Africa-Press – South-Africa. The South African Reserve Bank seeks to replace prime, the main reference commercial banks use to price trillions of rands of loans, with its benchmark interest rate.
Making the South African Reserve Bank’s policy rate the reference for prime-linked financial contracts would ensure “a clearer link between monetary policy and lending rates” and improve public understanding of loan pricing, the central bank said in a statement on Monday.
The transition should begin from 2027 at the earliest, it said in a consultation paper, starting formal engagements with banks and industry stakeholders on the proposed reform.
The prime rate has been fixed at 350 basis points above the benchmark interest rate since 2001. Lenders typically price loans using prime as a reference, with premiums or discounts to the measure depending on the cost of funding, risk appetite and the creditworthiness of clients.
More than 12 million contracts with an estimated value in excess of R3.2 trillion are linked to prime, with consumer loans and mortgages accounting for about a third, according to the central bank.
The consultation paper is “a welcome formal first step from the SARB on the prime rate cessation process,” Peter Attard Montalto, managing director at advisory firm Krutham, said.
The period of about one month for stakeholder comments suggests “they wish to move at pace,” he said.
New contracts
It might not be feasible to amend existing retail contracts given the scope of products as well as consumer protection laws, the Reserve Bank said in the paper.
It recommended a so-called fallback spread of 350 basis points above the benchmark interest rate in existing contracts to minimize risk and ensure continuity.
New contracts should directly reference the policy rate instead of prime, it said.
The central bank will introduce a new reference rate for short-term financial contracts such as derivatives, known as Zaronia, to replace the Johannesburg interbank average rate, or Jibar, on Dec. 31. Lessons from this transition will inform its shift from prime, it said.
The Reserve Bank’s benchmark rate is currently 6.75% and the monetary policy committee will meet next month to review it.
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