The South African Reserve Bank (SARB) has put forward a proposal to do away with the prime interest rate altogether, although the move to a new system is not without its dangers along the way.
Key Takeaways
- No change in cost: The total interest rate borrowers pay remains exactly the same under the new system, since the shift from prime to repo plus a margin is purely a change in how the rate is expressed, not in its actual value.
- Greater transparency: Linking loans directly to the repo rate allows borrowers to clearly see the margin their bank is charging, making it easier to compare offers across lenders and to understand how monetary policy decisions affect their repayments.
- A long, careful rollout: With over 12 million contracts and more than R3 trillion in exposure affected, the transition will be phased in gradually from 2027, giving banks time to update systems, revise documentation, and communicate the change clearly to avoid confusing retail customers.
How The Current And Proposed Systems Work
It is the SARB that determines the repo rate within South Africa, this being the rate at which the central bank extends credit to commercial banks operating in the country.
Despite this, banks across South Africa market their credit products by referencing the prime interest rate instead, a figure that is calculated by adding 3.5 percentage points on top of the repo rate.
The central bank’s intention is to do away with the prime lending rate entirely and replace it with the repo rate as the new benchmark against which all loans currently linked to prime would be measured.
In practical terms, this would mean that a loan that is currently priced at prime minus 1 would instead be expressed as repo plus 2.5 under the new arrangement.
Although the overall interest rate charged stays exactly the same, what changes is simply the point of reference used to describe it.
According to the SARB, this decision is not expected to carry any economic consequences whatsoever, given that every interest payment made by borrowers would remain entirely unaffected by the switch.
Under the revised system, any new loans taken out would be quoted as the repo rate plus an additional margin, a move designed to make the overall pricing structure considerably more transparent for consumers.
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The Appeal Of Simplicity
Tlhoni Komako, who serves as Fixed Income Portfolio Manager at Ashburton Investments, explained that the attraction of this particular approach is rooted primarily in how straightforward it is.
Given that the relationship between the prime rate and the repo rate has remained constant for more than twenty years, Komako noted that the changeover could be carried out without the risk of creating any concealed gains or losses for either party.
Although the impact on the numbers themselves may appear minimal, he pointed out that the more meaningful effect would be felt in how ordinary people come to understand their own loans.
Under the system currently in place, he explained, consumers are forced to interpret the cost of their borrowing in relation to the prime rate, a figure that does not give a direct reflection of monetary policy decisions.
As a result, he said, it becomes considerably more difficult for the average borrower to work out whether their loan is priced competitively, or to grasp how shifts in interest rates will actually affect their repayments.
By contrast, tying loans directly to the repo rate would give borrowers the ability to clearly see the margin being charged by their bank, as well as to compare that margin against what other lenders are offering.
When comparing loan offers under a repo-linked system, borrowers should focus on the size of the margin being added, since a smaller margin over the same repo rate signals a cheaper loan overall.
Doing so would also separate out the cost of money itself from the cost of the risk attached to lending, a distinction that the present system fails to capture, while simultaneously helping to improve broader financial literacy among the public.
Why Benchmark Reform Matters Beyond South Africa
Benchmark reform of this nature is not unique to South Africa, and similar exercises have been carried out, or are currently underway, in numerous other jurisdictions around the world. The underlying motivation in most cases is the same, namely a desire to move away from reference rates that are either opaque, prone to manipulation, or poorly understood by the general public, in favour of benchmarks that are tied more directly and transparently to the decisions made by central banks.
The Benefits For Household Financial Decisions
For an economy such as South Africa’s, where household debt levels remain a significant concern and where financial inclusion is an ongoing policy priority, a clearer and more easily understood pricing mechanism could, over time, contribute to better financial decision making at a household level.
It may also make it easier for regulators and consumer bodies to monitor whether banks are pricing risk fairly and consistently across different categories of borrowers, since the margin charged above the repo rate would be plainly visible rather than buried within a single combined figure.
Borrowers wanting to track how policy decisions affect their own credit can keep an eye on SARB Monetary Policy Committee announcements directly, since under a repo-linked system, any change to the repo rate will translate immediately and transparently into a corresponding change in their margin-based interest rate.
What This Means For Borrowers In Practice
For the millions of South Africans currently repaying a home loan, vehicle finance, or personal loan priced off prime, the practical reality is that monthly repayments are not expected to change as a direct result of this reform. What will change is the language used on statements, contracts, and loan offers, with the repo rate and an accompanying margin replacing the familiar prime-linked figure.
Shopping Around During The Transition
Borrowers who are in the process of shopping around for new credit during or after the transition period would be well advised to pay close attention to the margin being quoted by each lender, rather than focusing solely on the headline interest rate, since this margin is what will ultimately distinguish a competitively priced loan from an expensive one.
A useful way to compare loan offers side by side is to ask each lender to state their margin above repo explicitly in writing, rather than simply quoting an all-in interest rate, as this makes it far easier to spot which institution is genuinely offering the better deal.
Financial advisers and consumer protection bodies are likely to play an important role in the years leading up to 2027, helping to ensure that the public understands the change well before it takes effect, so as to reduce the risk of the confusion that Komako has warned about.
A Major Shift
Komako said that the greatest danger associated with the transition lies not in the mechanics of the change itself, but rather in how that change is perceived by the public.
A borrower who has grown used to seeing their loan described as prime minus 1 might well be taken aback to suddenly see the very same loan expressed as repo plus 2.5, even though the underlying level of risk has not shifted in the slightest.
He warned that this creates a genuine danger of confusion arising, and potentially even mistrust, particularly amongst retail borrowers who are less familiar with how these benchmarks function.
Banks, he said, would need to communicate clearly and consistently that nothing whatsoever has changed in terms of the actual cost of borrowing for their customers.
He stressed that the shift being proposed is purely about improving transparency, and not about altering the pricing of loans in any way.
He further added that experience from other countries around the world demonstrates that, whilst institutional market participants tend to adjust quickly to changes in benchmarks, retail customers frequently find it far harder to come to terms with such a change.
The Scale Of The Operational Challenge
Beyond the issue of communicating the change effectively, Komako noted that the operational side of the transition would also need to undergo an enormous overhaul.
More than 12 million contracts currently make use of the prime lending rate, spanning products such as home loans and personal loans, with the total value of this exposure exceeding R3 trillion.
For the banks involved, he explained, this would mean undertaking the following:
- Updating internal systems to accommodate the new benchmark
- Recalibrating existing pricing models from the ground up
- Revising legal documentation tied to millions of contracts
- Ensuring that regulatory compliance is maintained throughout
- Preserving continuity of service for existing customers
He was clear in stating that this is by no means a simple switch to flip, and that it would instead require careful planning, close coordination, and disciplined execution stretched out over the course of several years.
At A Glance
| Aspect | Current System (Prime) | Proposed System (Repo) |
|---|---|---|
| Benchmark used | Prime lending rate | Repo rate |
| Relationship | Repo rate plus 3.5 percentage points | Repo rate plus a margin |
| Example | Prime minus 1 | Repo plus 2.5 |
| Total cost to borrower | Unchanged | Unchanged |
| Transparency | Lower, indirect link to policy | Higher, direct link to policy |
| Contracts affected | Over 12 million | Over 12 million |
| Total exposure | Exceeding R3 trillion | Exceeding R3 trillion |
| Proposed start | N/A | From 2027 |
A Gradual Transition
The SARB has acknowledged the scale and complexity of what is being proposed, and as a result is putting forward a gradual transition, with implementation likely only to begin from 2027 onwards.
This extended timeline is designed to give institutions sufficient time to prepare adequately, whilst also allowing them to manage other reforms that are taking place at the same time, including the ongoing transition from JIBAR to ZARONIA, which refers to the rates at which banks lend to one another.
ZARONIA stands for the South African Rand Overnight Index Average, and unlike JIBAR, it is based on actual overnight transactions between banks rather than estimated rates, making it harder to manipulate.
Conclusion
The SARB’s proposal to retire the prime lending rate in favour of the repo rate marks a shift in clarity rather than in cost, with borrowers set to pay exactly the same amount despite seeing their loans expressed differently on paper. The real work lies ahead, both for banks tasked with overhauling systems and contracts across millions of accounts, and for consumers who will need clear, sustained communication to understand that nothing about their actual repayments has changed, with implementation only expected to begin from 2027, giving both institutions and the public ample time to prepare.
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