After the Bell: Why SA’s state bank ambition is dead in the water

Another state-owned enterprise (SOE) has gone down the tubes. It’s a blight for the state-owned entity universe and further underscores the government’s woeful track record at running things. 

The failure of Ithala, the development financier owned by the KwaZulu-Natal government, is another reminder of why the government’s much-vaunted plan of launching a fully fledged state bank is lofty and a bad idea. 

To recap, Ithala is facing a liquidation application in court from the SA Reserve Bank’s Prudential Authority, which regulates banks and other financial institutions in South Africa. The Prudential Authority has been worried about Ithala’s governance affairs and has been patient with it for years. Ithala has been operating under the radar as its financial status remained unknown, and it was even unknown how at risk the company was of collapsing. 

Ithala is not a bank, but its operations fall under the Prudential Authority’s purview because it takes deposits from more than 250,000 customers, and funds small, medium-sized and micro enterprises, cooperatives and infrastructure projects. 

Ithala does not have a banking licence, but was taking deposits, and was allowed to do so because the minister of finance regularly gave it exemptions, giving it the grace to regularise its affairs.

So, to protect 257,000 depositors and their money, the Prudential Authority wants to have Ithala liquidated. If the court agrees, a process of winding up the company will ensue, which will also involve the sale of its assets to free up money to pay back depositors and creditors.

Read more: Ithala faces provisional liquidation, but government guarantee will kick in to protect consumers

Ithala has fired a broadside against the Prudential Authority, calling its liquidation application “fundamentally flawed, frivolous and based on erroneous calculations”. It said efforts to regularise its affairs had been frustrated by the authority’s onerous requirements. Ithala has also argued that it is solvent, with assets “far” exceeding its liabilities. The Prudential Authority rarely loses in court, so the demise of Ithala is a fait accompli.

There are lessons to draw from this saga. The main lesson is that the government’s ambition to use its legislative and policy muscles to launch a state bank has limited prospects of success or chances of getting off the ground.

ANC head honchos — including Secretary-General Fikile Mbalula, former finance minister Tito Mboweni and his successor Enoch Godongwana, and Gauteng Premier Panyaza Lesufi — have been vociferous proponents for establishing a state bank. 

More recently, President Cyril Ramaphosa effected the start of the South African Postbank Amendment Act, which in effect transfers the Postbank’s shareholding from the South African Post Office (another troubled state-owned enterprise) to the government.  This allows for the creation of a Bank Controlling Company — the new holding company of a bank — paving the way for the Postbank to become a state-owned bank that offers a full suite of banking services, from deposit-taking to lending.  

Even the government’s track record of running the Post Office is sorry as the entity is in business rescue, with its financial and operational affairs being rehabilitated. The Postbank is equally in a mess; it cannot provide the full range of banking services because it has a limited banking licence, and it is owed R4.6-billion by the Post Office, compromising its financial sustainability. 

The Postbank falls short of corporate governance standards as it hasn’t had a full board (it’s run by three board members) since board members resigned en masse in September 2023, accusing the government of interfering in day-to-day operations. An uncomfortable number of executives serve on an interim basis. 

Supporters of a state bank (mainly Mbalula) have argued that one is needed because commercial banks are not doing enough to improve access to capital and banking services, especially for women and young people. However, evidence shows that there are now more people in South Africa with bank accounts and access to banking services than 20 years ago. According to data from non-profit research organisation FinMark Trust, whose data are widely cited by National Treasury, the number of unbanked or excluded people (those without bank accounts) has declined between 2003 and 2023, meaning that commercial banks have been making banking services accessible. 

Source: (FinMark Trust’s FinScope Consumer South Africa 2023 Survey)