Beware! Your Cooperative Society is gradually becoming a Ponzi Scheme

Are you a part of a Ponzi scheme or a member of a cooperative society? This is a question you must ask yourself over and over again, and to make certain what the answer is. If you’re a member of a cooperative – any cooperative as that – or you’re about to join one in a time soon, this question is especially for you so much so you don’t lose all your life savings in a swindling cesspit paraded as a cooperative.

 Cooperative societies exist everywhere today

Today, cooperative societies are ubiquitous. You will agree with me that they are pervasive in our society nowadays. If you work as a salary earner, there’s a possibility of a staff cooperative society in your place of work. There are cooperative societies in various churches today fostered by many a church members. In places of businesses and among market women, cooperative societies also exist to cater in unique ways for their members’ welfare.

There are even individuals who are members of more than one cooperative society. Some might be members of their staff cooperative societies at their various places of work and also join the ones in their churches or other religious places. An average market woman might be a member of a market cooperative association and at the same time a member of similar cooperative societies in another domain entirely. A worker might be a member of a staff cooperative at work while also a member of a housing cooperative society in his/her community.

Benefits of being a member of a cooperative society

Cooperative society provides a safe haven for participating members to save towards their retirement. Some organizations don’t have policy for gratuity payment to their retiring workers, and in this regard, a staff cooperative society in such an organization ensures that employees who are members have a platform for saving towards when they are either retired or fired – whichever comes earlier! 

A cooperative society is a source of cheap finance for most people. It’s not only cheap in term of interest rate but also, it’s easily accessible for an average individual. A member can easily finance the purchase of household and domestic electronic items such as television, washing machine and generator at a reduced interest rate. A cooperative society often facilitates the finance of such purchases for their members from reputable distributors. This has on many occasions helped struggling members on meager income without hope of financing such acquisition to obtain them.

In the same vein, some cooperative societies operate commodity stores and shops for the sale of household consumables.  Often times, members not only buy from these stores at comparatively cheaper prices but also on credit. Cooperative societies could facilitate this for their members because they leverage on the pool of fund from members’ contributions to buy in bulk directly from big distributors or manufacturers. And since most cooperative societies are not overly driven by profit, the markup on each store item sold to members is lower comparatively to other stores. Many indigent homes have been helped through these noble arrangements.

Moreover, cooperative societies afford members the opportunity of loans at cheaper interest rates comparatively to other sources. Members could obtain loans to finance the education of their wards given the expensive nature of education in today’s Nigeria relative to the earning of an average household. Funds could also be obtained easily and cheaply to finance a housing project and so on. In time of emergency, a cooperative society often constitutes a place to run to for a quick loan to ameliorate the emergency situation.

Why Ponzi scheme allegory?

But despite all these noble benefits that an average member enjoys in a cooperative society; why a Ponzi scheme allegory?

Despite the pervasiveness of cooperatives in our societies and their often touted benefits, you – as either an existing or a prospective member – must be wary so that you won’t regret later. Apart from all the benefits enlisted above, primarily, for most people, cooperative societies constitute a safe haven for saving towards when they retire or are fired. And given this personal objective of an average member, care must be taken to ensure that the cooperative society you’re a member of doesn’t go bankrupt before time such that your hard-earned money doesn’t go down the drains. You wouldn’t want it become a Ponzi scheme where for the desire of immediate benefits you put your investment in a vehicle that collapses in no time at all.

According to Investopedia.com a Ponzi scheme is “a fraudulent investing scam promising high rates of return with little risk to investors”. It’s an investing scam that generates returns for earlier investors with money taken from later investors. But a cooperative, on the other hand is a voluntary association of people with common objectives that formed an enterprise as a vehicle for the actualization of their common economic, social, and cultural needs and goals.  

Given the definitions above, from the perspective of an average individual, money put in a cooperative society as a member comes with little or no risk. But when a cooperative society is not well managed, or where those saddled with the management are neither honest nor transparent, then it may descend into a swirl pool of a Ponzi scheme and all your life savings – represented by the balance of your contribution to date less any indebtedness – in it could go down the drain.

Various writers and researchers have attributed some factors for the success of any cooperative society: innovativeness and adaptability, adequate planning, skilled management, effective communication, common member interest and networking with other cooperatives. But a cursory look will reveal that these are just functions that are within the areas of authority of any cooperative society’s management to perform for its success and survival.

Therefore, succinctly put, a cooperative society thrives on good management and financial prudency. The management of any cooperative just like any organization requires tact and there’s the need for an avid knowledge of finance on the part of those saddled with such responsibility. It demands not only their prudency, financial knowledge but also honesty and transparency. But where the management of a cooperative society becomes unscrupulous or lacks the requisite management skills or the combination of all these, then it could be on a freefall toward bankruptcy, and for you, it becomes a Ponzi scheme.

Financial objectives for the success of any cooperative society

You should understand that just like any financial institution, running a cooperative society requires striking a balance between the financial objectives of liquidity, solvency and profitability. These mixed with a dose of transparency and honesty on the part of those at the helms of affairs should guarantee the continued success and survival of the association. Every organization also strives to meet all these three financial objectives. But financial organizations mostly strive to reach equilibrium amongst all these three objectives.

Liquidity in a layman’s language is simply the availability of cash. It implies the present ability of an organization or individual in meeting its short term cash requirements or needs.

Just like every other business organization, a cooperative society must ensure that it has the ability and cash to meet its short term debt obligations. For instance, businesses and individuals have obligations that fall due and require payment within the period of one day to twelve months which must be met as such, and as at when due. The obligations of businesses in the short period include payment of salaries and wages, payment of suppliers for materials purchased and services enjoyed, and so on.

In the same vein, cooperative societies must meet its obligations such as advancing loans to all eligible members – eligible in the sense that their loan requests comply with the requirements contained in the association’s byelaw. If there’s a commodity shop, staff salaries must also be paid. Other obligations include payments to suppliers of goods and electronic items, and payments for some other miscellaneous items. All these require continuous availability of cash.

Solvency is similar to liquidity but contrarily it relates to the capacity of an organization to meet its long term obligations, and how to ensure there’s enough cash to meet them when they fall due. Some debts and obligations fall due after twelve months. It’s this type of obligations that creates solvency objective for a cooperative. 

It’s important to note that the ultimate survival of the cooperative depends on meeting this objective. Sometimes, for a staff cooperative society, employees of the company may be retrenched en masse and therefore, they all must be paid the balance of the sum on their contribution-loan accounts. For this, a cooperative society must have plans in place to meet this obligation.

Profitability is as it sounds. This financial objective implies the capacity to make a return on the financial activities of the cooperative. Profit is the excess of the income of the association over its expenses during a particular period of time usually a year. Profitability is the least important financial objective among the lot for any cooperative society. Most cooperative societies are not formed with profit motive but rather the motive for most cooperative formation is the satisfaction of members’ welfare and common goals.

Either covertly or overtly these are basically the main financial objectives every cooperative must strive to achieve while ensuring the paramount of members’ welfare and shared goals in the process. But as mentioned earlier, every cooperative must strike a balance between these financial objectives just like any financial institution to be able to meet its members’ common goals and objectives.

Ironically, the ability of the cooperative to satisfy its members’ welfare and common goals depends majorly on its solvency and liquidity capacity. ‘Money answers all things’ so says the Holy Writ. 

Money is also the lifeblood of any business organization. A highly liquid organization is far more preferable to a highly profitable one with heavy liquidity challenges. This is even truer for a cooperative society where the objectives of profitability ranked lower to the objective of members’ welfare. Members’ welfare is the dominant goal of an average cooperative society, and to meet it, liquidity is an important financial objective that must be met. That’s, the availability of cash as at when required.

Sources of funding for a cooperative society

Cheap finance and loans to members, financing of electronic items, asset financing/purchase, purchase of consumables and food items in bulk for the benefits of the members and so on presuppose the availability of money. For most cooperatives, the veritable source of finance is basically members’ contributions which can only be improved upon by the admittance of new members with the new injection of contributions this promises; and the encouragement of existing members to increase their contributions to the association.

But sadly, these routes for improved liquidity or cash for the association are fraught with difficulties and sometimes unsustainable. For a staff or worker cooperative society, recruiting new members to the association from the existing pool of the company’s workforce may prove daunting. Some of these workers might have apathy toward the cooperative society which might have been occasioned originally due to one reason or the other. On the other hand, waiting for the recruitment of new workers to get additional members to recruit into the association might result in a hopeless hope.

Alternatively, encouraging existing members of the association to increase their contributions may be a tall order especially if there’s no increase in their existing incomes. Members who might have endured a long wait before obtaining loan or any other form of finance from the society might be disincentivized toward increasing his or her contribution.

Signs of gradual transformation of the cooperative into a Ponzi scheme

When you start enduring a long wait before obtaining loans despite not having an existing liability with the cooperative society; and having fulfilled other requirements for such loans, then there’s a problem of liquidity if this occur persistently. Emergency loan should ordinarily be easy to obtain: the requirements are not stringent or overly unfavourable. Therefore, it shouldn’t take a long wait before it’s given. But if this is otherwise, watch out! It’s a symptom you shouldn’t ignore.

In the same vein, based on the individual cooperative byelaw, the amount of finance that a member can access via emergency loan is often small compared to other forms of loan and therefore the association should be able to accommodate it. But if such proved difficult for your cooperative to advance to you, then you should understand that your association is experiencing liquidity challenges. A scantily filled cooperative stores or shops, and instances where the store endures long periods of no restock of products due to default in paying suppliers and other likes should alert you to the fact that your cooperative’s cash capacity is strained.

Moreover, some members of some cooperative management see the society as a tool for the advancement of their personal goals, sometimes to the detriment of the other members and the cooperative as a whole. They give themselves and their cronies loans, most times beyond the limit imposed by the association byelaw and agreement collectively taken by the members at their various decision making fora.

Some of these executive members could also indulge themselves by suspending the interest they ordinarily should pay on the loans they take. Repayments on some of their loans sometimes lapse and could collusively be written off without the knowledge and approval of the other cooperative members. 

At times, they – the cooperative management – give themselves allowances and other largesse without the collective approval of the members. This largesse is often couched as honorarium in the accounts with no explanations. Sometimes, no member bothers to ask questions when they see such items in the accounts of the society.

A lot of this hanky-panky goes on that gradually bleed the finance and liquidity of the association. And eventually, in no distance time, if no diagnostic and remedial actions are taken, the cooperative lapses into a Ponzi scheme, goes bankrupt and members lose their funds.

What you should do to remedy the situation

To help arrest a descent of your cooperative society toward bankruptcy, you must be vigilant and act fast. For the financially savvy members, this problem can be deciphered from computing liquidity and gearing ratios from the figures in the financial statements. But the genuineness and correctness of the ratios are also depended on the truthfulness of the financial statements presented to the members by the management of such cooperatives.

In relation to the above, false and window-dressed financial statements from a dishonest management will not help much in this quest. Therefore, you must also watch out for unethical activities on the part of the management of your cooperative society.  Ask questions from other members and probe into the activities of the association keenly. 

In consonance with some like-minded members, request that the total contributions vis-à-vis loan balances of all cooperative members be published for the review of all members. Move for an extra-ordinary meeting of the members and jointly move for the appointment of an independent reviewer or an auditor for forensic investigation of the association’s books of accounts to determine the true financial state of the cooperative society.

On your part, if you’re knowledgeable in financial accounting, you can request for the bank statements of all the association’s bank accounts from the management. From these statements, you should be able to reconstruct any doctored financial statements of the association to their ‘true and fair view position’.  

Be proactive, your investment in that cooperative society may be lost if no care is taken!


7 Financial Consequences of the Finance Act 2020 on an Individual

The Finance Act 2020 – the latest Act in Nigeria – amends some existing and extant laws of the country. Among the Acts amended or impacted upon by this new Law are Capital Gains Tax Act, Companies Income Tax Act, Industrial Development (Income Tax Relief) Act, Personal Income Tax Act, Tertiary Education Trust Fund Act, Customs and Excise Tariff Act, Value Added Tax Act, Stamp Duties Act, Federal Inland Revenue Service Act, Nigeria Export Processing Zones Act, Oil & Gas Export Free Zone Act, Companies and Allied Matters Act, Fiscal Responsibility Act, and Public Procurement Act.  The Act, in its last part also establishes the Crisis Intervention Fund and Unclaimed Funds Trust Fund. But I know like me you will ask: what’s in it for me? How does the Act affect me?

As an ordinary individual you should know that the Finance Act 2020 brought into force on the 1st of January 2021 has implications and consequences for your finances. When I say finances, I mean finances; your inflows especially how much money comes in for you and how much money goes out.

What you should know as an individual is that this Act will affect your finance whether you like it or not. The effects it has on your finance may be high or low in magnitude. But whichever way, it will bear consequences on your finances. Your cash flows will be affected in ways you may not have given thoughts to before now. Such impacts on your finances may also be immediate or in the future depending on your finance state and the sources of your income.

Some individuals are salary-earners and therefore the Act may impact on their salary immediately in a noticeable way. While some others earn their incomes from businesses, vocations, trades and professions with the impacts of the Act being deferred. Having said this, these are the financial consequences of the Finance Act 2020 on you as an individual, trustee or executor.

1.     You are liable to tax working in Nigeria but living abroad.

Do you live abroad but work for clients in Nigeria? Please, get ready to experience a dip in your cash flow if you are a non-resident person working in Nigeria.

Nowadays, it’s easy to reside anywhere in the world and work in Nigeria or in any country for that matter. The Finance Act 2020 specifically mentions some jobs such as management, consultancy and professional services, which you could be doing in Nigeria while residing abroad. The era of internet and COVID-19 pandemic have made it not only a possibility or reality, but a new normal as CNN would call it. Management functions can be performed from anywhere around the world, so also is consultancy service. A website designer living abroad can render a service to their client in Nigeria without necessarily leaving their base.

The good news (or is it a bad news?) is: you – whether you are a non-resident Nigerian or non-Nigerian – are liable to tax on the income you derive from such services rendered while living abroad to a person living in Nigeria to the extent of your significant economic presence in Nigeria. According to the Act, what the extent of your significant economic presence in Nigeria from such service rendered to someone in Nigeria from abroad is will be determined by the order of the Minister of Finance.

So, what you, an individual living abroad, ordinarily enjoy as cash savings (in the form of no tax payment) on income derived from services rendered to a client living in Nigeria is now cancelled. The profits from a trade, business, or vocation carried on with someone living in Nigeria by an individual living abroad is now taxable to the extent of what the Act called significant economic presence in Nigeria. Where significant economic presence is not applicable, the withholding tax deducted from the payment to such non-resident individual becomes the final tax for the individual in respect of such profession or consultancy.

2.     Salary earners and others will pay more as personal income tax

Salary earners will pay more as personal income tax unlike before. Although, it’s not only salary earner that will have their pockets’ holes widened for more income tax payment, but this group of individuals will notice the effects on their pay slips easily. Let me reiterate it; your net pay for this month and subsequent ones will be reduced and this reduction in net pay may be more noticeable for high salary earners as the provisions of the new Act are implemented on your organization’s payroll.

But you will wonder how. The possible reduction in pay going forward is premised on the new definition of gross income as per section 29 of the Finance Act 2020.

Gross income is defined by this Act as income from all sources less all non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph (2) of the Sixth Schedule, and all allowable business expenses and capital allowance. This section categorically states that gross income is the income from all sources (please note the next phrase) less all … tax-exempt items. 

Do you remember Consolidation Relief Allowance (CRA)? Do you remember that the computation of CRA is based on the gross income. Section 5 of the Personal Income Tax (Ammendment) Act 2011 states that there shall be allowed a consolidation relief allowance of =N=200,000 subject to the minimum of 1% of gross income whichever is higher plus 20% of the gross income. Before now, gross income is simply computed as the total of all the income from all sources (excluding franked investment income of course), and this is used as the basis for the computation of the CRA. That’s either of =N=200, 000 or 1% of the gross income (whichever is higher) added to 20% of the gross income. But under the new Act, kindly expect your gross income to reduce due to this new definition.

Gross income is now all your total income less all non-taxable income and tax-exempt items. It’s the tax exempt items that are indeed relevant to you as a salary earner. The question is: what are your tax-exempt items under the provisions of the Act? These are your monthly pension contribution which is 8% of your gross salary, contribution to National Housing Fund (NHF) and, as you will see later, the previous year’s insurance premium on either your own life or the life of your spouse.

For example, let assume the following scenario for you for the month of February 2021: gross pay =N=500,000, monthly contribution to pension fund of =N=40,000 (i.e. 8% of =N=500,000) and a monthly contribution to NHF of =N=60,000. From this scenario, your pre-Finance Act 2020’s gross income will still be =N=500,000. But specifically for February 2021 (i.e. Finance Act era), your gross income will be computed as =N=400,000 (i.e. =N=500,000 – (=N=40,000 + =N=60,000)). That’s your gross salary less all the tax-exempt items such as contribution to pension and NHF.

Now remember, it’s on this figure that the Consolidation Relief Allowance will be computed. This new gross income will yield a CRA of =N=280,000 as against the sum of =N=300,000 based on pre-2021 definition for the same gross pay. A lower allowable deduction will increase the taxable income and by extension the tax to be deducted from your pay to arrive at your net pay or salary. Though the impact may be negligible on the income of low salary earners, but cumulatively over a 12-month period, and for high salary earners, this may become noticeable.  

Just so you know, people who derive their income from businesses, vocation or professional services are not immune to this too. The computation of their gross income will also include the deduction of items like capital allowances etc.   

3.     Profits from business, trade etc. are now assessed solely using actual year basis.

Going forward, the income from your unincorporated businesses, vocation, trade or profession will now be taxed using only Actual Year Basis (AYB) rule. But generally, businesses (both incorporated and unincorporated ones) are assessed using the Preceding Year Basis (PYB) rule. The PYB rule means the business profit that will be assessed for tax (or on which tax will be calculated and paid in a particular year) is the business income of the year before.

For example, if the year of assessment (i.e. the tax year) is year 2021, according to the PYB rule, the business profit that will be used for tax purpose is the business profit for the year 2020. 

Usually, for a new business, trade, or vocation, there will be no income for the preceding year (i.e. the year before the year of starting the business or trade). Or what will be the income to use for tax purpose in the year 2020 if you commenced a trade or vocation in the same year 2020 under the PYB rule? To work around this, under the Personal Income Tax Act, the income for a new business is assessed for tax using what is known by the accountants and tax practitioners as the commencement and cessation rule.

The commencement rule gives the tax payer the right to elect to revise the assessments or assessable profits for both the second and third year of the business using the AYB rule (mentioned above) if it’s favourable to them, while the business profit will be assessed in the subsequent years (i.e. fourth year and so on) using the PYB rule. In the final year and penultimate year of the business, cessation rule becomes applicable which gives the right of election to the tax payer to have the business profit revised using the AYB rule for the penultimate year of the business.

But under this new Act, the option to adopt either AYB or PYB rule based on which rule gives a better tax saving is no longer available to you as an individual having a business, trade, vocation or profession. All business incomes (for only unincorporated businesses and trades) are now assessed for tax using only AYB rule according to section 27 of the Act.

4.     Low-income wage earners are excluded from paying personal income tax.

If you are a low income earner, there is good news for you. Or if your income is the minimum wage of =N=30,000 as it is today in Nigeria; you are now exempted from paying personal income tax.

The members of the National Youths Service Corps (NYSC) and the Industrial Training (IT) students who earn monthly stipends that are =N=30,000 or less will greet this provision with happiness. Gone are now the days when a minimum wage earner will still be compelled to pay tax at the applicable rates. Even those who earned less than minimum wage were compelled to pay the minimum applicable tax rate of 0.5% of their total income in the pre-Finance Act 2020 period.

5.     You can use the premium payment on your own or your spouse’s life insurance to reduce your income tax liability

Good news here! The amount you pay as premium on your own life insurance or on your spouse’s life insurance is now allowed for deduction in the computation of your taxable income and the final personal income tax to be paid by you. According to section 29(3), There shall be allowed a deduction of the annual amount of any premium paid by the individual during the year preceding the year of assessment to an insurance company in respect of insurance on his life or the life of his spouse, or of a contract for a deferred annuity on his own life or the life of his spouse.

The amount to be used as allowable deduction is the previous year’s premium paid by you for life insurance either on your own life or that of your spouse.

6.     Payment of levy on electronic money transfer deposit of =N=10,000 and above

Do you know that there is now a levy of =N=50 (I know this is being paid by you as I am typing this article) on every deposit of =N=10,000 and above that you receive in your bank account via electronic money transfer? But you may consider =N=50 as too … insignificant to be bothered with.

But please picture how this will affect your finance as a business person or a trader. Imagine in a single day you receive a cumulative sum of =N=1 million via electronic money transfer of =N=10,000 each. This translate to 100 deposits on that particular day of =N=10,000 per deposit. The implication is that you would have incurred and paid a total electronic money transfer levy of =N=5,000 (i.e. =N=50 * 100) for just one day! Imagine what a huge drain this will constitute on your finance as a business person receiving inflows from your customers for sales on daily basis.

7.     Reduction in your air transportation cost

With the introduction of the Finance Act 2020, it is expected that the cost of your air transportation should drop at the existing Value Added Tax (VAT) rate. The Act provides that commercial airline ticket is now exempted from VAT. Consequentially, no VAT on your air ticket cost means a saving on your air transportation cost by about 7.5%. This will be a bit of financial relief for you if you are a regular airline passenger.

How to Prepare a Loan Amortization Schedule: a Prerequisite for a Thorough Understanding of Your Credit Risk’s Exposures

How to prepare a loan amortization schedule may not be one of those “how-to” you might be overly disposed to want to consider. Your initial take may be that since you will be provided with one at the point of obtaining a loan, then what’s the heck about knowing how it’s prepared? “Will not knowing how a car is manufactured preclude one from driving it?”

Anyway, you may be marginally right regarding a car but experience has shown that people who understand the workings of a car often excel in, not only driving but also how to maintain and handle it thereby extending its useful life than those without such knowledge. Beside, my personal experience with people without the knowledge of how a loan amortization is prepared and the details of its content indicates that such people, usually are highly vulnerable to credit risks unlike those that possess such knowledge.

A loan amortization versus a loan amortization schedule

To amortize, is to reduce a loan principal through a series of payment at periodic intervals over the tenure of the loan. For instance, if you obtain the sum of NGN100,000 from a bank as loan with a quarterly periodic payments agreement. The process of making such regular repayment amounts based on the amount stipulated on the loan amortization schedule agreed with the bank to liquidate or extinguish your debt is known as amortization.

A loan amortization schedule on the other hand is a schedule or table that shows the initial loan principal, the periodic interest amount, the periodic repayment amount, and the closing balance on the principal amount after each payment for each repayment period over the duration of the loan. It’s a table with columns for the headers and other amounts either determined or computed based on the agreed parameters of the loan.

It’s to be understood that a loan amortization schedule is usually prepared during the course of a loan negotiation, often before the loan is given. Upon agreement, the understanding is that repayment on the loan will be made accordingly in the spirit and figures in the schedule.

The columns in a loan amortization schedule

Depending on the information ‘mood’ of the lender, and possibly at the request of the borrower, a loan amortization schedule at the very basic level will usually have the following columns, namely:

  • Opening balance
  • Initial loan amount
  • Interest amount
  • Periodic payment amount
  • Closing balance

There are times when a schedule will provide an expanded view that includes the cumulative interest amount column and another column for the portion of the initial loan principal included in the repayment amount.

Illustration on how a loan amortization schedule can be prepared

In preparing a loan amortization schedule, the various figures required for each column-row intercept must either be determined as provided or calculated using the parameters provided in the loan agreement. To explain the procedures involved in the preparation of a loan amortization schedule, let’s use an illustration as stated below:

Let assume you approached a bank A for a loan of NGN10,000 at an interest rate of 8% per annum to be repaid over a period of 1 year. Repayment is to be made as instalments at the end of each month.

Procedures in the preparation of a loan amortization schedule

To prepare a loan amortization schedule you have to follow these procedures keenly. To understanding its content, these procedures will provide explanations on how the various amounts in it are either determined or calculated.

Here are the procedures:

  1. Identify the loan principal and the opening balance for each period

To even begin at all, you must identify the loan principal. This is the amount of the loan you are about to obtain from a lender. This is not only important in the sense that it’s the basis for the computation of the interest amounts on the loan over its tenure, but it’s also the basis for the calculation of the periodic payment (i.e. repayment amount) you will make as instalments to liquidate the loan and the interest amounts that accrued on it over the course of time.

Now over to you; based on the illustration given in the section above, what’s your loan principal?

Of course, your guess is as good as mine. It’s NGN10,000. But before you move further, remember, you need this sum, not only in the calculation of the first period’s interest amounts, but also in the computation of the periodic repayment amounts.

On the contrary, the opening balance for the first period of the loan will usually be zero. But subsequently, the opening balance for each period should be identified as the preceding period’s closing balance. That’s, if period 1 closing balance is NGN45,000, the opening balance for period 2 should automatically be equalled to NGN45,000.

  • Determine the number of repayment periods per annum

During the discussion between the borrower and the lender, the number of times repayments will be made as instalments in a year will usually be agreed on. For instance, as a salary-earner, you may agree with your lender to make repayments on the loan every month and based on this, the number of times you will make repayment on the loan in a year is … twelve. Right!

Making this determination regarding the number of payment periods on the loan in a year impacts not only the periodic repayment amount, but also the interest rate to be used in calculating the periodic repayment amount. Therefore, for our illustration the number of repayment periods per annum is 12 since repayment is expected to be made monthly (there are of course 12 months in 1 year!).

  • Determine the interest rate per repayment period

It’s easy to dismiss this procedure as not being necessary, since (you may assume) the interest rate is clearly stated in the illustration. Sure enough, an interest rate per annum is stated clearly in the illustration, but in the determination of the interest rate to use in the calculation of your interest amount for each repayment period what I called the interest rate per repayment period must be determined.

Just so you know, the interest amount (in our illustration) for each repayment period will not be calculated based on the 8% interest rate given but rather, on the interest rate that will be calculated using both the number of compounding and periodic payments in a year. Though, only the number of periodic payments is applicable in our illustration.

Therefore, to determine the interest rate for the determination of the interest amount for each repayment period on the loan amortization schedule, just divide the interest rate given by the number of the repayment periods. In your own case, in the illustration, the interest rate to apply on the initial loan sum and each subsequent opening balance of the loan for each repayment period, is calculated and approximated to 0.0067 (i.e. 0.08/12).

  • Calculate the interest amount for each repayment period

Once the interest rate per repayment period is determined, the calculation of the interest amount for each repayment period should be easy. This, you will calculate by applying the rate you determined in the procedure above on each of the opening balance of the loan amount.

Please, remember that there will be no opening balance in the first period. Therefore, for the initial period, the interest rate per period should be applied on the loan principal to determine the interest amount for the period.

  • Determine the periodic payment or repayment amount.

The periodic payment amount is the repayment amount paid by a borrower at the end of each repayment period under the loan agreement. This amount, which is usually a constant figure, embodies the applicable interest amount for the period and a portion of the outstanding loan principal.

Three parameters are required in the calculation of the amount to be paid per period (i.e. periodic payment or repayment amount) over the entire lifespan of the loan. These are: the initial principal loan amount, the interest rate per repayment period (remember this from step 3), and the number of repayment periods per annum(remember this from step 2).

It’s calculated using the formula below:

Pp = [ P / (1 – (1 + r)-N) ]  x  r


Pp = Periodic Payment or Repayment Amount

P = Initial Loan Principal

r = Interest per Repayment Period (stated in decimal fraction)

N = Number of Payment Periods per Year

Given our illustration,

P = NGN10,000

r = 0.0067 (i.e. 0.08/12)

N = 12

Therefore Pp (i.e. Periodic Payment Amount) is equalled to NGN869.88.

  • Determine the closing balance on the loan

The closing amount is determined as the sum of the opening balance amount and the interest amount less the repayment amount for the same period. Care must be taken here as in the first period the opening balance will be zero; there will be just the principal loan amount for this period. Therefore, for the first period, the closing balance should be calculated as the sum of the initial loan amount and the interest amount less the repayment amount for the period.

It’s expected that at the last repayment period, if your calculation is correct, the closing balance should come to zero. At this point, the loan is completely amortized.

Therefore, based on our hypothesized case, your loan repayment schedule will look as shown below:


Now that you understand how the figures in a loan amortization schedule are arrived at, you should be able to make quality decisions regarding your finances especially at the point of obtaining a loan. Credit card providers often charge interest amounts that are at variance with the agreed interest rate. By using any of the online loan amortization schedule calculators you can generate an amortization schedule and with this information you will be able to determine whether the organization is cheating you on the applicable interest amount on your credit card account or not.

Facts about Tax Clearance Certificate (TCC) in Nigeria

A Tax Clearance Certificate (TCC) is an official document issued by a particular tax authority, that indicates that a taxpayer is cleared of all tax liabilities for the three years before the current year. In other words, it’s a document that certifies that a taxpayer does not owe tax in respect of the immediate three years before the current year.

A TCC is issued by the Federal Inland Revenue Service (FIRS) in Nigeria upon application within a time frame – although the law specifies two (2) weeks – if the taxpayer/applicant is a corporate body (i.e. company). But for an individual taxpayer/applicant, the issuing body is the relevant tax authority of the state where the individual resides. For you as an individual living and residing in Lagos, your application for a TCC will be done through the Lagos State Internal Revenue Service (LSIR).

Usefulness of Tax Clearance Certificate (TCC)

TCC is important and compulsory for the execution of certain transactions in the country. Although in recent times, you may carry out some of the transactions stated below without as much as a show of a TCC in Nigeria.

Some of the situations that might warrant the need for a TCC include the followings:

  • Application for a loan from the government or any of its agencies (As at today, you can’t apply for a government industry loan without a TCC).
  • Application for the registration of a motor vehicle (You can still get away with this without a TCC in Nigeria today).
  • Application for a firearms license.
  • Application for a certificate of occupancy (I know people who got CofO lately without a TCC).
  • Application for the award of contracts from the government and its agencies (Without a TCC you don’t stand a chance except you cut corners!).
  • Application for a trade license (The same rule as above applies).
  • Application for an import and export license (Your application may not be treated without a TCC unless you know your way!).
  • Application for a gaming license (The same rule as above applies).
  • Application for a registration of a business name and incorporation of a company (I once incorporated a company with the CAC without as much as a demand for a TCC).

Conditions for the issuance of Tax Clearance Certificate (TCC)

For you to be issued a TCC you must:

  • Apply for a TCC by filling a TCC application form either online or in hard copy form; this will be submitted at the relevant internal revenue office of the state where you reside or FIRS office if it’s an application from a company.
  • You must have fully paid all the tax liabilities (i.e. personal income tax, Value Added Tax (VAT) etc) for the three years before the current year.
  • Or that you are not liable for any tax in the three years preceding the current year.

Content of a Tax Clearance Certificate (TCC)

The following are usually included in a TCC:

  • Tax payer’s name.
  • Tax identification number.
  • Chargeable or taxable income.
  • Tax liability or tax payable.
  • Amount of tax paid for those years.
  • A statement to the effect that no tax is outstanding or due.


For example, if you earn NGN1 million in 2018, 2019 and 2020. And personal income tax of NGN30,000 each was assessed or calculated as tax liability for each of the year which you promptly paid before due date in each year. The implication is that you owe no tax liability and a TCC should be given upon application to you in 2021 indicating all this information.

In the same vein, if you earn NGN300,000 (which is below the minimum wage) in 2021, 2022 and 2023  you can also apply for, and be given a TCC in 2024 to show that there is no tax unpaid for the three (3) years since your income is tax exempted for the years specified.

Minimum Wage-Earners, Minimum Tax and the Finance Act 2020

Something got my interest recently at the office on the Finance Act 2020. There was an argument among my professional colleagues on the issues of minimum wage and minimum tax payment as applicable under the personal income tax.

One group stated that minimum tax was no longer applicable under the personal income tax law; that minimum tax payment has been abrogated by the Finance Act 2020 with the introduction of zero tax on the incomes of minimum wage-earners. The opposing side stated otherwise.

In the same vein, someone among the group mentioned that those who earn minimum wage, and consequently don’t pay tax cannot apply for Tax Clearance Certificates (TCC), and even if they apply, their applications will be denied.

Based on all these arguments, the question of what’s the correct position of the law regarding some of these aspects of personal income tax under the extant laws in Nigeria becomes pertinent. Accordingly, these arguments raise some questions regarding your position vis-à-vis personal income tax in Nigeria. Below are some of the questions, and answers based on the prevailing tax laws.

Question 1: According to the Finance Act 2020, should the minimum wage referenced in the Act be interpreted as per month or per annum?

We all know that the current minimum wage in Nigeria is NGN30,000 per month.  We all understand that minimum wage in Nigeria is usually stated per month while it’s usually quoted per hour in the US.

But on the contrary, some of us also understand that in the Nigerian tax laws, most often than not, incomes (inclusive of wages) are usually meant to be interpreted as stated or mentioned per annum. Though, this argument couldn’t have arisen at all had it mean the arguers placed prime attention to the wordings of the Act regarding this matter.

First, no value (NGN30,000 or otherwise) is mentioned in the Finance Act 2020 as the amount for minimum wage. But it’s, however, alluded to that what constitutes the minimum wage amount is determined by the National Minimum Wage Act (NMWA).

At present, according to this Act (i.e. NMWA), the minimum wage in Nigeria is NGN30, 000 per month (i.e. NGN360,000 per annum). Though it’s possible for the National Minimum Wage Act to be changed tomorrow; but as long as the amount you earn monthly is below the amended value stated as minimum wage by the new provision, the exemption from the payment of personal income tax will apply accordingly.

But for now; if your monthly take-home is NGN30,000 or less, you are exempted (i.e. excluded) from the payment of personal income tax.

Question 2: Is minimum tax payment still applicable?

Based on the fact that minimum wage-earners and those who earn less are exempted from the payment of personal income tax, a new belief is being bandied that minimum tax payment is no longer applicable under the personal income tax law.

Please note that it’s Section 37 of the Personal Income Tax Act (PITA) 2004 that deals with minimum tax payment.  This section was amended by Section 7 of the Personal Income Tax Act (PITA) Ammendment 2011 by changing the minimum tax rate from 0.5% of the total income to 1%.

According to the provisions of these Acts, if you have no chargeable income after all the allowable deductions (e.g. Consolidated Relief Allowance (CRA)*) have been made, or where the tax applicable is less than 1% (not 0.5%) of your total income, you will be made to pay a personal income tax of 1% of your total income.

But the question is: does the Finance Act 2020 cancel this provision (i.e. minimum tax) since Section 30 of this Act amends Section 37 of the PITA 2004?

No! It doesn’t cancel the minimum tax provisions but only extends it by adding that if you earn a minimum wage or below you are exempted from the payment of personal income tax. In a situation where you earn more than the minimum wage (which as you know is presently NGN30,000 per month), and after deducting all your reliefs and allowable deductions such as CRA; if there is no chargeable income or where the tax applicable or payable is less than 1% of your total income. Then the personal income tax you will be made to pay is 1% of your total income.

To help you gain an understanding of how we arrive at this position, the excerpts below should do.

An excerpt from Section 37 of the PITA 2004:

Subject to the provisions of this Act, the income tax that may be payable on the chargeable income of an individual ascertained in accordance with the provisions of this Act shall in respect of each year of assessment, be assessed at the rate or rates specified in the Sixth Schedule to this Act so however that where after all deductions allowable under this Act the individual has no chargeable income or where the tax payable on the chargeable income of that individual is less than 0.5 per cent of the total income of that individual, the individual shall be charged to tax at the rate of 0.5 per cent of his total income.

An excerpt from Section 7 of the PITA Ammendment Act 2011 that amended the section above:

Section 37 of the Principal Act is amended by substituting for the figure “0.5” the figure “1” in lines 6 and 7 wherever it appears.

An excerpt from Section 30 of the Finance Act 2020 that amended Section 37of the PITA 2004:

Section 37 of the Act is amended by inserting, after the word, “income a new “proviso”—

“Provided that minimum tax under this section or as provided for under the Sixth Schedule to this Act shall not apply to a person in any year of assessment where such person earns the National Minimum Wage or less from an employment.”

Based on all these, the position of the law should be read as below:

Subject to the provisions of this Act, the income tax that may be payable on the chargeable income of an individual ascertained in accordance with the provisions of this Act shall in respect of each year of assessment, be assessed at the rate or rates specified in the Sixth Schedule to this Act so however that where after all deductions allowable under this Act the individual has no chargeable income or where the tax payable on the chargeable income of that individual is less than 1 per cent of the total income of that individual, the individual shall be charged to tax at the rate of 1  per cent of his total income.

Provided that minimum tax under this section or as provided for under the Sixth Schedule to this Act shall not apply to a person in any year of assessment where such person earns the National Minimum Wage or less from an employment.

Question 3: Can a minimum wage-earner apply for a Tax Clearance Certificate (TCC)?

This question seems pertinent. It’s easy to simply conclude that since you don’t pay tax as a minimum wage-earner you can’t apply for a TCC. And if you venture to apply, you will be denied.

But it’s not so. As a minimum wage-earner you have the right to apply for a TCC and your request should be granted provided you filed your tax returns appropriately and accordingly for the relevant years.

This means you completed the tax return forms with the details of your incomes and also included in its appropriate section the applicable tax which, in your own case is zero. As long as you have done this, a TCC bearing these details will be issued to you.


*CRA (i.e. Consolidated Relief Allowance) is the sum of the higher of NGN200,000 and 1% of gross income plus 20% of gross income. Remember that your gross income is your total income less all the tax exempts or reliefs.

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