How new tax regime’ll redefine risk in banking sector

By Chinwendu Obienyi

With Nigeria’s new tax regime fully in effect, analysts say it is poised to transform the banking sector, redefining risk management, compliance and profitability.

They note that banks will face increased regulatory scrutiny and higher operational costs and will compel lenders to rethink lending strategies, capital planning and investment decisions as they navigate a more complex fiscal and regulatory landscape.

It is no longer news that the new tax regime kicked off the year in perhaps what many will describe as a pivotal moment in the country’s fiscal and financial governance.

Nigeria’s latest tax reforms represent one of the most consequential shifts in its fiscal architecture in decades. Framed as a move to modernize tax administration, expand the tax base and improve compliance, the new regime is unfolding against a backdrop of weak revenue mobilisation, rising public debt and persistent fiscal deficits.

While much of the public debate has focused on the implications for individuals and businesses, a less examined, but critical dimension is how the reforms will reshape risk within the banking sector.

The integration of identity systems, banking data and tax administration is not merely a technical adjustment; it is redefining the role of banks in Nigeria’s political economy and altering the nature of risks they carry.

Recent recalibrations by Federal Inland Revenue Service (FIRS) now known as Nigeria Revenue Service (NRC) show that the tax-to-GDP ratio rose to about 10.86 per cent by the end of 2021, up from a long-term norm of 5–6 per cent over the preceding decade. However, this is far beneath the African average (16 per cent) and well short of what is required to sustainably fund public services. With oil revenues increasingly volatile and debt servicing consuming a growing share of government income, authorities have little fiscal room to manoeuvre.

According to external assessments and forecasts, the ratio is projected to strengthen modestly this year to an estimated 10.2–12.5 per cent of GDP, with reforms fully implemented. However, these figures remain well below the 15 per cent threshold often recommended by the World Bank and IMF for emerging economies seeking a sustainable revenue base.

This shortfall matters: inadequate tax revenue forces governments to borrow aggressively, worsening debt dynamics. Nigeria’s ratio of public debt to GDP has oscillated near 40 per cent, induced in part by the twin pressures of weak revenue collection and persistent deficits.

Against this backdrop, the presidency as well as policymakers have turned to structural reforms aimed at improving tax visibility and enforcement rather than raising headline tax rates. Central to this approach is the use of digital identity and financial data to close compliance gaps, an approach increasingly adopted by governments worldwide.

In Nigeria, this has translated into tighter linkages between bank accounts, the National Identification Number (NIN), and tax administration systems. But with the core of the new tax regime, there are profound arguments that the role of banks seen as financial intermediaries could change a whole lot in the coming months.

According to economic analysts, Nigerians might no longer treat their bank accounts as financial instruments but as gateways into the formal tax net. This shift effectively places banks at the frontline of tax enforcement, not as policymakers or tax authorities, but as the most visible institutional interface between the state and citizens.

For customers, interaction with the tax system is no longer abstract or distant; it is experienced directly through their banks. This dynamic, analysts argue, significantly alters how banks are perceived and the types of risks they face.

Historically, banking sector risk analysis has focused on credit risk, liquidity risk, market risk and, more recently, operational and cyber risks. The new tax regime expands this framework. In a country where trust in institutions is fragile and public sensitivity to government policy is high, this perception matters. Any disruption to access, delays linked to compliance requirements, or account restrictions tied to tax enforcement could quickly translate into public anger directed at banks rather than regulators or fiscal authorities.

Such pressures could manifest in protests, legal disputes, regulatory friction or reputational erosion, none of which are traditionally priced into banks’ risk models.

Experts’ views

One of the most significant analytical concerns is how behavioural responses to the new regime could reshape the financial landscape.

Nigeria has made gradual progress in financial inclusion over the past decade, driven by mobile banking, agent networks and digital payment platforms. Estimates suggest that over 64 per cent of Nigerians are now captured within the formal financial system.

However, analysts warn that aggressive or poorly sequenced tax enforcement could reverse these gains. Media Public Executive and Financial analyst, Blaise Udunze explained that this tax regime will now alter banks’ business risk profile completely.

“This is because banks are now exposed not only to credit markets but are faced with not only operational risk but heightened political risk and social backlash and let us not forget that the issue of reputation has been a very big challenge. This is no longer going to be an issue of banks’ balance sheets but it will rub off political and financial risk. Customers will now see banks as tax collectors.

At this point in time are the banks and no longer policy makers or NRC. Customers will necessarily interface with banks and so when it comes to this tax regime, they will talk about banks who have access to their accounts. Hence, this will become an issue as Nigerian customers are impatient and are angry with this system. There will be slower customer onboarding as the “trust issue” will begin to take center stage”, Udunze said.

He added that “When trust erodes, people change behavior. Customers may reduce account activity, avoid formal channels or revert to cash-based transactions and informal savings mechanisms.”

Such a shift would not only undermine financial inclusion objectives but also weaken banks’ deposit bases, limit credit creation and constrain the effectiveness of monetary policy transmission. In macroeconomic terms, increased cash usage reduces transparency, raises transaction costs and complicates efforts to manage inflation and capital flows. For an economy already struggling with weak investment confidence, this represents a non-trivial risk.

According to Udunze, the reforms impose tangible operational demands on banks. He said, “Integrating identity databases, synchronising customer records and ensuring compliance across millions of accounts require substantial upgrades to IT infrastructure, data governance systems and cybersecurity frameworks.

Institutions are now expected to synchronise huge database and I do not think they are prepared for this because we are talking about over 70+ million Nigerians who are account holders. Also, there will be an issue of IT investments that will be able to be provided for these institutions. So this is an additional burden and may impact on the profitability of the banks and the burden might shift to customers who are even complaining of the stamp duty that cost N50”.

While large tier-one banks may be better positioned to absorb these costs, smaller banks and financial institutions could face disproportionate strain. Heavy capital expenditure on compliance and technology could compress margins, particularly in an environment of rising funding costs and regulatory pressures.

A key analytical question is whether fiscal authorities, financial regulators and policymakers are sufficiently aligned in managing the transition.

While the objectives of improving tax compliance and expanding the revenue base are widely accepted, experts argue that policy sequencing and communication are critical. Without clear safeguards, exemptions for vulnerable groups and phased implementation, the reforms risk unintended consequences.

“The federal government needs to recognise that this regime places a significant burden on banks,” Udunze said. “Timeframes matter, coordination matters, and trust matters.”

Conclusion

Ultimately, Nigeria’s new tax regime is not just a fiscal reform, it is a structural intervention that reshapes the relationship between the state, banks and citizens.

For banks, risk is no longer confined to loan defaults or market volatility. It increasingly encompasses public perception, political exposure and the delicate balance between compliance and customer trust.

The challenge lies in achieving revenue objectives without weakening financial intermediation or reversing hard-won gains in inclusion.

As Nigeria navigates this transition, the success of the reforms will depend not only on technology and enforcement, but on credibility, communication and institutional coordination. Without these, the cost of redefining risk in the banking sector may prove higher than anticipated.