The South African Reserve Bank (SARB) wants to eliminate the prime lending rate in favor of its key rate, which could change loan contracts worth billions of rand, Bloomberg reported on Tuesday, February 17.
Making the SARB’s policy rate the benchmark for financial contracts indexed to the prime rate would ensure “a clearer link between monetary policy and interest rates on loans” and improve public understanding of credit pricing, the central bank said in a statement released on Monday.
The transition is expected to begin no earlier than 2027, according to a consultation document, kicking off formal discussions with banks and other industry stakeholders about the proposed reform.
The prime rate has been set at 350 basis points above the benchmark interest rate since 2001. Lenders typically use the prime rate as a benchmark for setting loan prices, applying premiums or discounts depending on the cost of funding, risk appetite, and customer creditworthiness.
More than 12 million contracts, with an estimated value of over 3.2 trillion rand ($200 billion), are indexed to the prime rate, with consumer loans and mortgages accounting for about a third of that amount, according to the central bank.
The consultation document “is a welcome first formal step by the SARB in the process of phasing out the prime rate,” said Peter Attard Montalto, managing director of consulting firm Krutham. The period of about a month for gathering comments from interested parties suggests that “they intend to move quickly,” he added.
New contracts
It may not be feasible to change existing retail contracts, given the diversity of products and consumer protection laws, the SARB said in the document. It is therefore recommended that a so-called safeguard spread of 350 basis points above the reference rate be adopted in current contracts in order to minimize risks and ensure continuity.
New contracts should refer directly to the policy rate instead of the prime rate. Although the effective price of credit will remain unchanged, banks will now present interest rates as a margin above the reference rate.
The central bank will introduce a new reference rate for short-term financial contracts, such as derivatives, called Zaronia, to replace the Johannesburg interbank rate, effective December 31, 2026. The lessons learned from this transition will guide the change from the current prime-based system.
The SARB’s policy rate currently stands at 6.75%, and the monetary policy committee is expected to meet next month to reassess it.
