The future of state-owned Ithala is hanging by a thread after the high court in Pretoria dismissed its leave to appeal the decision that it must comply with the stringent conditions imposed on it by the Prudential Authority (PA), which might see the company’s deposit-taking activities wind down.
“I am not persuaded that another court would come to a different conclusion or that there are any other compelling reasons why leave to appeal ought to be granted,” judge Anthony Millar ruled.
The KwaZulu-Natal government had asked Millar for leave to appeal his September judgment that the PA was well within its rights to impose conditions on Ithala as a means to safeguard depositors’ money.
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 is now 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, is expected to lapse at the end of 2023.
Business Day reported in October that the PA slammed Ithala, saying its regulatory returns are frequently late and not compliant with regulations governing banks, making it difficult for the PA to supervise it appropriately.
The KwaZulu-Natal government approached the North Gauteng High Court, asking it to interdict the four conditions the PA imposed on Ithala’s exemption, describing them as “extraordinary”.
One of the conditions is that the provincial or national government provides 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.
In addition, in the event of noncompliance with the conditions attached to the exemption notice, authorities will wind down Ithala’s deposit-taking activities, and Ithala subject itself to an audit, to be conducted at the cost of the PA.
At the time of the legal challenge, Ithala had not met any of the conditions demanded by the PA. The consequence is that if Ithala does not obtain a further exemption, it cannot lawfully continue with its deposit-taking activities.
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.
Ithala tried in vain to convince the court that the conditions imposed by the PA are draconian.
“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 KwaZulu-Natal with many very real-world consequences that make this highly undesirable.”
The decision of the court to dismiss the Ithala and the provincial government’s leave to appeal adds a layer of uncertainty to the future of the company, with the PA set to take a decision in the coming days on whether it grants another exemption.
In its court papers, the PA states the “exemption granted to Ithala in terms of this exemption notice is to afford Ithala a final opportunity to regularise its deposit-taking activities, and accordingly should the conditions stipulated in this exemption notice not be met, in accordance with the terms and on the basis stipulated herein, then Ithala’s deposit-taking activities shall be subject to winddown ...”
The KwaZulu-Natal administration and Ithala can still petition the Supreme Court of Appeal to hear the matter. The two entities were not immediately available to comment on Friday’s court judgment. The PA, as a policy, does not comment on entities that it regulates.
The court judgment adds to Ithala’s problems as it scrambles 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 at the end of 2023.
Ithala tried unsuccessfully to woo Standard Bank to replace Absa.
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.
Business Day reported two weeks ago that Ithala was cautioned by the Financial Sector Conduct Authority (FSCA) for failing to submit financial reports for two years.
The FSCA also 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.
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