Novelist and wit Mark Twain once said: “The more you explain it, the more I don’t understand it.” He could have been talking about Ithala bank.
The embattled development bank owned by the KZN provincial government is staring liquidation in the face, a fact that has initiated court cases, divided opinions, accentuated political disputes, and set the SA Reserve Bank up against both provincial and national politicians. There is only one way out of this mess and that is for parliament to intervene quickly, says Stuart Theobald, executive chair of consultancy Krutham.
But will it? Probably not.
Meanwhile, nearly half a million customers, creditors, and depositors are in a kind of limbo. That’s because Ithala’s deposits are theoretically guaranteed by the national government. But there is a dispute about that too, because the national government’s position is that the guarantee comes out of the provincial government’s budget – and the KZN government doesn’t like that idea.
The whole situation is rapidly unravelling, and yet, the urgency and resolve needed to bring the problem to a head seem to be missing. What should be done? What are the options?
The short history is that Ithala had been operating under a ministerial exemption from the Banks Act, which expired in December 2023. Despite directives to cease deposit-taking activities, Ithala continued operations, leading to regulatory intervention and the appointment of someone called a “repayments administrator” who is, significantly, not a business rescue practitioner.
The repayments administrator, in this case Bowmans lawyer Johan Kruger, contends that Ithala is technically insolvent. Specifically, Ithala’s liabilities amount to R2.79bn, while its total assets stand at R2.35bn, resulting in a shortfall of R441.63m.
The KwaZulu-Natal Treasury disputes this, asserting that the institution’s assets exceed its liabilities. A case on that issue is still outstanding, but earlier this month the Pietermaritzburg High Court granted Ithala partial relief, allowing it to resume certain operations such as paying staff and servicing loans. However, the institution remains prohibited from accepting new deposits.
Godongwana wades in
The national government then waded into the problem; Finance Minister Enoch Godongwana approved a R2bn government guarantee aimed at safeguarding the funds of over 223,000 retail depositors affected by Ithala Bank’s operational disruptions. This measure was intended to ensure that depositors could access their funds, which had been frozen following the Prudential Authority’s intervention due to the bank operating without a valid banking license.
However, the National Treasury emphasised that the guarantee was to protect depositors and not to bail out the bank itself, and it expected the KZN government, as the owner of Ithala Bank, to bear the financial responsibility for the guarantee. KZN’s Finance MEC, Francois Rodgers, has expressed surprise and concern over this expectation, saying the province was not consulted and that the financial burden could have significant implications for the provincial fiscus.
The crux of the problem, says Theobald, is that Ithala operates within a tricky legal grey area. Like the Post Bank and the Land Bank, it operates essentially by exemption from the Banks Act – and yet in this case, that exemption is somewhat curtailed by the imposition of the repayments administrator.
One option before the government and banking regulators is to do what they did when African Bank failed in 2014: split the bank into the good bank and the bad bank, by appointing an administrator to manage the bank’s viable assets, and by elbowing industry to share the debts of the failed part of bank.
The problem is that African Bank was a formal deposit-taking institution operating under the Banks Act, and the legislation allows and to an extent, anticipates these kinds of problems.
But banks operating under an exemption do not technically fall under banking legislation, which has effectively opened the way for the multi-dimensional political standoff. And this status has prevented the repayments administrator from having authority over the bank’s board, which would be necessary for a wholesale reconstitution of the bank.
What the government should do is to quickly go to parliament with specific legislation to deal with this legal lacuna, says Theobald.
The problem is that KwaZulu-Natal Premier Thami Ntuli has been a vocal advocate for the preservation of Ithala Bank amid its ongoing legal and financial challenges, calling for both public institutions and the general public to actively support the bank.
Legislation that would allow the South African Reserve Bank’s Prudential Authority to effectively close the bank is likely to go down like a lead balloon. But further delays could have the same result – and this time for the bank itself.
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