In the case of insolvency, consumers face the potential loss of all or part of their deposits. The liquidation application means that their accounts will have to be closed to allow for the pending court processes – affecting about 257,000 Ithala depositors.
However, the South African Reserve Bank believes this will be in consumers’ best interest as the appointed liquidator will be able to use insolvency legislation to recover and distribute their funds to the extent possible. The Prudential Authority, which is responsible for the prudential regulation of banks and insurance companies within the SA Reserve Bank, has appointed a repayment administrator to deal with the repayment of deposits. The repayment administrator’s appointment was confirmed by the Gauteng Division of the High Court in Pretoria in December 2023.
Why has the Reserve Bank applied for Ithala’s liquidation?
Although commonly referred to as a bank, Ithala was never granted a banking licence. Ithala did have a temporary exemption, allowing it to receive deposits while it regularised its operations. However, on 22 July 2022, the Prudential Authority issued a final exemption notice, advising that Ithala would have a final opportunity to regularise its deposit-taking activities, and warning that noncompliance would lead to the withdrawal of the exemption. The idea was that Ithala would ultimately obtain a banking licence in terms of the Banks Act or cease all its deposit-taking activities.
However, by the time the final exemption notice lapsed on 15 December 2023, Ithala had failed to meet all the conditions outlined in the exemption notice.
“Ithala did not provide sufficient capital commitments or secure a legally binding renewal of the guarantee over its deposits from its shareholder, the Provincial Government of KwaZulu-Natal,” the Reserve Bank said last night, adding that the freezing of accounts would 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,” said the Reserve Bank.
“However, this is the necessary step to protect depositors. 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,” said the Reserve Bank.
What were the concerns about Ithala?
Some of the Prudential Authority’s concerns revolved around the effectiveness of Ithala’s boards and the following in particular:
- Compliance with the exemption notice and applicable legislation and Ithala’s adherence to banking practices;
- Prolonged vacancies;
- Challenges in attracting experienced and skilled banking executives; and
- Challenges in establishing a succession-planning framework, which has contributed to the complexities faced by Ithala.
Ithala's response
In a statement issued early on Friday morning, Ithala alleged that the grounds for the liquidation application are "fundamentally flawed, frivolous and based on erroneous calculations. Ithala is solvent with assets that far exceed its liabilities. Moreover, the Auditor General of South Africa has given Ithala a clean audit report for the year ended 31 March 2024 and confirmed its going concern status."
Management said it would be "taking immediate action. Our legal team will be filing an urgent interdict to contest the RA's orders. In parallel, Ithala's shareholder, the KwaZulu-Natal Provincial Government, has reached out to Minister of Finance, Enoch Godongwana, advocating for a temporary solution that would allow deposit transfers to another bank until a permanent licensing framework is put in place for Ithala."
Government guarantee
National Treasury issued a statement to “assure the retail depositors of Ithala SOC Limited 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.”
In June 2023, the government provided a similar guarantee to the SA Reserve Bank to facilitate the repayment of deposits up to a maximum amount of R100,000 per depositor in the case of Habib Overseas Bank. In that instance, consumers with amounts above R100,000 had to retain a deposit with Habib Overseas Bank for their remaining balances, with the proviso that some or all of the remaining balance might be paid out later, depending on the bank’s financial position.
It was not quite the same though, as Habib Overseas Bank was placed under curatorship based on governance, compliance and operational failures. DM