Why Bangladesh needs a windfall tax on bank profits

Illustration: TBS

While Bangladesh's economy faced persistent inflation, foreign exchange pressure, and weak business growth, several foreign and local banks reported record-breaking profits in 2024. Foreign-owned Standard Chartered Bank Bangladesh, for instance, earned Tk3,300 crore in profit, the highest ever recorded in the country's banking history. At the same time, private sector credit growth slowed to just 7%, well below the target of over 9%. 

This contrast highlights a growing imbalance within the financial system, where banks are thriving while the broader economy continues to struggle. This situation calls for government action, particularly through a windfall tax on these extraordinary profits.

The source of these profits is no mystery. Behind the technical language in annual reports, with terms like "interest income" and "investment gains," lies a clear pattern. Instead of focusing on lending to businesses and individuals, banks are increasingly directing funds toward government bonds and treasury bills. 

These investments, essentially loans to the government, have delivered guaranteed returns at rates often better than those offered to the productive sectors of the economy. Many listed banks saw their profits surge in early 2024, driven largely by these risk-free government securities rather than any expansion of economic activity.

Although this strategy is legal, it means public money is effectively enriching bank shareholders, both domestic and foreign. Taxpayers fund the government, which in turn pays interest on its debt to these banks. This interest then flows directly into banking profits. Meanwhile, ordinary people face rising prices, stagnant wages, and limited access to credit. 

Unlike the banks, most individuals do not have the means or access to invest directly in government bonds, which remain largely reserved for institutions with privileged entry into primary auctions and secondary markets.

This creates a financial system divided into two distinct groups. On one side, banks deploy billions into government securities and collect substantial profits. On the other hand, average citizens watch their savings lose value, unable to access the same opportunities. The trust deficit in much of the commercial banking sector has left many people with no choice but to park their money in banks offering minimal returns. Institutions with strong fundamentals are capitalising on this, while depositors bear the cost.

To make matters worse, foreign-owned banks repatriate these taxpayer-supported profits to their parent companies overseas. This increases demand for foreign currency, weakens the taka, and raises the cost of imports. The ultimate burden of this cycle falls once again on ordinary citizens, the same taxpayers who subsidised these profits in the first place.

Bangladesh would not be breaking new ground by imposing a windfall tax. Several countries have already done so. Hungary, for example, introduced a 10% tax on banks' net revenue in 2022, reduced it to 8% in 2023, and then made it progressive in 2024. Larger banks now pay higher rates, with the highest set at 30%. 

This ensures that the biggest, most profitable institutions contribute a fairer share while protecting smaller, local banks. Italy also introduced a windfall tax on bank profits, using the additional revenue to support mortgage borrowers as interest rates climbed. These international examples show that windfall taxes on banks can work both politically and economically when carefully designed.

The idea itself is not new. Windfall taxes have been used in many countries during times when certain industries gained extraordinary profits because of external events. From Australia and Italy to Mongolia, governments have introduced them in sectors such as mining and energy. 

During the global energy crisis between 2021 and 2023, the idea gained fresh momentum. Even the experts at the International Monetary Fund suggested that governments should consider permanent windfall profit taxes for industries that benefit disproportionately from unusual economic circumstances.

In Bangladesh, a windfall tax on banking profits could raise significant revenue for public investment. Consider three possible scenarios:

Conservative scenario (5% tax): If the top 20 banks earned a combined Tk15,000 crore in extraordinary profits in 2024, a 5% tax could raise Tk750 crore each year. This could finance rural electrification, improve healthcare facilities, or support small and medium-sized businesses.

Moderate scenario (10% progressive tax): A tax starting at 5% for profits under Tk500 crore and rising to 10% for profits above that level could raise approximately Tk1,200 crore annually. This revenue could fund large infrastructure projects or help establish a national sovereign wealth fund, similar to those in Qatar, Norway, or the UAE.

Ambitious scenario (up to 15% progressive tax): A more aggressive structure, taxing larger banks at up to 15% while exempting smaller banks and development finance institutions, could generate around Tk1,800 crore per year. This amount could transform Bangladesh's social safety net or accelerate investment in renewable energy projects.

The funds raised through a windfall tax could be used for transformative national investments. These might include expanding digital infrastructure to improve broadband and digital payments access, closing the current digital divide. Resources could also support climate adaptation and renewable energy initiatives, positioning Bangladesh as a regional leader in sustainable development. 

Strengthening community-based financial institutions could promote financial inclusion in areas neglected by profit-driven private banks. At the same time, targeted investment in innovation and research, venture capital for startups, and improvements in healthcare, education, and affordable housing would strengthen human capital and reduce inequality.

Some critics might argue that windfall taxes discourage business investment and economic growth. However, this claim does not hold up when banks are already diverting funds away from productive lending into government securities. Under current conditions, capital is not being used in ways that stimulate the economy. A windfall tax would ensure that society receives a fair return from profits generated through public resources. 

Others might suggest that banks could pass the tax burden onto customers through higher fees or lower deposit rates. While this is a possibility, effective regulation and healthy market competition can limit such practices. More importantly, the public benefits of reinvesting windfall tax revenue far outweigh the modest risks of marginally higher banking fees.

This is not just an economic issue. It is a question of fairness. In a year when millions of Bangladeshis struggled with inflation, unemployment, and financial uncertainty, it is unacceptable for banks to earn record profits from government debt. 

These profits are made possible by the taxpayers, who do not have access to the same investment opportunities. A windfall tax would be a sound financial policy, but more importantly, it would be a clear statement that prosperity in Bangladesh must be shared fairly.

The country now faces a choice. It can continue to allow banks to collect extraordinary profits from public funds while the economy and public services suffer. Or, it can introduce a windfall tax that makes the financial system fairer and helps fund the nation's development priorities.

The decision is straightforward. A carefully designed windfall tax on excessive banking profits would raise vital revenue, reduce inequality, and demonstrate that Bangladesh is committed to building a fairer, more inclusive economy. Now is the time to act, before another year passes with banks growing richer while ordinary citizens bear the cost.

Sketch: TBS

Hafiz Ahmed is a Senior Researcher at The University of Sheffield, UK. The views expressed are personal and do not necessarily represent the views of the institution. Contact: hafiz.h.ahmed@ieee.org 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.