Profits and Risks of Banks in a Developing Country: A Case for Bank Taxation in Ghana

Abstract

The big ten banks in Ghana are too profitable (in terms of what is socially optimal) and they earn much higher profits compared to other industries. Their excess profits are being made at the expense of the public and that they should contribute toward the public finances. We propose a bank tax that not only taxes the profits of banks but also aims to tax short term borrowing of banks, while assessing the individual and systemic bank risks in Ghana. We also investigate why the National Fiscal Stabilisation Levy (NFSL) should remain in place for banks in Ghana and gauge its impact on bank returns and profits. Specifically, we propose a bank tax of 1% of total liabilities net of equity and insured deposits or 5% of profit before tax, whichever is higher. It is estimated to raise revenue of about GHc 220 million per year, more than the amount of aid that Ghana receives every year. Our research has policy implications not only for Ghana but for all the developing countries that have a banking sector earning hefty profits.

Keywords: banks, taxation, regulation, systemic risk, multivariate extreme value theory

JEL Classification: G28, G21, G29, G12, C49