The Mkhize farm debacle – what else lurks in Ithala’s loan books?

The Prudential Authority’s recent filings at the KwaZulu-Natal Division of the High Court in Pietermaritzburg, aimed at securing a liquidation order against Ithala SOC, make for grim reading.

According to the Prudential Authority and its designated Repayment Administrator, Ithala SOC is technically and legally insolvent.

In fact, Ithala SOC, a subsidiary of the Ithala Development Finance Corporation (IDFC), appears to have a crater-sized hole in its balance sheet.

The extent of Ithala SOC’s financial troubles are detailed in the Repayment Administrator's solvency report, filed with the Prudential Authority's court application.

If Ithala SOC were to immediately repay all of its depositors, the bank would face a massive deficit of R1.62-billion. Ithala SOC has R2.47-billion in customer deposits on its books, yet its current assets, including cash and investments that it can immediately access, are worth only R847-million.

So, where is the rest of the bank’s money?

According to Ithala SOC’s latest financial statements, an amount of R2.1-billion is tied up in loans and advances to customers. It is the status and recoverability of these funds that will ultimately decide whether Ithala SOC will become another state-owned scandal. 

There is already sufficient reason for deep concern over the bank’s loan book. 

The Repayment Administrator hasn’t yet had an opportunity to scrutinise each and every Ithala loan, but its provisional assessment hints at mismanagement, or worse.

Case in point: Roughly 10% of Ithala’s loan book is made up of staff loans. In other words, the bank loaned about R210-million to its own employees, at least according to the Repayment Administrator's report. These loans “include instances where declined credit decisions were allegedly overruled by the Office of the CEO and where loans were processed without following proper procedures”. 

The Repayment Administrator also raised concerns over Ithala’s pensions-backed loans, while some of the loans granted to taxi operators are also in doubt.

It is too early to say how much of Ithala’s loans would have to be impaired or written off, but provisional assessments look dire. Ithala SOC’s own Chief Financial Officer (CFO) reckons 37.5% of the bank’s loans could be impaired. In other words, roughly R800-million in loans may be unrecoverable, or only partly recoverable. 

But the full state of affairs is not yet clear. 

The Repayment Administrator seems to view the CFO’s figure as something of a conservative estimate. The Repayment Administrator has only had “limited access to the pertinent information”, and one certainly gets the sense that it doesn’t want to take the bank’s own calculations at face value.

The SA Reserve Bank’s main gripe with Ithala SOC is that the latter had been operating without a banking license, and without an exemption notice since mid-December 2023. These are alleged criminal offence in terms of the Banks Act. 

“I have and/or shall report this contravention and numerous other offences committed by Ithala and/or its representatives to the SAPS for criminal investigation in due course,” reads the Repayment Administrator's report.

Considering the references the Repayment Administrator makes to Ithala SOC’s loan book, the report suggests that at least some of the “numerous other offences” relate to the loans the bank had been handing out.

Which finally brings us to senior ANC figure Dr Zweli Mkhize and an Ithala loan that his wife, Dr May Mkhize, had obtained to purchase a farm. 

Before we get into it, a quick clarifier: Dr May Mkhize’s company received its loan from the IDFC, not from Ithala SOC, the banking division that is now in the SA Reserve Bank’s crosshairs.

However, all available data suggests that the IDFC’s financial position is itself not very healthy. 

The IDFC’s latest annual report reflects total loans and advances worth R863-million, mostly made up of asset finance and financing granted for agriculture ventures. Of this total, R526-million is classified as non-performing loans. This means more than 60% of the loans on the IDFC’s books are, to some degree, in trouble.

Given the current developments, Scorpio has decided to look into another questionable loan within the broader Ithala group.

The Mkhizes’ family farm

Scorpio’s work on the health department’s Digital Vibes debacle partly focussed on the Mkhize family’s farm in KwaZulu-Natal. 

Read more: R1.88m from Digital Vibes deal funnelled to May Mkhize’s farm loan — family’s ‘cut’ climbs to R8.7m

Here’s a quick refresher: Under then minister Zweli Mkhize, the health department in 2019 awarded a R150-million communications contract to Digital Vibes. Our investigation showed that the contractor’s directors were closely linked to the minister. Later, we detailed how some of the proceeds from the contract ended up with the minister’s family. Mkhize himself also benefited from the deal. The Special Investigating Unit (SIU) confirmed our initial findings and unearthed much more. 

One of the Digital Vibes cash trails we traced was this one: In May 2020, Digital Vibes received a tranche of money from the health department, upon which it transferred funds to an entity called Mateta Projects. Mateta subsequently forwarded money to a company called Sirela Trading. Sirela, in turn, deposited R1.88-million into an Ithala loan account belonging to a company called Cedar Falls Properties 34. 

It was easy enough to determine that Cedar Falls’ sole director at the time was May Mkhize, the then minister’s wife. What’s more, Deeds Office records revealed that Ithala in 2006 granted Cedar Falls an R11.8-million loan to purchase a 1,300-hectare farm near Pietermaritzburg.

Although the loan was granted to May Mkhize’s company, the subsequent farming venture very much seemed like a family affair. Dedani Mkhize, the ex minister’s son, managed the farm’s finances through an entity called Tusokuhle Farming. May Mkhize also had a brief stint as a director of Tusokuhle Farming, from 2017 to 2018.

Zweli Mkhize, meanwhile, was no stranger to the farm. A picture taken in 2018 showed him in farming attire, alongside one of the farm’s employees.

Contentious loan

As we reported in 2021, the Ithala loan was problematic for two reasons. Firstly, it seemed as if May Mkhize’s loan was being serviced with the proceeds of a tender which the SIU described in court filings as 'apparently rigged'. 

The second reason relates to the Ithala loan itself, and to the position Zweli Mkhize occupied at the time. In 2006, when Ithala granted the loan, Mkhize was KZN’s MEC for finance and economic development, Ithala’s parent department. Zweli Mkhize however has in the past denied having played any role in the granting of this loan.

Scorpio can now unpack a third troubling aspect regarding the Ithala loan. Our latest work draws from records the SIU filed in its pursuit to recover the Digital Vibes funds. Our analysis should raise pertinent questions over Ithala loans granted to politically exposed persons (PEPs). 

Ithala loan balance

In order to confirm that Sirela Trading had indeed contributed R1.88-million towards Cedar Falls’ Ithala loan, the SIU subpoenaed a summary of the loan account. 

At the time, the SIU was only concerned with the Digital Vibes deal and its related cashflows. So were we. 

But there is another important detail on the loan account’s summary, one that shifts the focus away from the Digital Vibes fiasco and onto Ithala’s handling of loans linked to PEPs.

The Ithala loan’s transaction summary confirmed that the R1.88-million deposit arrived in Cedar Falls’ Ithala loan account on 23 June 2020. Crucially, what it also showed was this: before the payment from Sirela Trading, Cedar Falls’ Ithala loan balance had stood at R10.56-million. The document also revealed that the interest rate for Cedar Falls’ loan was set at 6.5%.

We also know the loan has a term of 20 years, or 240 months, thanks to a statement Dr Zweli Mkhize made shortly after our report on the payment from Sirela Trading. 

Recall that Ithala had granted the R11.84-million loan to May Mkhize’s company back in 2006. So, come June 2020, the loan would have been nearly 15 years old, roughly three quarters into its life. Despite all those years having lapsed, Cedar Falls hadn’t made any significant dent in the loan amount.

Scorpio used Ooba Home Loans’ bond amortisation calculator to determine just how far behind May Mkhize’s company appeared to have been in servicing its loan. The calculator factors in the principal loan amount, along with the interest payable on that figure.

By June 2020, when the payment from Sirela landed in the account, the loan term would have been in its 174th month. According to the Ooba calculator, the balance at that point should have been at around R4.88-million. Thanks to the document the SIU subpoenaed, we know the balance instead stood at R10.56-million. By all appearances, Cedar Falls had fallen way behind on its loan. The apparent shortfall, in fact, amounted to a hefty R5.68-million.

When Sirela made its dubious contribution towards paying off the loan, the balance dropped to R8.67-million. But even then the loan balance would have been roughly R3.8-million short of where it needed to be at that juncture.

'Domestic Prominent Influential Persons'

We tried our utmost to get the IDFC’s input as to why the Cedar Falls loan account didn’t seem to check out.

We wanted to know how the loan had fallen into arrears, and what the IDFC had done about it.

"Please note that Ithala Development Finance Corporation Limited [IDFC] is unable to share any information involving clients without the clients' consent," the entity stated.

It added that "loans to Domestic Prominent Influential Persons are granted in line with IDFC policies."

 Scorpio sent detailed queries to Drs Zweli and May Mkhize via a family spokesperson, but the couple said they had no comment.

Where to now? 

So, what to make of Cedar Falls’ Ithala loan, and what does it say of the IDFC and the current ructions at its banking arm?

A hefty loan made to a politically exposed person, which was seemingly allowed to fall substantially into arrears, raises obvious questions.

If Ithala had extended indulgences to May Mkhize, for whatever reason, it does not inspire much faith in their fiscal discipline. It also brings into question whether or not this was an isolated case.

It is early days yet in the Ithala saga, and the wider public hasn’t yet caught onto its potential significance. 

That may soon change.

Large swathes of the Ithala group’s loan books appear to be in total shambles.

Taxpayers who propped up the IDFC, together with the Ithala SOC’s depositors, could end up losing at least R1.3-billion. This estimate is based on the doubtful loans Ithala itself detailed in its financial filings. There are fears that a deeper, independent probe into Ithala’s affairs would reveal an even worse scenario.

As such, South Africans may have to prepare themselves for another major scandal at a state-owned financial institution. DM

(Ithala SOC "unequivocally and factually denies that it is insolvent". The entity disputes the findings in the Repayment Administrator's solvency report, which it has labelled as "questionable to put it lightly". According to Ithala SOC, the Repayment Administrator made "unfounded" conclusions regarding the entity's loan books, which includes those loans extended to the entity's own employees, and its pensions-backed loans. Ithala SOC's rebuttals are detailed and voluminous, and Daily Maverick will give due consideration to the entity's assertions in our next reports on this matter.)