as they will stimulate growth in the SME space, improve their profitability and as a result, their working cash flow, as they will now be able to retain more profits which hitherto, would have gone to the government through taxes.
On the flip side, the repeal of the minimum tax exemption granted to companies with 25% imported equity might discourage potential foreign investors into critical sectors of the economy that require foreign investment but a long time to break-even.
The proposed amendment to Section 19 – Excess Tax Dividend
Section 19 aims to prevent tax avoidance mechanisms of companies but rather became an overkill to preventing tax revenue losses. The section provides that where the dividend payment of a company is higher than taxable profits, the dividend shall be taken as the taxable profit and assessed to tax at the CIT rate. However, dividends can be paid out of retained earnings which have been taxed before or franked investment income received by the company which should not be subjected to tax.
This, therefore, invariably results in double taxation for the company. The proposed amendment to this section is that excess dividend tax shall apply to only untaxed distributions other than profits specifically exempted from tax and franked investment income. This is to discourage double taxation whereby dividend paid out of retained earnings that have been subjected to tax will be subjected to a further tax.
The proposed amendment to Section 29 – Commencement and Cessation Rule
The old basis for computing tax liabilities for the commencement of business and cessation of business poses a risk of double taxation as there are chances of overlap in the basis period of assessment. The proposed amendment seeks to correct this by replacing the old basis with a simplified actual year basis period of assessment.
Other amendments in the proposed Finance bill seek to instil more convenience into the tax regime. Examples are:
- The Bonus of 2% of tax payable (medium-sized companies) and 1% (Large Companies) for early payment of tax
- Exemption of stamp duty for bank transfer below ₦10,000 and transfers between same owner’s account within the same bank: this is specifically beneficial to MSMEs, especially those in the micro-businesses as a lot of their transactions volume fall in this category.
- Compensation for loss of employment below ₦10 million to be exempted from Capital Gain Tax
- Exemption of companies with turnover less than ₦25 million from VAT registration and filling: this removes the regulatory bureaucracy/bottlenecks that MSMEs have continuously faced in their attempt to maintain VAT compliance.
The robustness of the proposed amendments to our fiscal laws is unprecedented in the history of tax administration in Nigeria and it will provide significant support for SMEs in terms of tax benefits. However, no matter how fantastic a tax regime is structured, there will always be loopholes that will be exploited by taxpayers to avoid tax. Therefore, the government needs to continuously review and update our tax statutes to block these loopholes and ensure the government receives the right amount of tax. At the same time, the government needs to invest in critical sectors of the economy that will stimulate production, while also pruning down the over-bloated government expenses.
The government needs to find a way to effectively capture the informal sector in the tax net as it has huge potentials to drive significant improvement in the government’s tax revenue. Furthermore, there needs to be a conscious effort on the part of the government to plug leakages in tax collection to ensure the taxes that are collected are not funnelled into the private pockets.
The proposed amendment in the Finance bill 2019 for banks to request Tax Identification Number (TIN) for account opening for individuals and for existing customers to provide their TIN to continue operating their accounts, is a move in the right direction. If the current Financial Inclusion drive of the CBN successfully capture a sizeable number of the informal sector, and the FIRS can collaborate effectively with the banking sector, a good number of the players in the informal sector can be captured in the tax net and invariably increase government’s revenue from taxes.
This bill, if passed, will definitely be a big win for Buharinomics and a very laudable effort at overhauling the nation’s fiscal laws, especially around taxation. As highlighted, most of the elements are clearly aimed at easing business operations and alleviating the regulatory burdens for SMEs. This is expected to stimulate growth in the SME space and ultimately drive increased growth rate for the economy.
Strong performance from Stanbic IBTC, despite weak retail banking position
Will Stanbic IBTC be able to generate profit from its personal banking division by full year?
Stanbic IBTC made a profit after tax of N45.2billion, growing its profit by 24.7% when compared with this period last year.
The feat is remarkable; given that a majority of financial institutions responded as expected to the economic downturn triggered by inflationary pressures, oil price instability, and lack of notable business activities, necessitated by the corona-virus pandemic that has characterised the 2020 business calendar year.
These other organizations reflected positions worse off than their escapades in 2019. In cases where improvements in bottom-line were seen, it was only marginal.
Stanbic IBTC was not exempted from these economic trials, their immensely diversified business portfolio boosted their numbers on multiple fronts. Robust presence in Asset Management paid off, as commissions and fees represented a massive 62% of general fees and commission income. It’s Corporate and Investment division continues to produce astoundingly, contributing the highest and growing profit after tax of 49.2%.
This focused and efficiently monitored diversification, is turning Stanbic IBTC into world-beaters, reflecting in the expansion of its gross earnings by 7.8%, from N117.4billion in HY’2019 to N126.6billion so far this year.
This position could have appeared even better; had STANBIC been able to demonstrate in its personal and business banking segment, the same excellence, noticeable in its other business segments (Wealth, Corporate and Investment).
It’s Personal banking (generally regarded as Retail banking), encompasses the provision of banking and financial services to individual customers and SME’s (Small and Medium scale enterprises), mortgage lending, leases, card products, transactional and lending activities such as telephone banking, ATM’s, etc. The segment suffered this year, closing with a loss of N3.2billion, despite being responsible for over 58.4% of general staff costs. This poor position was sponsored by a reduction in income levels, especially non-interest income from fees and commission.
Unsurprisingly, given CBN’s policy at the start of the year to implement a much-reduced transfer fee rate, an increase in Non-performing loans is another causal factor for its loss this half-year. STANBIC cannot afford to bask in the euphoria of the massive successes of its Wealth and Corporate segment, at the expense of Retail banking.
Retail banking is fundamental to any bank looking to be a force, or preserve its going-concern status in this critically competitive economic environment. It has been the subject of immense research in the last decade, with many banks devising strategies to acquire a large chunk of the market share in this business segment. The banking landscape is evolving amidst growing competition, such that a bank that generally does well in its retail banking segment, is perceived as strong by the public. This has an underrated capacity to effortlessly attract more customers. Banks need to revisit the drawing board and re-embrace their sacred purpose of serving the basic and pure needs of their individual customers.
Michael Lafferty, Chairman of the Lafferty Group, whilst describing Retail banking said, “Retail banking is the foundation on which global banks are built,” It is a vast retail and consumer banking market, pointing out that the world’s biggest banks built their financial empire from the mass market.
Stanbic IBTC must be conscious in its quest to provide universal banking and find a balance in product and service offerings across its business segment.
A summary of the performance parameters in its financial statement, shows growth in gross earnings, from N117.4billion to N126.6billion, and improvement in earnings per share from 342kobo to 419kobo.
Attention now shifts to the impact of the bank’s new super app, supposedly a one-stop-shop for its diverse offerings, including banking, investing, pensions, trading, and insurance, and how it affects the bottom line in subsequent quarters.
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Lastly, will Stanbic IBTC be able to generate profit from its personal banking division by full year? We await their H2’2020 results.
Is Zenith Bank thriving on the strength of sound financial indices?
Zenith Bank posts N103.8bn profit in half-year financial result.
Sound financial indices have made Zenith Bank one of the largest banks in the Nigerian banking Industry. It was recognized as the Most Valuable Banking Brand in Nigeria 2019, in the Global Banker magazine Top 500 Banking brands; and Best Commercial Bank in Nigeria 2019, by the World Finance.
Zenith Bank has successfully bolstered this narrative even further with the release of its Half Year 2020 Financial Report, where it closed with a profit of N103.8 billion.
Growing profit position in these perilous times, speaks remarkably of the suppleness and elasticity of any establishment. A lull in economic activity caused by inflationary pressures, precariousness of the market, and the coronavirus pandemic has forced most Deposit Money Banks (DMBs) to cave in, and reveal achievements worse off than their 2019 results y/y – but not Zenith Bank Plc. The institution has showcased beyond reasonable doubt, that the apparent limitations are incapable of distorting its active growth pattern.
Zenith Bank closed H1 2020, 16.8% better off than it did in 2019 y/y, in terms of profit after tax. Although this massive leap, hugely resulting from tax paid as profit before tax, noted just a 2.2% growth. Further analysis of its HY’2020 results, demonstrates more efficiency, a focused cost of fund optimization, and an aggressiveness in generating income across its business heads and segments. This strategy had begun since 2018, and was shared by the bank when it disclosed planned implementation of an improved core banking system, hoping it would ultimately enhance efficiency while reducing costs.
Zenith Bank has thrived on the strength of its sound business model, corporate governance, conservative risk management, and strategic corporate social investment. The bank has been very forceful in the market, improving massively across all of its income generating segments, despite the plausible and obvious hindrances. This is a testament to its superiority, and sponsors its claim for supremacy.
The bank made N22billion from foreign exchange revaluation gains and despite evidence to the contrary, it endeavored in operating expenditure (OPEX). OPEX may have grown by 7.7%, but disclosures and note to the accounts shows that in virtually every expense head, costs dropped. The 7.7% was triggered majorly by Information Technology related costs, fuel and maintenance, and an increase in the compulsory banking cost fund, set up for the Asset Management Company of Nigeria (AMCON) by the CBN.
Now, like every hero susceptible to their hubris, Zenith has its own problems, which questions its position at the top. Yes, the bank may have an amazing and constantly improving interest expense to interest income ratio, but it does not possess the finest result in this regard as of yet. HY 2019 interest expense took as much as 33.6% of its income, while HY 2020 dropped to 27.4%. This is good, but still considerably high, if we carry out a peer-to-peer analysis with Guarantee Trust Bank Plc (masters of low-interest expenses), whose ratio stands at 16% for HY 2020.
However, Zenith has sustained the momentum of positioning itself as the crème de la crème in the Nigerian Banking Industry for quite some time. The bank’s pattern of growth and performance, strongly indicates its capabilities to manage its interest expense in subsequent quarters. It will be interesting to see how this pans out by year end.
In summary, despite economic difficulties this year, with most bank’s bottom-line at a worse position than the corresponding period last year, Zenith posted improved profit yet again. Could this be enough to portray supremacy?
UBA Plc H1’2020 results, a true reflection of its rightsizing decision?
UBA’s H1 2020 result is yet another demonstration of the resilience of its business model.
The upward review in benefits of some employees and directors this year, coupled with the rising operational costs, constitutes the hot topics from the 2020 semi-annual results released by UBA Plc.
Widely regarded as the banking sector’s largest employer of labour in Nigeria, the bank in December 2019, embarked on a ‘rightsizing’ exercise, which partly resulted in new hires, as well as promotions, improved remunerations, and benefits for existing employees.
The Group Head, Media and External Relations, UBA Plc, Nasir Ramon commenting on this said, “over 5000 staff of UBA Plc, started the new year with a lot of cheer, as the bank promoted to new grades, coupled with salary upgrades. Beneficiaries of this exercise will receive up to 170% increase in their salaries and benefits, whilst a good number have been moved to higher grade levels.”
Directors saw their emoluments amplify by 177.7% (Fees and Sitting allowances) as demonstrated in the financial statements of the bank. Rising to N50million in June 2020, from N18million in 2019 y/y.
Now, Deposit Money Banks (DMB’s) might be adjudged to be honorable in all of their objectives, but the truth is they are neither self-sacrificing nor are they expected to be. DMB’s are established for profit, and would incessantly prioritize business good sense over social empathy, for the sake of their owners. The import of this is, UBA Plc expects its colossal investments in employees and directors to overwhelmingly reflect in its bottom-line.
Half-year 2020 results is clearly not in sync with this philosophy, as it reflects a weakened position compared to the corresponding period last year, despite the investments in human capital. Profit before tax dropped by 18.7%, from N70.3billion recorded in HY’2019 to N57.1billion in the current period. Profit after tax waned as well by 21.7% to N44.4billion from N56.7billion in HY’2019.
Interestingly enough, the top-line fared pretty well. Interest income and fee income showed improvements, albeit marginally by 0.3% and 6.7% respectively. This makes it illogical to attribute the entirety of the decline in profit to the recent austerity measures put in place by the CBN, reducing funds transfer fees and card maintenance charges.
The Coronavirus pandemic played a big role too, by widely stunting the economy in the second quarter of 2020, and negatively impacting profit. But even these do not provide substantial and sufficient convictions as to why the Tier-one bank did not hit the profit-bar it set for itself, from its truly emphatic 2019 financial year. Does this mean that UBA Plc got the decision wrong at the start of the year?
Six months seem too short a period to immediately class management’s decision to jack up the benefits and emoluments of its internal customers as a failed one. Although, no one anticipated the travails of COVID-19 and its resulting consequences, investments in human capital is widely proven to yield tremendous growth in the long haul. Besides the fact that it has given UBA Plc a solid reputation in the market place, it also makes the company very attractive to the very best of industry talents. Furthermore, employee engagements of this nature, foster brand loyalty which ultimately trickles down to how passionately these personnel undertake their tasks and deliverables. The true bearing of this investment is expected to reflect in due course, in subsequent quarters.
Commenting on the result, UBA’s Group Managing Director/Chief Executive Officer, Mr Kennedy Uzoka said, “Our H1 2020 results is yet another demonstration of the resilience of our business model in an extremely uncertain and tough operating environment. We recorded commendable growth in our underlying business in terms of customer acquisition, transaction volumes, and balance sheet whilst inflation, depressed yield environment and exchange rate volatility impacted our net earnings as anticipated.”
In today’s increasingly aggressive marketplace, where consistently generating revenue, is paramount to preserving the longevity and going-concern status of any establishments, costs must also be accorded as much attention and significance. Tightening and managing costs with the aim to improve and generate profit is genius strategy especially in today’s banking industry. The banking industry is under threat from ruthless competitions. Multifarious streams that had hitherto been available for generating income for DMB’s are being severely hindered by the ‘austere’ policies (from the perspective of commercial banks) from the apex bank, making effective cost management a survival mechanism.
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Employee benefits rose by 20% from N37.2billion in HY’2019 to N44.6billion in HY’2020, while Directors’ emoluments (Fees and Sitting Allowance) as earlier stated, surged by 177% from N18million in 2019 to N50million in 2020 y/y. The total operating expenses increased 22.6% in 2020. UBA Plc, unavoidably expended N22.4billion on Banking Sector Resolution cost trust fund, in compliance with the CBN’s requirement to contribute to the cause of the Asset Management Company of Nigeria (AMCON). Security and other payments for core services experienced increase as well compared to the preceding year.
Avoidable expenses like Penalties and Premises Maintenance Charge, should be extensively reviewed and extinguished wherever possible, to improve bottom line. UBA plc has forked out N565million in penalties so far in 2020, representing 6177.7% increase from just N9million in 2019 y/y. This is a prime example of the operational brick walls, UBA Plc must properly address to improve its fortunes in subsequent quarters.