Judge finds the banking regulator treated Ithala unfairly over ‘secretive’ appointment

Ithala Bank’s management have won a temporary reprieve after the high court in Pietermaritzburg found the lender was treated unjustly by having its deposit activities essentially placed under administration in “secret”.

While not a bank, Ithala takes deposits due to an exemption granted it by the Prudential Authority.

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 must be renewed every 12 to 24 months. The most recent exemption, granted in June 2022, lapsed at the end of 2023 and was not renewed.

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 is entirely reliant on the Prudential Authority’s continued issuance of exemption notices in terms of the act.

Business Day reported in January that the Prudential Authority had started the process to wind down Ithala’s retail banking activities by appointing a repayments administrator to look after the company’s deposit-taking activities.

Johan Kruger, one of SA’s leading investigators of Ponzi and pyramid schemes, was appointed as Ithala’s repayment administrator after a court order in December.

According to the Reserve Bank’s website, a repayment administrator is appointed to “manage and control the repayment of the money unlawfully obtained”.

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However, the high court last week tore into how Kruger was appointed, finding it was unnecessary for the application to have been heard in camera and without the knowledge of Ithala.

“I am of the view that the existing court order created an injustice to the respondent because it was obtained in its absence on an urgent basis,” the judge said.

“The application ought to have been served on the respondent and mechanisms could have been employed by the applicant to ensure the matter was heard in camera, if he wanted to prevent the risk of a ‘bank run’ or run on the bank .

“The applicant could have built in safeguards for the hearing of the application so that it could be heard to the exclusion of members of the public, but on notice to the respondents.

“I am of the view that the application was not sufficiently urgent to be moved ex-parte at 8.30am

Kruger in’the s contention morning.” was that the application was heard in secret as to avoid a bank run on Ithala, which would have caused panic. This argument did not sway the presiding judge.

“There was a material nondisclosure of the facts which might have influenced the outcome of the application had the respondents been present. It accordingly follows that the reconsideration application must succeed...”

The decision by the court puts the Prudential Authority in a spot of bother as it has not renewed Ithala’s exemption, making its deposit-taking activities in legal quagmire.

Legally, the Prudential Authority and Kruger can still bring a fresh application, with Ithala given an opportunity to state its case.

Thulani Vilakazi, CEO of Ithala, said he hoped the Prudential Authority took cognisance of the ruling by the high court.

“The government set up Ithala to mobilise financial resources and to provide financial and supportive services to the people of KwaZulu-Natal, especially the poorest of the poor in deep rural areas, Vilakazi said. “The government must, therefore, do everything possible to support Ithala in fulfilling its mandate of banking the unbanked,” he said.

“Ithala has steered a steady ship — for over 20 years since the corporatisation of Ithala, it has been able to meet depositors’ demand. And one of the key aspects is that Ithala has never ever dipped into the depositors’ funds to cover its losses.”

The state-owned Ithala last month told parliament that Kruger had removed its executives as signatories on its bank accounts.

In a presentation before legislators, the bank said nearly two-thirds of its loan book was made of home loans. It had about R2.9bn in deposits at the end of November 2023, with 37.1% of this made up of fixed deposits.

Ithala’s presentation also showed it had 27,475 stokvel accounts with a total value of R290m, with a footprint of 38 branches in KwaZulu-Natal. There are 328,704 customers holding 398,522 accounts.

Ithala is scrambling to secure a sponsorship agreement with a bank authorised to clear and settle payments in the national payment system after its longterm banker, Absa, informed it of its intention to terminate their nearly 20-year agreement.

According to banking laws, nonclearing 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, which has been trying to get a banking licence for the past two decades, is in talks with Bidvest Bank on a partnership. The Prudential Authority could not be reached to comment.

KRUGER’S CONTENTION WAS THE APPLICATION WAS HEARD IN SECRET AS TO AVOID A BANK RUN ON ITHALA