The South African Reserve Bank (SARB) has proposed discontinuing the prime lending rate as the banking sector’s primary benchmark and replacing it with direct quotation against its own “SARB policy rate” (SPR), previously the repurchase (repo) rate.
The reform is presented as modernisation, an alignment with international practice and a clarification of monetary transmission. There is excellent logic in this ambition. Over time the prime rate has become an administrative convention that many borrowers misunderstand. However, clarity must not be confused with transformation, and transparency must never become a stalking horse for price control.
At its core, this proposal addresses a communication problem. The Bank argues borrowers mistakenly treat the prime rate as a universal base rate from which all margins accrue, when lending is priced according to funding costs, capital requirements, liquidity buffers, borrower risk and the like. Quoting loans as a spread over the SPR may well make the linkage to monetary policy more explicit. However, it does not alter the economics of credit by a single basis point. A loan that is today expressed as prime plus one percentage point may tomorrow appear as SPR plus 4.5 points. The arithmetic is identical. Public perception may not be.
International precedent should temper any inflated expectations. The recent global migration from the London interbank offered rate (Libor) to several alternative risk-free reference rates, including the new secured overnight financing rate for dollar-denominated products, did not reduce borrowing costs. It did not compress margins. It did not revolutionise competition. It may have changed the plumbing of the system, but it did not even marginally change the incentives that drive it. Where borrowers hoped for cheaper credit, they were disappointed. Where politicians imagined structural relief through benchmark reform, they found markets are governed by risk and capital, not by labels.
The scale of the South African transition alone should induce sobriety. More than 12-million contracts, worth more than R3.2-trillion, reference the prime lending rate. Migrating that stock requires legal precision, contractual fallback language, operational retooling and co-ordinated industry effort. Benchmark reform elsewhere has shown how easily legacy documentation can become contested and how swiftly uncertainty can metastasise when substitution clauses prove inadequate.
Benchmark reform elsewhere has shown how easily legacy documentation can become contested and how swiftly uncertainty can metastasise when substitution clauses prove inadequate.
South Africa’s own recent experience in shifting from the Johannesburg interbank average rate (Jibar) to Zaronia — the new South African rand overnight index average, which reflects the actual interest rates obtained by commercial banks for rand-denominated overnight wholesale funds — demonstrated the painstaking care required to avoid disruption. None of this is insurmountable, but none of it is trivial.
The greater danger lies not so much in the technical reform itself but in the political temptation that accompanies it. Already there are calls for the Bank to standardise and cap margins above the SPR, to impose a ceiling of 500 basis points regardless of borrower risk, to penalise banks that exceed it, to mandate uniform transmission mechanisms, and even to retrospectively reconcile historical margins. This is not transparency reform. It is price control dressed up in the language of “fairness”.
Credit markets function on risk differentiation. A lender prices according to probability of default, given default, funding structure, regulatory capital and macroeconomic uncertainty. A uniform ceiling on spreads does not make high-risk borrowers safer. It makes them entirely unbankable.
Banks will not absorb uneconomic risk out of some sort of “patriotic sentiment”. They will simply decline the exposure. Capital will migrate to borrowers who fit within the regulatory cap, and those outside it will be rationed out of the system. The result will not be cheaper credit for the marginal entrepreneur. It will be no credit at all. Recourse for them will be to informal lenders, where transparency is minimal, rates far higher and protections flimsy.
The assertion that benchmark reform must be coupled with margin limits to “protect micro, small and medium enterprises” rests on a complete misunderstanding of how capital is allocated. Access to credit depends on confidence in repayment, enforceability of contracts, stability of the macroeconomic environment and adequacy of collateral, not on administratively imposed ceilings. Where spreads appear high, they reflect underlying risk premiums embedded in an economy characterised by volatility, constrained growth and regulatory capital burdens. One may debate those fundamentals, but suppressing the price signal does not eliminate the risk; it merely conceals it until rationing results.
There is also a risk of inflating consumer expectations. In an environment of high household indebtedness and cost-of-living strain, any reform touching lending rates may be interpreted as a promise of relief.
Nor should transparency be conflated with competition. South Africa’s financial sector is shaped by structural realities, concentration, capital intensity, funding costs and vast swathes of prudential regulation. Whether loans are quoted relative to the prime rate or to the SPR does not alter those structural determinants. Competitive pressure, where it exists, will continue to manifest in negotiated spreads, product innovation and service differentiation. Where it does not, benchmark relabelling will not magically conjure it into existence. The history of global benchmark reform confirms this. Markets adjusted to new reference rates without any perceptible compression of margins or transformation of market power.
There is also a risk of inflating consumer expectations. In an environment of high household indebtedness and cost-of-living strain, any reform touching lending rates may be interpreted as a promise of relief. The Reserve Bank has been careful to state the change is about transparency, not affordability. That discipline must be maintained. To imply instalments will fall because the reference rate changes would be disingenuous. Banks will continue to price for risk, for capital, for liquidity and for macroeconomic uncertainty. The label does not repeal the logic.
None of this is an argument against the reform itself. Replacing an archaic and conceptually misleading benchmark with direct policy rate referencing is intellectually coherent and consistent with international evolution. It may enhance clarity and strengthen the credibility of monetary transmission. If executed with legal precision, operational discipline and candid communication, it can improve the architecture of South Africa’s credit markets.
What it must not become is a vehicle for market interventionism. Once the central bank is pressed to dictate permissible margins, to enforce ceilings irrespective of risk, to punish deviations from administratively defined spreads, the reform ceases to be about transparency and becomes another failed experiment in price control. History is unambiguous about the consequences of such experiments. Prices divorced from risk lead to rationing, misallocation and ultimately instability.
An efficient, free and functioning credit market does indeed require clear benchmarks. However, it also requires the freedom to price risk honestly. The Reserve Bank’s initiative can advance the former. It should resist all pressure to compromise the latter.
• Dr Benfield, a retired professor of economics from the University of the Witwatersrand, is a senior associate and board member of the Free Market Foundation.
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