UK based Finance expert proposes Ghana taxes bank securities and profits
Dr Sajid Mukhtar Chaudhry, Senior Lecturer of Finance Economics, Aston Business School of Aston University, United Kingdom, has proposed new taxes on high profits of banks and investments on treasury securities.
He explained that a risk-based tax scheme was needed to incentivize banks to focus on core business of lending to businesses and mitigate the risk associated with the volatility of the short-term funding that could affect the growth of the financial sector.
He further noted that a transaction-based tax on the high profit of banks that mostly had low lending to investment ratio would help the country raise the needed revenue to either fund budget deficit, set up a dedicated resolution fund for a crisis or for deposit in general reserves.
“I propose a tax of 2 per cent of total liabilities net of equity and insured deposits for the long term or 10 per cent of profit before tax, whichever is higher.
“For the short term, I propose a 10 per cent, thus a rate which changes with the change in the interest rate, as tax on investment in treasury securities,” he said during an Institute of Economic Affairs (IEA) economic policy forum on the theme, “Profits and Risk of Banks in Ghana: A case for Permanent Bank Taxation.”
Dr Chaudhry observed that Ghanaian banks were too profitable in terms of what is socially optimal as they earned much higher profits compared to other industries with most of the profits coming from investment in treasury securities where more than 95 per cent banks investment go into.
Other factors accounting for high profits, he said, included high net interest margins which was how much interest bank charges on loans and lower rates on deposits paid to customers.
He disclosed that much higher profits would be recorded if banks further reduced their provision for bad and doubtful debts.
“Usually lending constitutes about 65 to 70 per cent of balance sheet and investment are between 15 to 20 per cent. And so, your lending as a bank should be about four times your investment because banking is not about investing into treasuries,” he said.
According to the World Bank, Ghana as at 2021 has a loan to Gross Domestic Product (GDP) ratio of less than 15 per cent as compared to the Sub-Saharan African average of over 35 per cent.
Dr Chaudhry said it was important to have regulations that insulated the final customer from being burdened with the imposed taxes on banks.
Mr Patrick Boamah, Vice Chairperson, Finance Committee of Parliament of Ghana, said it was important to note that only two indigenous banks made up top 10 banks in the country in terms of balance sheets.
Implementation of new taxes would require tact to protect non-performing indigenous banks as banking sector has recently recorded a tax increase that included VAT threshold rise to 2.5 per cent and the increase of marginal income tax rate to 35 per cent.
Professor Charles Ackah, an economist, suggested the introduction of a windfall tax as against the imposition of a 10 per cent tax and the restructuring of the regulatory framework of the banking sector to allow for the establishment of an Ombudsman solely for the banking sector.
“What we proposed is to have two institutions and let the central do their normal monetary policy regulation and let’s have an inspector for the banking sector to deal matters related to competition in the sector,” he said.
Source: GNA