FSCA Suspends Ithala Bank’s License Amid Solvency Issues
Embattled KwaZulu-Natal-based development agency Ithala, which has ambitions to become a fully-fledged bank, has suffered another setback after the Financial Sector Conduct Authority (FSCA) suspended its licence.
The FSCA said it had failed to meet financial soundness requirements, as solvency is a crucial element in the viability of a financial services provider (FSP).
“Solvency requirements are imposed to ensure, among other things, that an FSP is able to meet unforeseen liquidity needs and, if necessary, achieve an orderly wind-down of the FSP’s business without adversely affecting the interests of customers or other stakeholders,” the regulator said on Friday
“The suspension of the licence means that Ithala must not enter into any new business as required by the FAIS Act and must take reasonable steps, in consultation with affected clients and product providers, to ensure that any outstanding business is transferred to another authorised FSP.
“Under the suspension, Ithala is permitted to continue to provide financial services to existing businesses.”
Business Day reported in 2023 that the Durban-based company was reprimanded by the FSCA for failing to file financial reports for two years.
However, the regulator refrained from penalising the company and instead ordered it to rectify its breaches if it wanted to avoid suspension or revocation of its licence.
This came after the FSCA found that Ithala was not holding customers’ short and long-term insurance money in segregated accounts as required by financial regulation law.
“Following the suspension order, Ithala made an application to the Financial Services Tribunal (“Tribunal”) for a review of the FSCA order and at the same time applied for an interim stay of the order pending the outcome of the review application. The Tribunal dismissed the interim application on August 22, 2024. A date for the hearing on the application to reopen the proceedings before the court has not yet been set,” the FSCA announced.
Ithala has its origins in the Bantu Investment Corporation, which was established in 1959 for the black community in KwaZulu-Natal. Today it finances small, medium and micro enterprises, cooperatives and infrastructure projects.
The company is seeking a sponsorship agreement with a bank authorised to clear and settle payments in the national payments system after its long-time banking partner, Absa, informed it that it intends to terminate its almost 20-year contract.
Under the country’s banking laws, financial services companies such as Ithala, which are not clearing banks, participate indirectly in the national payments system through sponsorship arrangements with other clearing banks. Without a sponsor, it is virtually impossible to do business and conduct transactions in South Africa.
Finance Minister Enoch Godongwana urged Ithala to scale back its ambitions and consider partnering with an established lender or apply for a less stringent mutual banking licence while it settles its affairs to qualify as a commercial bank.
This comes at a time when Ithala is embroiled in a high stakes game with the Prudential Regulation Authority (PA) over its lapsed exemption and the appointment of an administrator for repayments.
Although Ithala is not a bank, it accepts deposits under an exemption granted to it by the regulator. Ithala has until recently operated under a banking licence exemption, which can be renewed every 12 to 24 months.
The last exemption expired in December — after Ithala failed to meet some of the conditions set by the PA.
Following the expiry of the exemption, the PA appointed Johan Kruger, one of SA’s leading Ponzi and pyramid scheme investigators, as Ithala’s repayment administrator following a court order in December, essentially taking over Ithala’s deposit-taking activities.
However, the High Court in Pietermaritzburg ruled in March that Ithala should have been given the opportunity to make representations to the court when the application for Kruger’s appointment was made.