Africa-Press – South-Africa. The application to liquidate Ithala State-Owned Company (SOC) earlier this year has led to significant confusion, as the company had never been registered as a bank, and account holders may be uncertain about the path forward.
In a recent press release, the South African Reserve Bank (SARB) sought to clarify many of these concerns and set the record straight.
Ithala SOC is a licensed financial services company and registered credit provider wholly owned by the KwaZulu-Natal provincial government.
On Thursday, 16 January, the Prudential Authority (PA) released a statement saying it had filed papers in the Pietermaritzburg High Court for Ithala’s provisional liquidation.
The banking regulator said it believes this action is in the best interests of Ithala’s approximately 257,000 depositors, as the appointed liquidator will be able to recover and distribute their funds to the extent possible.
It said the Reserve Bank had appointed a Repayment Administrator (RA) responsible for repaying deposits, which the Pretoria High Court confirmed in December 2023.
“The Repayment Administrator, appointed by the SARB, has established that Ithala is technically and legally insolvent, exposing depositors to potential loss of their deposits or parts thereof,” the regulator said.
Moreover, 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.
Since Ithala was never a registered bank, this left many wondering why it was allowed to take deposits.
The SARB clarified that, even though Ithala has never been registered as a bank, it had been permitted to operate a bank’s business through various exemptions.
All exemptions expressly required Ithala to separate its deposit-taking activities from its other businesses, such as its business as a credit provider advancing loans to the public, which Ithala did not do.
The Reserve Bank further explained that the RA, following the PA’s application to liquidate, instructed Absa to freeze only those accounts related to Ithala’s deposit-taking business.
As a result, from 16 January 2025, Ithala could no longer receive deposits into its deposit-taking accounts, nor could it make payments from those accounts.
“This also affected depositors. This action was taken to protect depositors by preventing a run on the entity – a situation where large numbers of depositors try to withdraw their funds at once, potentially causing the institution to collapse,” the SARB explained.
“Freezing the accounts and instituting a liquidation process allows for an orderly and fair repayment to all affected depositors.”
Where we are now
After the PA applied for Ithala’s provisional liquidation, Judge Ncube delivered a judgment in the Pietermaritzburg High Court.
In this judgment, it was confirmed that the RA was entitled to take control of Ithala’s deposit-taking activities, and that Ithala was not permitted to accept deposits from the public.
However, the RA has applied for leave to appeal the judgment to the extent that it prevents him from taking control of all of Ithala’s assets.
“The RA deems this necessary because Ithala did not separate its deposit-taking activities from its other businesses, such as its business as a credit provider advancing loans to the public,” the SARB said.
“While an application for leave to appeal automatically suspends the operation of the judgment, the RA has nevertheless taken all necessary steps to comply with Judge Ncube’s order.”
“In this regard, the RA has only frozen accounts related to Ithala’s unlawful deposit-taking, in line with the judgment.”
Since his appointment, the RA has also commissioned independent forensic accountants to assess Ithala’s solvency and liquidity.
Their report found that Ithala is technically insolvent, meaning its liabilities exceed its assets.
Specifically, Ithala’s liabilities amount to R2.79 billion, while its total assets stand at R2.35 billion, resulting in a shortfall of R441.63 million.
The PA had previously reported that, between 31 March 2008 and 31 March 2024, Ithala incurred losses totalling R520 million.
“The institution has, over time, operated with a high-cost structure that is misaligned with its size, complexity and risk profile,” the SARB said.
The PA and RA are currently awaiting the court’s communication regarding the liquidation application’s outcome.
In the meantime, the RA, following the PA’s instruction, has engaged with certain registered banks to appoint a Repayment Bank.
“This will enable the repayment of deposits owed to Ithala clients, which were unlawfully taken by the bank,” the SARB said. “This is a necessary step in terms of the Banks Act.”
At the start of May, Finance Minister Enoch Godongwana also approved a R2 billion guarantee to protect the funds of Ithala’s depositors. Ithala holds around R2.5 billion in deposits.
The Reserve Bank further clarified that Ithala’s clients remain liable for all loans they have taken out.
“The PA’s actions in relation to Ithala do not extend to its loan business. However, the PA is aware that Ithala has sent SMS notifications to all clients informing them that loan repayments must now be made to an alternative Ithala account,” it said.
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