Ithala Faces Liquidation
By Mpho Moloi
The Prudential Authority, under the South African Reserve Bank (SARB), has initiated legal proceedings in the Pietermaritzburg High Court for the provisional liquidation of Ithala SOC Limited. This move follows Ithala’s failure to meet critical regulatory requirements and its subsequent insolvency. The decision impacts approximately 257,000 depositors, whose funds will now be subject to the liquidation process.
Prudential Authority Takes Decisive Action
The Prudential Authority, responsible for regulating banks and insurance companies in South Africa, has stated that the liquidation of Ithala is necessary to protect depositors’ interests. The authority revealed that Ithala, which has long been referred to as a bank despite not holding a banking licence, had failed to comply with the conditions of its exemption under the Banks Act.
“The appointed liquidator will be able to utilise insolvency legislation to recover and distribute funds to the extent possible,” the Prudential Authority said in its statement.
To manage the situation, a repayment administrator was appointed in December 2023, a decision confirmed by the Pretoria High Court. The administrator has been tasked with overseeing the repayment of depositors’ funds. However, depositors’ accounts will now need to be closed to facilitate the court proceedings.
“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,” the authority added.
A Temporary Exemption That Lapsed
While Ithala has been operating as a financial institution for decades, it was never granted a banking licence. Instead, it operated under a ministerial exemption, which allowed it to accept deposits temporarily. In July 2022, the Prudential Authority issued a final exemption notice, giving Ithala an ultimatum to regularise its deposit-taking activities or cease operations.
Despite the opportunity, Ithala failed to meet the required conditions, leading to the lapse of the exemption on 15 December 2023.
“It has been common knowledge to all parties that the granting of an exemption to Ithala was temporary and subject to certain conditions. Ithala had to ultimately obtain a banking licence in terms of the Banks Act or cease all its deposit-taking activities,” the authority stated.
Insolvency and Financial Mismanagement
The repayment administrator, appointed by the South African Revenue Service, determined that Ithala was both technically and legally insolvent. This posed a significant risk to depositors.
Further compounding the issue, Ithala failed to secure a legally binding renewal of the guarantee over its deposits from its shareholder, the provincial government of KwaZulu-Natal. Additionally, it could not provide sufficient capital commitments to address its financial instability.
National Treasury has since intervened, confirming that government will guarantee depositors’ funds. In a joint statement, Treasury and the Ministry of Finance reassured the public:
“This 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.”
Regulatory Actions and Oversight
Ithala’s troubles began long before the Prudential Authority’s application for liquidation. Late in 2023, the Financial Sector Conduct Authority (FSCA) suspended Ithala’s licence to provide financial services under the Financial Advisory and Intermediary Services (FAIS) Act.
The FSCA stated that Ithala did not meet the financial soundness requirements stipulated in the FAIS Act, a critical element in protecting financial customers. The suspension prohibited Ithala from conducting new business while requiring it to transfer outstanding business to other authorised financial service providers.
These regulatory actions aimed to mitigate further risks to depositors and clients while highlighting Ithala’s ongoing struggle with compliance.
Parliamentary Intervention
In September 2024, Parliament’s Standing Committee on Finance visited Ithala in an attempt to address its challenges. Chairperson Dr Joe Maswanganyi stated:
“Our visit here is to ensure that a bank with the developmental mandate, such as Ithala, does not die on our watch.”
The committee acknowledged Ithala’s developmental role, particularly in KwaZulu-Natal, but noted that its inability to secure new clients or meet regulatory requirements made its long-term sustainability questionable.
Depositors Urged to Act
As the liquidation process unfolds, depositors are being advised to urgently make alternative banking arrangements. National Treasury has emphasised that every effort will be made to ensure an orderly process and protect depositors’ interests.
The Prudential Authority has reiterated its commitment to transparency and fairness throughout the liquidation process. While government guarantees provide some reassurance, depositors are encouraged to remain vigilant and proactive.
Broader Implications
The liquidation of Ithala raises critical questions about the oversight and management of financial institutions operating under exemptions. As a state-owned entity with a developmental mandate, Ithala played a significant role in KwaZulu-Natal’s economy. Its downfall serves as a cautionary tale about the importance of compliance and financial stability.
For the Prudential Authority and other regulatory bodies, Ithala’s case underscores the need for stringent monitoring and enforcement to prevent similar situations in the future.
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