Ithala SOC Limited has launched a fierce attack on Johan Kruger, the repayment administrator (RA) appointed by the South African Reserve Bank (SARB), accusing him of arrogance and callousness. This follows the Prudential Authority’s application to the High Court in Pietermaritzburg for Ithala’s provisional liquidation.
Although often referred to as a bank, Ithala was never granted a banking licence. Its origins lie with the Ithala Development Finance Corporation Limited (IDFC), founded in 1958 and owned by KwaZulu-Natal. The IDFC drives economic growth in the province.
In 2001, Ithala became a fully owned subsidiary of the IDFC after a SARB recommendation to separate the entities. Operating under a temporary Banks Act exemption, Ithala has struggled for more than a decade to secure a permanent banking licence. That exemption expired in December 2023.
In the same month, the SARB appointed Kruger, an expert in Ponzi and pyramid scheme investigations, as Ithala’s RA after the PA invoked provisions of the Banks Act to take control of unregistered entities.
Yesterday (16 January), the PA announced it had approached the High Court to liquidate Ithala, stating this move was in the best interests of its approximately 257 000 depositors.
“The appointed liquidator will be able to utilise insolvency legislation to recover and distribute their funds to the extent possible,” the PA said.
Ithala, however, hit back in its own media statement, warning of its imminent closure unless the government intervenes to stop what it called the “arrogant and callous” actions of the RA.
The entity claimed to have engaged extensively with the PA to secure its ability to continue operating, only to have Kruger “unjustly” order it to halt deposits and withdrawals despite assurances of financial stability”. It added that these assurances were backed by key stakeholders, including National Assembly’s Standing Committee on Finance and the KwaZulu-Natal provincial government.
Ithala further accused the PA of pursuing liquidation proceedings before a formal court order, describing the grounds for this as “fundamentally flawed, frivolous, and based on erroneous calculations”.
“Kruger’s directive to all Ithala service providers to halt operations directly undermines our customers’ access to their funds and the ability to conduct transactions,” the statement continued. “This irresponsible action comes at a critical time, as many citizens prepare for the new school term and face essential financial obligations such as school fees.”
Ithala filed an urgent interdict to challenge the directives issued by the RA, which include halting deposits and withdrawals. However, the court declined to grant the interdict, citing the imminent court hearing scheduled for Friday 24 January.
KwaZulu-Natal’s MEC for Economic Development, Tourism and Environmental Affairs, Reverend Musa Zondi, said it was important to note that the court has not yet ruled on the case’s merits.
Funds protected by government guarantee
To address depositors’ concerns, National Treasury issued a statement assuring retail depositors that their funds will be protected by a government guarantee, subject to the completion of necessary technical work. This includes providing a government guarantee to one or more banking institutions to facilitate the timely migration of depositors’ accounts and ensure access to funds.
National Treasury said it was working closely with the PA to ensure an orderly process that protects depositors’ interests.
“While depositors will need to urgently make alternative banking arrangements, they can be assured that we will endeavour to secure their funds as far as is possible,” the statement read.
Treasury added that further details about accessing guaranteed funds would be provided after the court’s decision on Ithala’s liquidation application.
Zondi too urged depositors not to panic, stating that the premier of KwaZulu-Natal, Thami Ntuli, had escalated the issue to President Cyril Ramaphosa.
“This is not a matter of insolvency but one of ensuring fair and equitable processes in addressing Ithala’s licensing and operational challenges. To the people of KwaZulu-Natal, I assure you that your funds are safe, and we are doing everything possible to resolve this matter swiftly,” said Zondi.
Build-up to liquidation application
Although Ithala has expressed outrage over the liquidation application notice, they can’t claim they didn’t see it coming.
Last year, the FSCA suspended Ithala’s licence as a financial services provider, effective 26 July 2024, pending compliance with conditions necessary to lift the sanction.
Ithala, authorised as a Category I FSP, had come under scrutiny during the FSCA’s supervision, which found that it failed to meet the financial soundness standards required under the FAIS Act.
Read: How Ithala’s licence suspension may affect clients and operations
One of the grounds on which the FSCA relied for suspending Ithala’s FSP licence was that for the financial years to the end of February 2020, 2021, 2022, and 2023, Ithala demonstrated that its assets did not exceed its liabilities.
The suspension bars Ithala from engaging in new business activities under the FAIS Act but allows it to continue servicing existing clients. It was also tasked with working alongside clients and product suppliers to transfer any outstanding business to an authorised FSP.
The suspension remains in place until Ithala meets the conditions for it to be lifted.
On 24 October 2024, the PA issued a directive instructing Ithala to stop accepting deposits and repay all existing deposits within 14 business days.
The directive warned that failure to comply could be considered an act of insolvency or an inability to pay debts, potentially triggering legal action for the winding-up of the entity or the sequestration of its insolvent estate. The PA further cautioned that it might apply for Ithala’s liquidation if the directive was ignored.
Following the directive, Kruger sent correspondence to Ithala, outlining that the repayment process would be managed by him and specifying that Ithala pay R2.47 billion, as reflected in its 31 March 2024 financial statements. He also instructed Ithala to transfer the funds to the trust account of Bowman Gilfillan Inc.
On 6 November 2024, Ithala responded through its attorneys, Malatji and Co, stating that it was seeking legal advice. The deadline for compliance with the directive was 14 November 2024. To date, Ithala has not complied.
In its statement last week, Ithala announced that its shareholder, the KwaZulu-Natal provincial government, had approached Finance Minister Enoch Godongwana to advocate for a temporary solution. This would enable the transfer of deposits to another bank until a permanent licensing framework is established for Ithala, the entity stated.
“The province emphasises that this temporary transfer is crucial and can be reversed if Ithala regains its licensing to accept deposits,” Ithala said.
The question of solvency
Ithala has maintained that it is solvent, asserting that its assets far exceed its liabilities. The entity supported this claim by noting that the Auditor-General provided Ithala with a clean audit report for the year ended 31 March 2024, confirming its status as a going concern.
However, the PA challenges this assertion, pointing out that Ithala incurred cumulative losses of R520 million between 31 March 2008 and 31 March 2024. According to the PA, “committed capital injections have merely absorbed losses, hindering capital deployment to grow Ithala’s balance sheet. Ithala has a high-cost structure relative to its nature, size, complexity, and risk profile”.
To substantiate its position, the PA provided a table illustrating Ithala’s capital injections and financial performance over this period.
In the founding affidavit accompanying the notice of motion, Nomfundo Tshazibana, the PA’s chief executive and deputy governor of the SARB, outlined the reasons for seeking Ithala’s liquidation:
- Insolvency under the Banks Act. Ithala is deemed insolvent under section 83(3)(b) of the Banks Act for failing to comply with the directive and instruction to repay deposits.
- Solvency report findings. The RA’s report concluded that Ithala is factually, technically, and legally insolvent.
- Unlawful deposits. Financial statements as of 31 March 2024 reveal that Ithala unlawfully held deposits totalling R2.47bn.
- Acknowledgment of insolvency. Ithala “unequivocally indicated through its letter from its attorneys of record, Malatji, that it would be unable to repay the unlawfully held deposits and thus committed an act of insolvency”.
- This article was updated to include comment by KwaZulu-Natal’s MEC for Economic Development, Tourism and Environmental Affairs, Reverend Musa Zondi.
PA is correct to debar Ithala not fit and proper and financial soundness.