The Prudential Authority’s (PA) patience with embattled KwaZulu-Natal-owned development agency Ithala has finally run out, with the regulator seeking the company’s liquidation in a move to protect more than 250,000 depositors.
The Reserve Bank, which houses the regulator, said it was seeking the liquidation of Ithala, effectively ending its ambition of being a fully fledged bank.
“The Prudential Authority believes this action is in the best interests of the about 257,000 depositors of Ithala, as the appointed liquidator will be able to use insolvency legislation to recover and distribute their funds to the extent possible,” the central bank said in a statement.
“The liquidation application means that depositors’ accounts will have to be closed to allow for the pending court processes. This measure will avoid a run on the institution and allow for a fair and orderly distribution of available funds. We understand the inconvenience and hardship this may cause. However, this is the necessary step to protect depositors,” it added.
“Depositors must note that the National Treasury has written to the Prudential Authority, advising that the government will guarantee their funds. In the interim, depositors must urgently make alternative arrangements to address their banking needs.”
Ithala has its origins in the establishment of the Bantu Investment Corporation in 1959 to cater for the black community in KwaZulu-Natal. It now funds small, medium and micro enterprises, co-operatives and infrastructure projects.
The company has been in and out of court with the Prudential Authority in recent years as the regulator sought to have the entity regularise its affairs.
Though not a bank, Ithala takes deposits due to an exemption granted by the Prudential Authority. Ithala has until recently been operating with a banking licence exemption, which is renewable every 12-24 months.
The most recent exemption lapsed in December after Ithala failed to meet conditions laid out by the Prudential Authority.
The regulator raised concerns about Ithala’s high cost structure relative to its nature, size, complexity and risk profile.
The Treasury also reassured Ithala’s customers about their deposits.
“The National Treasury wishes to assure the retail depositors of Ithala that their deposits will be protected by a government guarantee, subject to the conclusion of the necessary technical work. This work includes providing a government guarantee to one or more banking institutions to ensure the accounts of depositors can be migrated timeously and funds can be made available,” it said.
“We are working with the Prudential Authority to ensure an orderly process that protects depositors’ interests. While depositors will need to urgently make alternative banking arrangements, they can be assured that we will endeavour to secure their funds as far as is possible.”
The Financial Sector Conduct Authority suspended Ithala’s licence in August after it failed to meet financial soundness requirements.
Sponsorship woes
Ithala also has been scrambling to secure a sponsorship agreement with a bank authorised to clear and settle payments in the national payment system, after its long-term banker, Absa, informed it of its intention to terminate their nearly 20-year agreement.
According to the SA’s banking laws, nonclearing financial services firms such as Ithala participate in the national payment system indirectly through sponsorship agreements with other clearing banks. Without a sponsor, it is practically impossible for such firms to do business and transact in SA.
Finance minister Enoch Godongwana has previously urged Ithala to lower its ambitions and consider partnering with an established lender or to apply for a less strenuous mutual bank licence while it regularises its affairs to qualify to become a commercial bank.
According to a presentation by Ithala to parliament last year, home loans accounted for almost a third of its book. It had deposits of R2.9bn at the end of November 2023, 37.1% of which were fixed deposits.
Ithala’s presentation showed it had 27,475 stokvels, and 328,704 customers holding 398,522 accounts.
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