KwaZulu-Natal state-owned development agency Ithala is 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.
In a letter from the Prudential Authority (PA) to Ithala, obtained by Business Day, Absa notified the entity a year ago that it would end the agreement by the end of 2023. Several issues about its governance structures were raised in the letter.
The document also shows that after Absa’s notice to terminate the partnership, Ithala tried unsuccessfully to woo Standard Bank to replace Absa.
“Absa Bank has advised Ithala that it intends to terminate its sponsorship arrangement with Ithala for clearing and settlement in the national payment system, with effect from December 31 2023,” the watchdog told Ithala.
“The PA has also been advised by Ithala that the Standard Bank of SA has declined to enter into a sponsorship arrangement with Ithala for clearing and settlement in the national payment system.”
Backbone
The Reserve Bank, to which PA reports, has the legal responsibility for the NPS, the backbone of SA’s financial system.
According to the country’s banking laws, nonclearing 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 had its origin in the establishment of the Bantu Investment Corporation in 1959, which was set up to cater for the black community in KwaZulu-Natal. The company has long aimed to be a fully fledged bank, with little success. It currently funds small, medium and micro enterprises, co-operatives and infrastructure projects.
While not a bank, Ithala takes deposits due to an exemption granted to it by the PA.
Ithala told Business Day that the reason advanced by Absa for the imminent termination of the long-standing sponsorship was “strategic misalignment”. It said Absa does not provide it with key facilities such as real-time clearance, SWIFT and PayShap.
“Sponsorship agreement negotiations with various banks, including Standard Bank, are ongoing. Because of the nature of these agreements, sponsoring banks have to undertake rigorous internal assessment before making a decision. Once Ithala secures a potential sponsoring bank, it will seek approval of the sponsorship from the relevant regulators,” Ithala said.
Transition
“Given the transition plan and processes under way to secure another sponsor bank, Ithala will continue to have access to the national payment system.
“We are confident that we will secure a new sponsor bank subject to regulatory approval and implement a smooth transition while continuing to service our clients.”
Absa declined to comment, citing standard confidentiality in contractual arrangements with third parties.
In the letter, the PA also slammed Ithala, saying 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.”
Ithala has for more than a decade tried to obtain a permanent banking licence. It is currently operating with a renewable banking licence exemption notice, which is renewable every 12 to 24 months.
The most recent exemption, granted in June 2022, is expected to lapse at year’s end.
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, has rubbed the company and the provincial government up the wrong way.
Another condition 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 risk-weighted assets held by Ithala, or R250m. This guarantee would be in favour of the PA.
The PA says Ithala has met none of its conditions.
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”.
Judge Anthony Millar last week dismissed all issues raised by Ithala and the provincial government, jeopardising the future of the entity.
“The purpose of imposing this condition 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 reads.
“The Reserve Bank does not comment on entities that it regulates,” the central bank said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.