By Nicholas Larsen, International Banker
On July 17, 2024, Nigerian President Bola Ahmed Tinubu issued a letter and an executive bill to the Senate requesting a major amendment to the existing Finance Act 2023, introducing a one-time windfall tax of 50 percent on the profits realised from all foreign-exchange (FX) transactions conducted by banks in the 2023 financial year. The Senate increased the tax by a hefty 70 percent a few weeks later—retroactively for the 2023 financial year as well as for 2024 and 2025. However, while analysts initially broadly criticised the move, the strong profitability reported by Nigerian lenders this year is allaying concerns over the extent of the tax’s harmful impact on the banking sector’s stability.
Typically implemented as special one-off levies on corporations earning unusually high profits, windfall taxes can often provide governments with substantial injections of revenue. Such profits are invariably earned due to favourable market conditions and are therefore regarded as being “unearned” by the company rather than earned through extraordinary efforts. The taxes can then be used by the government to fund redistributive economic policies, such as social-welfare and infrastructure programmes.
This is no different in Nigeria’s case, whereby the windfall tax was implemented on the banking sector’s excess realised profits from foreign-exchange transactions—gains that arose from the government’s exchange-rate unification policy. With the Nigerian central bank easing exchange controls in June 2023 and again in January 2024, the ensuing 70-percent depreciation in the naira against the dollar provided several Nigerian lenders with handsome windfalls “as a result of forex allocation to selected commercial banks”, according to Mohammed Sani Musa, chairman of the Senate Committee on Finance.
Some also regarded the decision to levy such a steep tax on banks’ FX gains as a consequence of the Tinubu government’s increasing desperation to unearth new sources of revenue. Oil exports have historically represented the country’s biggest source of government revenue and foreign-exchange income, but they have remained lacklustre in recent years, forcing the most recent two administrations to increase borrowing to plug the growing hole in the budget deficit. And having recorded a fiscal deficit of 6.1 percent of the country’s gross domestic product (GDP) in 2023—more than double the 3-percent threshold set out in Nigeria’s Fiscal Responsibility Act of 2007—the windfall tax on banks was seemingly announced as an urgent response to this growing fiscal imbalance.
Initially estimated to bring in up to 6.2 trillion naira—or around 68 percent of the deficit—the government confirmed that the proceeds from the windfall tax would be primarily invested in capital-infrastructure development. The funds would also be used to improve access to education and healthcare, as well as to bolster several other public-welfare initiatives.
The initial reaction to the tax’s imposition, however, was one of marked concern, particularly from analysts wary of the severity of the levy’s impact on Nigeria’s banking sector. A July 2024 report from Moody’s titled “Nigeria’s proposed windfall tax on foreign-exchange gains is credit negative for banks”, for example, was highly critical of the move. “The windfall tax will have a particularly negative effect on banks whose capital adequacy is close to regulatory thresholds,” the credit-rating firm noted. “The tax follows record profits declared by banks in 2023, largely because of foreign-currency revaluation gains related to the naira’s massive devaluation of 37 percent in June 2023.”
A report from fellow ratings firm Fitch Solutions, published a few weeks later, moreover, suggested that the windfall tax would weigh heavily on the Nigerian banking sector’s profitability, liquidity and investor confidence. “The windfall tax specifically targets banks’ realised profits and will drastically erode profit margins, potentially impacting banks’ credit profiles. This additional financial burden could lead to liquidity issues, as banks may need to divert funds from critical areas to meet tax obligations,” the report noted, adding that such a diversion would limit banks’ ability to invest in new technologies, reinvest in operations, expand loan portfolios and support economic activities.
“The banking sector already faces high regulatory costs, including the substantial cash reserve ratio, as well as the AMCON [the Asset Management Corporation of Nigeria—a banking sector clean-up vehicle] levy and deposit-insurance premiums, which together cost the six largest banks NGN406 billion in 2023, up 27.7 percent from the previous year. The introduction of the windfall tax adds another layer of financial strain,” Fitch added, whilst also voicing concerns over the potential for a double-taxation scenario, with banks having already paid a 30-percent income tax on their 2024 tax returns. “This raises questions about whether banks will need to pay an additional 40 percent or face full double taxation, complicating their financial planning further. The windfall tax could deter investor confidence and negatively impact the market value of banking stocks.”
The Chartered Institute of Bankers of Nigeria (CIBN), meanwhile, labelled the tax as discriminatory, with its president, Professor Pius Olanrewaju, telling local media outlet Punch in July 2024 that the tax would “violate fairness and equity in taxation as banks are the only entity singled out for this payment”. Olanrewaju observed that other sectors and businesses that had recognised similar foreign-exchange gains in their books in 2023 were exempt from the windfall tax, while the absence of a corresponding incentive to cushion the impact of the tax would also weigh on the banking sector.
“Imposing taxes on foreign exchange gains may deter foreign investors and negatively impact Nigeria’s investment landscape, especially at a time when banks are required to raise capital and they may be looking towards foreign investors,” Olanrewaju added. “This action can discourage foreign investors. The implementation of this tax could lead to reduced investment, decreased liquidity, and increased costs and negatively impact Nigeria’s economic growth and development, and the tax could lead to reduced market participation, exacerbating currency fluctuations and potentially destabilise the economy.”
Despite such initial concerns, however, the broadly positive earnings results reported by Nigeria’s largest banks thus far in 2025 strongly suggest that the banking sector has been able to withstand the impacts of the windfall tax. According to an April 11, 2025, report from Fitch, the tax on realised gains on FX transactions announced in 2024 “appears to be much less significant than we initially feared and will be absorbed by strong profitability”.
That said, for the full year 2024, seven Nigerian banks—First City Monument Bank (FCMB), Fidelity Bank, Guaranty Trust Bank (GTCO), Stanbic IBTC Bank, United Bank for Africa (UBA), Wema Bank and Zenith Bank—incurred a combined income-tax expense of N819.95 billion, which was a 94.96-percent increase from the N413.73 billion reported in 2022. Of this amount, a hefty N223.27 billion (or 27.23 percent of the total) was reported as attributable to the newly implemented windfall tax.
UBA, for example, stated that it had paid N57.91 billion over the two financial years of 2023 and 2024. “Following a series of engagements, provision of information, and reconciliation meetings with the Federal Internal Revenue Service, a provisional Windfall Levy of N57.91bn was estimated to be payable by the bank for the 2023 and 2024 financial years, broken down as follows: FY2023: N24.819 billion and FY2024: N33.092 billion.”
Meanwhile, in the 2024 financial year, Zenith Bank paid the highest windfall tax of N63.31 billion, GTCO paid N51.25 billion, Stanbic IBTC Holdings paid N17.18 billion, and Fidelity Bank paid N13.33 billion. “The Act imposes a 70 per cent levy in retrospect for the 2023 financial period, 2024, and 2025 on foreign exchange gains from the impact of foreign exchange on financial instruments as a result of currency floating by the apex bank (CBN),” Fidelity Bank stated in its audited report. “The sum of N5.71 billion of the N13.33 billion relates to gains realised in the 2023 financial year.”
While such obligations appear to be manageable for Nigeria’s major lenders, Fitch nonetheless warned that the banking sector’s nonperforming loan ratio (NPL ratio) will rise throughout 2025 due to the high inflation and interest rates incurred from the end of November 2024, when 4.9 percent was recorded. “Stage 2 loans are high in some banks, and the expected lifting of forbearance measures on loan classification could further increase impaired loans,” Fitch stated in its April 11 report. “However, loan books are small (35 percent of total assets), limiting the impact on banks’ performance. Significant progress has been made in raising capital to achieve compliance with higher minimum paid-in capital requirements by end-1Q26, although increased M&A activity is still likely among third-tier banks.”