A full bench of the Pietermaritzburg high court has slammed the embattled Ithala board for its “arrogance” in the bank’s long-running disputes with the Prudential Authority (PA).
The bank is under administration.
The court on Friday granted Johannes Kruger, the repayments administrator appointed by the PA in 2023 to look after Ithala’s affair, leave to appeal an earlier decision of the court that significantly curtailed his powers.
The May decision effectively stripped Kruger of operational and management control of Ithala as well as any authority over human resources, treasury, market, finance and other operational functions of the bank.
The matter will now be heard before the Supreme Court of Appeal (SCA), where Ithala, owned by the KwaZulu-Natal provincial government, is expected to face off with Kruger for the umpteenth court challenge.
Kruger was appointed in December 2023 after the lapse of Ithala’s last exemption, which afforded the bank a final opportunity to regularise its deposit-taking activities.
In essence, Ithala had to obtain a banking licence in terms of the Banks Act or cease all its deposit-taking activities.
The full bench of the court tore into the conduct of Ithala’s board and the arguments presented before it, including that it was unable to pay employees and service providers.
“The inflammatory language used is misdirected as Ithala’s board knew full well for approximately 20 years that the SA Reserve Bank … required Ithala to not only ring-fence the deposit-taking portion of its business, but also set up a separate independent entity which could be registered as a bank,” the unanimous judgment reads.
“Notwithstanding such advice, over that period, Ithala’s board either through its arrogance or hubris ignored the injunctions of the Reserve Bank and PA and continued to operate as a deposit-taking institution,” it says.
“The board knew that the exemptions were going to end and could be under no illusion as to the finality (and the insistence by the PA) that the exemptions would end. The exemption granted in July 2022 clearly set out that this was to be the final exemption and that after December 2023 there would be no further exemptions.”
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 12-24 months. The most recent exemption, granted in June 2022, lapsed at the tail end of 2023.
One of the reasons the PA pulled the plug on Ithala is that it failed to meet a condition that the provincial 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.
Among Ithala’s deposit-taking activities offerings include transactional accounts and a wide range of saving and investments accounts.
The company’s lending services include rural home loans, short-term loans and vehicle finance, including taxi finance.
In a presentation by Ithala to parliament last year, the bank said nearly two-thirds of its loan book was home loans. It had about R2.9bn in deposits at end-November 2023 of which 37.1% comprised fixed deposits.
Ithala has about 38 branches in KwaZulu-Natal.
The Financial Sector Conduct Authority a year ago suspended Ithala’s licence, accusing it of failing to meet financial soundness requirements, saying solvency was a critical element for the viability of any financial services provider.
The full bench was at pains that Ithala and Kruger work together pending the SCA appeal.
“The outcome of this appeal should not sound a death knell to Ithala as contemplated. Ithala is not supposed to die and should not be left to die pending the final outcome of the SCA appeal. It undeniably serves an important purpose in the province of KwaZulu-Natal,” reads the judgment.
“If this order is genuinely put into operation, Ithala should be able to continue operating its normal business with the RA in control of the deposits taken by Ithala with the necessary co-operation at delineation of the accounts co-mingled.
“Perhaps the migration of deposits to another bank would help Ithala’s cause. In short, Ithala has to work with the PA until the outcome of the SCA appeal.”
Kruger has already established that Ithala is technically and legally insolvent, exposing depositors to potential loss of their deposits or parts thereof.
To this end, the PA in January filed papers in the Pietermaritzburg high court for the provisional liquidation of Ithala, saying it believes this action is in the best interests of the about 257,000 Ithala depositors.
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