Ithala’s chief executive wants policy intervention for the ‘financially sound’ institution

The chief executive of Ithala SOC said on Monday that policy intervention from government was needed to lift the “financially sound” development financer from the quandary in which it finds itself.

Despite Thulani Vilakazi’s bullish outlook, Ithala suffers from an inability to persuade South Africa’s banking oversight bodies to convert the entity into a full-blown bank, and concerns remain about its seemingly unprotected customer base.

“We are in a terrain where we are holding bank deposits, but we are no longer having the instrument that gives us cover to operate and mimic a bank,” Vilakazi told a media briefing in Durban.

“There is a cure,” he said. Either Ithala was granted a licence under the appropriate section of the Banks Act, became a mutual bank, “or an exemption must be granted”.  

“Without an exemption we require a policy intervention,” he said.

Ithala has long held ambitions to transact as a commercial bank, something an exemption notice repeatedly extended since 2001 had allowed it to do to a certain extent, meaning that, among other things, it could take deposits.

But the last exemption expired on 15 December last year, and the Prudential Authority, which regulates banks in the country, refused to grant another extension.

Absa, with which Ithala had a sponsorship agreement that allowed it access to the national payment system, also recently ended its 20-year agreement, citing issues with Ithala’s governance structures. Vilakazi has previously worked for Absa and Standard Bank groups.

In the latest blow, Ithala’s financial services provider licence was suspended by the Financial Sector Conduct Authority (FSCA) on Friday, effective 26 July, because it did not “meet the financial soundness requirements specified in the appropriate legislation”.

The appropriate legislation here refers to the Financial Intermediary Services (FAIS) Act, which protects financial consumers.

The suspension means Ithala is prohibited from doing any new business and any outstanding business must be transferred to an authorised financial services provider, which Vilakazi said had been “carried out”. Other requirements had also been met, he said.

Ithala can, however, continue serving existing clients.

The suspension will be lifted when specified conditions are met, with solvency being one of the most critical requirements.

Ithala is the banking arm of the Ithala Development Financing Corporation (ITFC), which is the second largest property owner in KwaZulu-Natal and is wholly owned by the provincial government.

The province’s economic development MEC, Musa Zondi, told the briefing that Ithala’s leaders had presented the “new developments” to the premier and cabinet, and that the premier would soon make an announcement.

“It is important to emphasise that this crisis is being addressed with the utmost urgency,” said Zondi, adding that the KwaZulu-Natal government was committed to “restoring Ithala’s dignity and reputation”.  

Providing background to the company, Vilakazi said Ithala was “conceived” in 2001 when a decision was made by the South African Reserve Bank to separate banking activities from developmental ones. “Hence, that was the start of Ithala today as you know it,” he said.

Since then, Ithala had been granted permission under the exemption notice to “act and behave like a bank”, he said.

As for solvency, he said that in terms of the requirements set by the FSCA, for a financial service provider to be deemed solvent, the equation used was “very simple” — current assets minus current liabilities.

But, he added: “In banking theory, no bank can meet that equation, because what happens in banking is that the assets that you finance — cars, homes etc — are financed on a long term basis. So your short term assets will never be equal to what you are financing on a long term basis.”

The SOC had been granted an unqualified audit for the past 10 years, he said, “which tells you that Ithala is financially sound”.

Ithala recorded a net loss of R51.97 million for the year ended 31 March 2022. Included in this was R9.40 million as a result of the July riots and Covid-19 related costs of R1.8 million. Sasria insurance claims of R13.7 million were expected to be received in the 2021-22 financial year to reduce the unrest losses, but only R1.8 million was received, Ithala said in its annual report.

According to the auditor general, a material loss of R4.21 million was incurred as a result of the write off of loans and advances, down from R9.2 million for 2021. The auditor general also said that “management did not implement adequate controls around supply chain management processes to prevent irregular expenditure”.  

Although it services the “unbanked and poor”, Ithala historically offered sweetheart loans to the politically connected, including since deceased Prince Sifiso Zulu, former KwaZulu-Natal premier and national health minister Zweli Mkhize, and its own managers and executives.  

According to its annual report, 85% of its clients earn a monthly income of about R5 000. Ithala services stokvels, cooperatives, taxi associations, offers personal and business banking, and insurance.

Vilakazi said the institution had been instrumental in allowing its clients to save “not for consumption, but for things that matter — education, building houses in rural areas”.

When he appeared before parliament’s finance portfolio committee in February, Vilakazi also made pleas for intervention.

He told the committee that South Africa’s Banks Act only allows for public companies to register as banks, the definition of which includes “national” state-owned companies, which excludes Ithala because it is provincially-owned.

Vilakazi sought intervention to amend the relevant legislature to remove the word “national” from the definition, and asked that this be fast tracked through a Members Bill, which was left with the sixth administration.

He also asked the treasury to grant the exemption, and had asked the finance minister to intervene on Ithala’s behalf. But as a treasury representative told the committee, the minister does not have the authority to do so.

At the same committee meeting, then KwaZulu-Natal economic development MEC Siboniso Duma said the committee should not listen to “doomsayers”, because Ithala was performing well.

Infrastructure Development Finance Company chief executive Pearl Bengu said at the same committee meeting that the IDFC did not rely on the government for funding. She said Ithala SOC would “always” be sound because it was a subsidiary of the “profitable” IDFC.

In a meeting of the KwaZulu-Natal legislature’s standing committee on public accounts in April last year, then Scopa chairperson Maggie Govender said there had been a decline in customer deposits at Ithala and that “uncertainty around how long it will continue as a going concern” was a worry.

Ithala first applied for authorisation to establish itself as a bank in 2016, but this was declined “because of insufficient capital and lack of requisite banking skills and systems”. It applied again in June 2023, but was also declined.

The FSCA said in its statement that Ithala had made an application to the Financial Services Tribunal for the reconsideration of the FSCA’s decision “and simultaneously applied for the interim suspension of the decision pending the outcome of the reconsideration application”. 

The tribunal dismissed the interim application on 22 August, and a hearing date for the reconsideration application before the tribunal is yet to be determined.