The South African Reserve Bank (SARB) has started a consultation process aimed at discontinuing the prime lending rate—a rate at which banks lend to consumers.
This Reserve Bank announced this on Tuesday, saying it has published a consultation paper inviting stakeholders to provide comments and suggestions on the proposed cessation of the prime lending rate by March 20.
Since 2001, the Reserve Bank has fixed the prime lending rate at 350 basis points above its policy rate.
The central bank stated in the announcement that the SARB policy rate (SPR), also referred to as the repurchase (repo) rate, would be used as a replacement rate as a result of the changes.
“This would make the SPR the reference rate for PLR-linked [prime lending rate] financial contracts, ensuring a clearer link between monetary policy and lending rates and improving public understanding of loan pricing mechanisms,” said the bank.
The central bank said the proposed reform is part of ongoing efforts to modernise South Africa’s interest rate benchmarks and to align with international best practices.
“Furthermore, the prime lending rate has become detached from its original purpose as the base rate for pricing credit, leading to widespread misconceptions about its function.
“This, in part, reflects the evolving nature and use of the PLR since its introduction in South Africa’s financial markets, which include a time when the PLR was used as a base rate for bank lending.
“However, since 2001, the rate has been used as an administrative reference with a fixed spread of 350 basis points above the SPR.
“While the simplicity of the PLR has enabled the comparability of lending rates and better monetary policy transmission, its continued use is deemed counterproductive given misconceptions about its intended purpose,” said the Bank.
Transition to be carefully managed
The Reserve Bank said the use of the term “SARB policy rate” instead of “repo rate” reflects the evolution of the monetary policy implementation framework.
“The term ‘repo rate’ was appropriate when the SARB implemented monetary policy using a structural shortage framework and the policy rate reflected the cost at which the SARB lent short-term liquidity to commercial banks using repurchase agreements.
“However, in 2022, the SARB transitioned to a surplus framework for monetary policy implementation, which has reduced the need to refinance liquidity shortages significantly.”
A transition from the PLR to the SPR as a key reference for lending rates, expected only after the Johannesburg Interbank Average Rate cessation, will be carefully managed to minimise disruptions and the risk of economic value transfer.
This process will include robust fallback language in new contracts, legislative safe harbour provisions for legacy contracts, and extensive stakeholder engagement to ensure a smooth migration.
Lessons learned from the recent Jibar benchmark transition will inform the approach.
The SARB also revealed that estimates suggest that there are more than 12 million contracts that currently reference the prime lending rate. “The estimated value of these contracts is more than R3.2-trillion, of which retail mortgages and consumer loans are the largest, accounting for 37% of the total exposure.”
All stakeholders are invited to provide comments and suggestions on the proposed cessation of the PLR by March 20.
All comments, suggestions and general queries relating to this consultation paper should be sent to the SARB at sarbwgrirb@resbank.co.za.
