Prominent South African state-owned ‘bank’ fighting for survival

Individuals with deposits at the Ithala state-owned company (SOC), commonly known as Ithala Bank, will receive their funds before Christmas through a different financial institution. 

This comes as the ‘bank’ faces liquidation, with the Reserve Bank’s Prudential Authority applying to liquidate the institution to protect depositors from further mismanagement. 

The Prudential Authority has clarified that Ithala is not a bank, with it not operating under a banking licence but rather through an exemption granted by the Finance Minister that enabled it to receive deposits. 

Ithala had last received an exemption notice in December 2023, which was the last chance the company had to regularise its deposit-taking activities following a series of non-compliance issues. 

The company failed to do so, pushing the Prudential Authority to apply to the Pietermaritzburg High Court for the provisional liquidation of Ithala to enable a liquidator to recover and redistribute depositor funds. The National Treasury guaranteed these funds. 

However, depositors were told to make alternative banking arrangements during the court case and a series of appeals, with Ithala’s operations halted. 

Following the appointment of a Repayment Administrator, independent forensic accountants assessed Ithala’s liquidity and solvency. 

They found that Ithala is technically insolvent as 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 pending liquidation of the company left many individuals in KwaZulu-Natal (KZN) without access to funds in their accounts with Ithala. 

Now, KZN Premier Thami Ntuli told Newzroom Afrika the depositors can expect to receive all their funds before Christmas, thanks to a deal with the National Treasury. 

“Our agreement is that before Christmas, people will have access to their funds because we have been through a number of challenges and have been unable to allow depositors to access their money,” Ntuli said. 

“We are now at a point where the matter is resolved, and people will be able to access their money in an institution that will be announced soon.” 

Attaining a bank licence

Ithala has long held ambitions to be a fully-fledged bank that operates under its own licence. However, this comes with significant compliance challenges. 

The several exemptions granted to Ithala by the National Treasury were intended to enable it to meet compliance requirements to become a bank. 

“The issue of compliance for Ithala is a significant one for it to attain a banking licence, because it has been operating with an exemption that has been halted,” Ntuli explained. 

“What we are saying is that we are going to support the institution to meet the compliance requirements, so that it can operate under normal circumstances.” 

This is the second phase of the provincial government’s plan to resurrect Ithala, with it spending much of 2025 focusing on ensuring depositors can access their funds. 

Denker Capital’s Kokkie Kooyman, a renowned banking sector analyst, said the potential liquidation of Ithala came about after three years of mismanagement and a lack of urgency in addressing compliance issues. 

Kooyman said these challenges cannot be fixed overnight, as it would require a complete cultural shift within the company to become good custodians of depositor funds. 

Kooyman explained that while Ithala’s balance sheet appears to show that it is adequately capitalised, there are problems below the surface. 

Chief among these is the quality of the bank’s loan book, which may show that a significant portion of its loans cannot be paid back. 

Another key issue is Ithala’s operating systems, which may not be adequate for a company that acts as a bank. 

This is a direct result of the company’s management, which has resulted in clients losing trust in the institution and minimal action being taken to do what is necessary to meet regulatory requirements. 

“The problem has been growing for around three years, which is when the Prudential Authority first warned about Ithala’s operations,” Kooyman said. 

The regulatory body has repeatedly given Ithala grace by extending its exemption, but has let the final notice lapse in December 2023. 

Once it lost this exemption, clients would naturally lose trust in the institutio,n as it was the final chance for the company to regularise its deposit-taking activities following a series of non-compliance issues.

“The shareholders failed to understand the extent of the problem and the risk of a shutdown from the Prudential Authority,” Kooyman said. 

“The Reserve Bank cannot afford a run on a bank and a loss of trust in the banking system.” 

“The problem with a bank is that once the public loses trust in the bank, the party that stands to lose the most are depositors, so they start withdrawing their money. This creates a run on the bank.”

“That is basically unstoppable and is a really nasty phenomenon that has resulted in many banks falling over.”