Ithala: a banking dream in ruins
KwaZulu-Natal stateowned Ithala was supposed to be a blueprint and prototype for how capable the government can be at running a fully-fledged bank.
But after two decades of trying to get a banking licence from regulators, the future of the company is in peril after the Prudential Authority (PA) took steps to unwind Ithala’s deposit-taking activities.
The appointment of a repayments administrator to repay the public and entities who have kept their deposits with Ithala would come as a blow to small businesses and people in the province who bank with the entity.
With a footprint of about 38 branches in KwaZulu-Natal, many of them in far-flung places, Ithala has over the years been a bank of choice for rural people and small businesses in the province.
It had more than R2.5bn in customer deposits up to November and provided finance of about R2.2bn to people in rural areas and townships to buy homes, cars and other items.
While not a bank, Ithala takes deposits. It does so on application for and the granting of an exemption by the PA.
Ithala has for more than a decade tried to obtain a permanent banking licence. It has been operating with a renewable 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 PA has not renewed the exemption, rendering Ithala into a glorified Ponzi scheme.
The cracks between Ithala and the PA came to a head last year when the company, with the support of the provincial government, took the regulator to court seeking an order setting aside the stringent conditions the PA had imposed on it.
The conditions of the exemption, particularly the PA’s stance that Ithala has been given a “final opportunity” to regularise its deposit-taking activities or such activities will be wound down, rubbed the company and the provincial government up the wrong way.
Another condition is that the provincial government or national government must provide irrevocable and unconditional guarantees to fund all capital shortfalls to an amount of 15% of the risk-weighted assets held by Ithala, or R250m. This guarantee would be in favour of the PA.
Ithala has not met any of these conditions and has failed in its court bid to have them set aside.
“The purpose of imposing this condition [the guarantee] is entirely consistent with the purpose for which the Prudential Authority was established and, pertinently, in the case of Ithala to ‘protect financial customers against the risk that those financial institutions may fail to meet their obligations’,” the judgment of the high court in Pretoria reads.
Heinz de Boer, a member of the economic development and tourism committee in the KwaZulu-Natal legislature, said the demise of Ithala was on the cards for many years,
“Ithala has been an issue of concern for quite a while and in fact this very issue of Ithala being sustainable and the banking licence has been under discussion for several years at the economic development and tourism portfolio committee in the province and there has been extensive inquiries from the committee about its business case,” De Boer said.
“We were unfortunately told there were plans in place to get a banking licence as Ithala served a lot of people. Quite obviously, the province is not able to financially support Ithala. It is a symptom of the absolute chaos that is rampant in the economic development cluster in KwaZuluNatal at the moment ... one by one the entities are failing. It is disappointing as there are a lot of people relying on the bank.”
In its opposition to the conditions, Ithala tried to make a case on the impact the decision to not grant it an exemption or banking licence will have on its clientele.
“Existing clients of Ithala [will], through an arbitrary stroke of regulatory fait, join the innumerable in SA who are excluded from the formal regulatory banking space and who operate on the fringes of the sophisticated and regulated financial systems in SA,” Ithala argued in its court papers.
“This is contrary to the intention and policy of incorporating, rather than excluding, rural communities from such critical banking functions.
“It would be a significant step backwards for rural KwaZuluNatal with many very real-world consequences that make this highly undesirable.”
The decision by the PA to appoint Johan Kruger, one of SA’s leading investigators into Ponzi and pyramid schemes, as Ithala’s repayment administrator adds to the woes facing the company.
The company is also scrambling to secure a sponsorship agreement with a bank authorised to clear and settle payments in the national payment system (NPS) 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 NPS indirectly through sponsorship agreements with other clearing banks. Without a sponsor it is practically impossible to do business and transact in SA
Ithala has also had run-ins with the Financial Services Conduct Authority (FSCA). The watchdog last year took Ithala to task for failing to safeguard its clients’ insurance premiums.
This was after the FSCA found that Ithala did not keep clients’ short- and long-term insurance funds in separate, ring-fenced accounts, as required by the Financial Sector Regulation Act.
The FSCA also took issue with Ithala for failing to submit financial reports for two years.
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.
Ithala did not respond to questions relating to its future. The KwaZulu-Natal government also did not respond to requests to comment.
IT WOULD BE A STEP BACKWARDS FOR RURAL KWAZULUNATAL .. WITH MANY VERY REAL-WORLD CONSEQUENCES
THE WATCHDOG LAST YEAR TOOK ITHALA TO TASK FOR FAILING TO SAFEGUARD ITS CLIENTS’ INSURANCE PREMIUMS