Unpacking the R2. 2 billion guarantee dispute surrounding Ithala Bank

Ithala Bank is in a protracted legal battle with the South African Reserve Bank's Prudential Authority (PA) which has filed papers for the bank's provisional liquidation .
A dispute has ensued over theR2.2billion guarantee needed for IthalaBank, with the National Treasury (NT)warning that its primary task is to protectcustomers and not to bail out the bank.The Treasury described its stance asa standard approach it has applied insimilar situations to safeguard customersof other embattled financial institutions.
This statement follows revelations that the KwaZulu-Natal provincial govern-ment has approached the Treasury to enquire about the guarantee.
Senior management of Ithala recentlyinformed members of the provinciallegislature that, despite negotiations with the Treasury over the guarantee, it resolved to give the guarantee to the SA Reserve Bank instead of the province.
The Mercury understands that opinions differ on what the guarantee is for and how it should be utilised. The province believed it could find a commercial bank to take over the deposits of Ithala, and the guarantee was to help facilitate that process and guarantee that commercial bank, as it would have been taking over a liability.
Ithala Bank, owned by the provincial government, is facing liquidation following an application brought by the Prudential Authority via a Repayment Administrator (RA). Its functions have been taken over by the RA.
Dr Thulani Vilakazi, the Group CEO of Ithala Bank, recently briefed the finance portfolio committee about a letter from the Ministry of Finance indicating that the bank's liquidation must proceed.
This letter was a communiqué from the Treasury to the Reserve Bank. During the recent briefing, Vilakazi revealed that Treasury had addressed critical matters in a letter, including the guarantee sought by the province, which would have allowed customers access to their accounts.
Ithala Bank customers have not had access to their accounts for months.
'We had an engagement with the premier two weeks ago, and we learned that the minister of Finance had issued a guarantee of approximately R2.2bn;however, the guarantee is not in favour of the province but rather the Reserve Bank. In our interpretation of the communiqué issued by the minister, it is clear that the (letter recommends) that liquidation process must go ahead. They must liquidate our assets and pay out the depositors,' said Vilakazi.
KZN Finance Minister Francois Rodgers expressed awareness of the changing stance and noted that the guarantee now goes through the Reserve Bank.'As Treasury, we are not happy. The national ministry has continually changed the goalposts. Every day that passes, the people who have money with Ithala are the victims.
'Initially, the province proposed that the guarantee be given to the province in the form of a loan to secure the deposits in Ithala Bank, with Ithala and the province responsible for the interest on that loan. This arrangement would have allowed the commercial bank and Ithala to work together to ensure that depositors have access to their funds,'said Rodgers.
He said the court case to liquidate the bank should proceed, adding that they were not fearful of the process, as 'the bank's assets exceed its liabilities, which means that the bank cannot be liquidated'.
KZN Premier Thami Ntuli said the letter was directed to the Reserve Bank,and it was better placed to comment on its contents. However, he indicated thatthere were aspects that unsettled theprovince.'We are in the process of writing tothe minister asking for clarity on someof the things that we saw in that letter.'
The Treasury said: 'The framework under which the National Treasury pro-vides financial support to reduce the harm being suffered by ordinary depos-itors at Ithala as a consequence of the liquidation application is defined in pastpractice and formalised in law.'The National Treasury has applieda consistent approach to providingresources to depositors affected byfinancial sustainability issues faced by adeposit-taking financial institution. This action required that financial support beprovided to the depositors and not theshareholder.'
The National Treasury said this approach was consistent with the cov-erage afforded under the Deposit Insur-ance Scheme and support provided to the depositors of Habib Bank, African Bank, Ubank and VBS. In each case, the legal responsibility of the minister relates to acting in the interest of depositors. The Treasury made it clear that the action being taken was only in relation to depositors and not a bailout of the provincially owned entity.
'Ithala is owned by the KwaZulu-Natal Provincial Government, making it the financial responsibility of the KZN Provincial Government regarding any guarantees and/or financial injections.
"National Treasury focus is on ensuring that customers do not lose their hard-earned deposits and are not forced to go even longer without access to their funds,' it said.
THE MERCURY

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