Regulator clamps down on Ithala
State-owned development agency Ithala’s ambitions of being a fully fledged bank were dealt a heavy blow after a repayment administrator was appointed to look after its affairs, in a move that essentially begins the process of winding down its deposit-taking activities.
The Reserve Bank has appointed Johan Kruger, one of SA’s leading investigators into Ponzi and pyramid schemes as Ithala’s repayment administrator after a court order in December.
According to the Bank’s website, a repayment administrator is appointed to “manage and control the repayment of the money unlawfully obtained”.
This is after the Prudential Authority (PA) invoked sections 81 to 84 of the Banks Act, which empower the regulator to take control of the activities of unregistered entities.
These activities are, however, confined to illegal deposittaking. Ithala has for more than a decade tried to obtain a permanent banking licence, without success. It has been operating with a banking licence exemption notice, which is required to be renewed every 12 to 24 months. The most recent exemption, granted in June 2022, lapsed at the end of 2023.
The appointment of Kruger signals that the PA no longer regards Ithala as a deposittaking institution and that Kruger must start a process to pay its depositors back their money.
Ithala’s demise could damage the reputation and credibility of state-owned entities in the banking sector as it comes at a time when the government is taking steps to turn PostBank into a fully fledged bank that it hopes will emerge as a viable alternative to established banks in the private sector.
Kruger over the years has been involved in complex investigations, including a scheme known as Travel Ventures International, with a total value exceeding R6bn. He assists the Bank’s financial surveillance department with investigations into contraventions of the exchange control regulations. This role includes overseeing a team of forensic accountants investigating financial statement fraud, asset tracing and dealing with complex legal issues related to the regulations and other relevant legislation.
Ithala and the PA have had numerous run-ins over the past year, as exclusively reported by Business Day.
The PA in a letter to Ithala in June 2023 warned it that its regulatory returns are frequently late and not in compliance with regulations governing banks, making it difficult for the PA to appropriately supervise it.
“The Banks Act does not provide for a provincially owned entity such as Ithala to apply for authorisation to establish a bank. Consequently, Ithala’s continuation of its deposit-taking activities will be entirely reliant on the PA’s continued issuance of exemption notices in terms of the Banks Act,” the letter reads.
“Operation under exemption is meant to be a temporary measure that is aimed at assisting qualifying institutions to regularise themselves as a type of financial institution.
“Ithala has not been able to do that since [its] formation.”
The PA gave the KwaZuluNatal agency a “final opportunity” to regularise its deposittaking activities or such activities would be wound down.
To extend its exemption and protect depositors’ money, the PA put forward stringent conditions for Ithala to meet. One of the conditions is that the provincial government or national government provide irrevocable and unconditional guarantees to fund all capital shortfalls to an amount of 15% of the riskweighted assets held by Ithala, or R250m. This guarantee would be in favour of the PA.
The provincial government
dragged the central bank and the PA to the high court in Pretoria, arguing that the conditions were irrational, going as far as to call the guarantee condition “extraordinary”. The court ruled against Ithala, and denied it leave to appeal against its decision at the tail end of 2023.
The PA gave its clearest indication yet that the exemption Ithala has relied on to resemble a bank is not imminent. “The PA is not in discussion to renew the exemption,” a PA spokesperson told Business Day.
This is in contrast to what the company’s CEO, Thulani Vilakazi, told this paper a few weeks ago: “Ithala and its stakeholders are in continuous engagement with the PA regarding the exemption.
“The PA has committed for Ithala’s operations not to be disrupted and to continue as normal while engagements on the exemption are ongoing, to prevent financial instability.”
Ithala has its origin in the establishment of the Bantu Investment Corporation in 1959, which was set up to cater for the black community in KwaZuluNatal. Now it funds small, medium and micro enterprises, coops and infrastructure projects.
Ithala is also scrambling to secure a sponsorship agreement with a bank authorised to clear and settle payments in the national payment system after its long-term banker, Absa, informed it of its intention to terminate their nearly 20-year agreement.
According to the country’s banking laws, non-clearing financial services companies such as Ithala participate in the national payment system indirectly through sponsorship agreements with other clearing banks. Without a sponsor it is practically impossible to do business and transact in SA.
Ithala did not respond to questions related to the appointment of the administrator and its deposit-taking activities.
ONE OF SA’S LEADING INVESTIGATORS INTO PYRAMID SCHEMES IS ITHALA’S REPAYMENT ADMINISTRATOR