Following the FSCA’s recent suspension of Ithala’s licence under the FAIS Act, some are asking whether another VBS Mutual Bank saga is unfolding.
In a statement released on 23 August, the FSCA announced the suspension of Ithala SOC Limited’s licence as a financial services provider. The suspension, effective from 26 July, will remain in place until Ithala satisfies the conditions required to lift the sanction.
Ithala, authorised as a Category I FSP, came under scrutiny during the FSCA’s ongoing supervision, which found that the institution failed to meet the financial soundness standards outlined in the FAIS Act. Specifically, Ithala was found wanting with compliance with sections 46(1) and 48(1) and (2) of the Determination of Fit and Proper Requirements (Board Notice 194 of 2017).
The FSCA underscored the critical importance of solvency for FSPs, noting: “It is imperative that FSPs comply with the requirements of the FAIS Act, which are aimed at protecting the interests of financial customers. Solvency is a critical element for the ongoing viability of any FSP, and compliance with the solvency requirements is of utmost importance.”
The Authority explained that the solvency requirements ensure that an FSP can meet unforeseen liquidity needs and, if necessary, undergo an orderly resolution without jeopardising the interests of clients or stakeholders.
The suspension prohibits Ithala from engaging in new business activities under the FAIS Act. However, the company has been tasked with working with clients and product suppliers to transfer any outstanding business to another authorised FSP.
Despite the suspension, Ithala is allowed to continue servicing its existing clients.
The road travelled thus far
VBS Mutual Bank was declared insolvent and placed under curatorship in 2018 when it was found that it had defrauded citizens and taxpayers of about R2 billion. The bank originated as Venda Building Society in 1982 and transitioned to a mutual bank in 1992.
Ithala Development Finance Corporation Limited (IDFC), established in 1958 and owned by the province of KwaZulu-Natal, is a development finance agency, promoting economic growth in the province. Ithala is the only financial institution with a physical presence in many rural areas.
Ithala SOC Limited, a 100% subsidiary of the IDFC, was separated from the IDFC in 2001 following a South African Reserve Bank (SARB) recommendation. Operating under a temporary exemption from the Banks Act, Ithala has struggled for more than a decade to secure a permanent banking licence. This exemption expired in December last year.
Also in December, the SARB appointed Johan Kruger, a top investigator into Ponzi and pyramid schemes, as Ithala’s repayment administrator. This appointment came after the Prudential Authority invoked sections of the Banks Act to take control of unregistered entities.
Business Day reported that Kruger’s role signalled that Ithala was no longer regarded as a deposit-taking institution, and that Kruger’s task was to return funds to Ithala’s depositors.
But Ithala’s woes do not end here. It is also urgently seeking a sponsorship agreement with a bank authorised to clear and settle payments in the national payment system after Absa, its long-term banker, ended their nearly 20-year partnership. Without such an agreement, Ithala faces significant operational challenges, because non-clearing financial institutions rely on sponsorship from clearing banks to function within South Africa’s banking system.
What is next for the bank’s clients?
In an interview with SABC News, Khaya Sithole, a Chartered Accountant and independent analyst, shed light on the ongoing struggles faced by Ithala with the regulators.
Sithole said: “Ithala has been going through a couple of challenges with the regulators, and obviously central to the challenge is its ability to continue working in the way that it’s been working”.
He explained that the FSCA’s licence suspension meant that Ithala “cannot enter into new business undertakings”. It must also “find a way of managing that transition” so that existing customers are not suddenly left without support.
Discussing the impact of Ithala being placed under administration last year, Sithole noted that the process was not without controversy.
Litigation arose over whether Ithala should have been given an opportunity to respond before the SARB made the appointment.
“The court did agree that Ithala should have been given an opportunity to engage in the process before that decision was taken,” he said. However, he added, this was seen as more of a procedural issue than a ruling on Ithala’s ability to continue operating as before.
He noted that, throughout this process, the regulator has emphasised the importance of protecting clients.
“The fate of current clients, those that already have resources, that already have some investment in relation to Ithala – those should not be left to hang out to dry,” Sithole said.
He said the goal is to ensure a smooth transition to an alternative service provider, much like when Nedbank stepped in during the VBS crisis to facilitate access to funds for affected clients.
Sithole noted that this situation requires clear communication to manage expectations. He said whether clients continue to access services through Ithala under the administrator or through a new provider, the regulators and administration must make decisions that ensure uninterrupted service for Ithala’s customers.
On the arrangement between Absa and Ithala, Sithole said that when Absa decided it wanted to terminate its sponsorship agreement, Ithala tried to find an alternative sponsor, “and so far, that has not been successful”.
He said the termination of this agreement means that Ithala’s customers may soon face significant challenges.
“The consequence… is simply that even the existing customers of Ithala would not be able to transact in the way that they become accustomed to using the type of cards that have been issued by the bank,” Sithole noted.
The uncertainty revolves around whether Ithala can secure a new sponsor. If it does, the new sponsor will have to determine whether to enable transactions with existing cards or issue new ones.
“Until they do find a sponsor, the risk is that at some point the authorities will say, look, we’ve given you enough time… you cannot offer this service,” Sithole warned, noting the potential for Ithala’s current customers to be excluded from the national payment system.
Is this a repeat of VBS?
SABC News highlighted that, according to a presentation by the KZN Government’s Parliament portfolio earlier this year, Ithala manages more than 27 000 stokvels valued at about R290 million and more than 1 000 co-operative accounts worth around R16.5m. The potential impact on these accounts raises concerns, leading the news channel to ask whether this could be another VBS-type situation.
Sithole firmly responded, “No”.
He underlined the importance of clear communication: “The issues here are relating to compliance and the fitness of purpose for what Ithala does and how it does it. In the VBS case, there were instances where money was being looted.
“What seems to be the problem with Ithala is that, obviously, because it does not have a current exemption notice, it should not be undertaking the business it’s undertaking.”
He said that under the current circumstances, it is not ideal to be onboarding new customers. “They need to be able to figure out how to deal with the current customer base.”
Sithole also addressed the public’s concerns when hearing about a banking institution’s licence suspension.
“Whenever people hear that a licence has been suspended… the assumption is that you’re no longer going to be able to access your funds. The assumption is that whatever is happening behind the bank is going to take such a long time to resolve, you will be locked out of the system.
“So, a lot of people would legitimately panic… which is why it’s important for the bank to keep explaining exactly what its day-to-day affairs are, what is going to happen to those who need to access their funds.”
Dire consequences
In response to the FSCA’s recent announcement, AmaZulu King Misuzulu kaZwelithini has expressed grave concern over the suspension of Ithala Bank’s licence. According to a News24 report, he warned that the move would severely his subjects who depend on the bank for their business and social enterprises, stating that “thousands will be affected” by the disruption.
The Traditional Prime Minister of the Zulu Nation, Reverend Thulasizwe Buthelezi, supported the king’s concerns in a statement released on Sunday. He said that “His Majesty strongly feels that the services of Ithala Bank, as the backbone of rural and township entrepreneurs in KwaZulu-Natal, must not be disrupted”.
Buthelezi also highlighted that King Misuzulu sees Ithala as a significant legacy of his late prime minister, Prince Mangosuthu Buthelezi – one that must be preserved for future generations.
In response to the crisis, King Misuzulu has directed Buthelezi to reach out to both the Minister of Finance and the Premier of KwaZulu-Natal to ensure that all efforts are made to reinstate Ithala Bank’s licence without delay.
Following the decision to suspend the institution’s licence, Ithala Bank applied to the Financial Services Tribunal for reconsideration of the FSCA’s ruling and requested an interim suspension of the decision pending the outcome of this application.
The Tribunal rejected the suspension application on 22 August, and a date for the reconsideration hearing has yet to be set.
The biggest problem with not being able to onboard new clients is that the current base of customers will migrate to other viable banks hence the end of Ithala. Ithala as a state-owned institution cannot modernize quickly as and when necessary; here lies its biggest obstacle. It is for this reason, that, I suggest that, it must be sold as soon as possible. Just step into its offices and you will not believe this is a money-handling institution.