KwaZulu-Natal state-owned development agency Ithala is carrying out deposit-taking activities without a banking exemption, which expired at the end of 2023.
Thulani Vilakazi, CEO of Ithala, said it is in “continuous engagement” with the Prudential Authority (PA) over the exemption.
“The PA has committed for Ithala’s operations not to be disrupted and to continue as normal whilst engagements on the exemption are ongoing, to prevent financial instability,” Vilakazi said.
While not a bank, Ithala takes deposits due to an exemption granted to it 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 must be renewed every 12 to 24 months. The most recent exemption, granted in June 2022, lapsed at the end of 2023.
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 act.
The company has been at loggerheads with the PA over “stringent conditions” imposed on it by the regulator, which might see the company’s deposit-taking activities wind down.
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 it will have to subject itself to an audit to be paid for by the PA.
Ithala has tried unsuccessfully to get the courts to set aside the conditions. In November it lost leave to appeal against an earlier decision by the North Gauteng High Court that the PA was well within its rights to impose the conditions.
The PA in that matter raised concerns to the court that Ithala has not regularised itself as a banking institution.
“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,” its court papers read.
Business Day reported in November that Ithala was cautioned by the Financial Sector Conduct Authority (FSCA) for failing to submit financial reports the two years before.
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 companyappears to have attended to these shortcomings.
Ithala 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 at the end of last year.
Vilakazi said the existing sponsorship agreement with Absa has been extended to May 1 to allow a transition to a new sponsoring bank.
“Negotiations with a prospective bank(s) are at an advanced stage and once finalised will be subject to the PA’s approval before 1 May 2024. Over and above the clearing and settlement sponsorship, Ithala is presently engaged in a Strategic Banking Alliance negotiation with a licensed bank(s) to harness retail banking synergies for the benefit of our customers,” he said.
“The Strategic Banking Alliance option has the full support of the PA as Ithala readies itself towards a full banking licence.”
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.
The PA has not responded to questions by the time of publication.
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