Sometimes the most meaningful economic reforms are not the ones that change interest rates.
They are the ones that make the financial system easier to understand.
This week, South African Reserve Bank Deputy Governor Rashad Cassim outlined the Reserve Bank’s plans to move away from the traditional prime lending rate and, over time, have loans quoted directly against the SARB repo rate as part of the modernisation of South Africa’s interest-rate benchmark framework. At first glance, this sounds like a technical change. It isn’t. It is about transparency.
And transparency is almost always good for the economy.
For decades, South Africans have borrowed money at prime, Prime minus 1% or prime plus 2%. Yet, ask the average borrower what prime actually is and few can explain it. Many believe it is the interest rate determined by the Reserve Bank. It isn’t.
Prime is a lending benchmark used by commercial banks. It has traditionally been set 3.5 percentage points above the Reserve Bank’s repo rate, with individual borrowers then receiving discounts or premiums depending on their risk profile.
Under the proposed system, that changes.
Instead of being quoted prime -0.5%, a borrower may simply be quoted: repo rate +3.0%.
That may appear to be a small adjustment. It isn’t.
For the first time, borrowers will immediately see the gap between the Reserve Bank’s policy rate and the rate they are paying their bank.
That gap is, in simple terms, the bank’s lending margin. It has always existed.
The difference now is that it becomes far easier to see, understand and compare.
Let me be clear. This is not an argument that banks are charging excessive margins.
Banks have legitimate funding costs. They carry credit risk. They face capital and liquidity requirements. They employ thousands of people and, like every business, are expected to generate a reasonable return for shareholders.
But transparency changes markets. If one bank quotes repo +2.8% and another quotes repo +4.4%, borrowers will naturally begin asking why.
That is exactly how competitive markets are supposed to work.
Healthy competition begins when prices are easier to compare. Why should borrowing be any different?
Readers of this column will know that I have consistently argued in previous articles that South Africa’s recent inflation has largely been driven by supply-side shocks, not excessive consumer demand.
Higher global oil prices. Electricity tariff increases. Logistics failures. International shipping disruptions.
These are the forces that have pushed prices higher. That is why I have questioned whether relying primarily on demand-side monetary policy was always the most appropriate response.
Higher interest rates cannot produce more electricity, lower the oil price, repair freight rail or improve our ports.
Nor can they remove the structural constraints that continue limiting South Africa’s economic growth. Those require investment. Infrastructure. More accountability. Better governance. And policies that encourage businesses to expand with confidence.
This week’s announcement from Deputy Governor Cassim is important for a different reason. It is not about making borrowing cheaper. Nor is it about making borrowing more expensive.
It is about making borrowing easier to understand.
That matters because better information leads to better decisions. Better decisions encourage stronger competition. Stronger competition benefits borrowers. And better-functioning financial markets support investment.
South Africa does not have a borrowing problem nearly as much as it has a growth problem.
Businesses need confidence to invest. Entrepreneurs need confidence to expand. Families need confidence to buy homes.
Every reform that improves transparency and strengthens confidence should therefore be welcomed.
Imagine if the same philosophy extended beyond banking. Imagine greater transparency in public procurement, municipal finances, infrastructure delivery, state-owned enterprises and government performance.
Transparent systems build trust. Trust builds confidence.
Confidence encourages investment. And investment creates jobs.
South Africa’s economy needs many big reforms.
Reliable electricity, efficient ports, competitive freight rail, capable municipalities and public-private partnerships.
This week’s proposal will not solve those challenges on its own.
But it moves one important part of our economy in the right direction.
For years, South Africans have paid close attention to the Reserve Bank’s interest rate.
Perhaps it is now time to pay closer attention to the banks’ lending margins as well.
Because healthy markets do not fear transparency. They depend on it.
And if this reform encourages borrowers to ask better questions, strengthens competition between lenders and improves confidence in South Africa’s financial system, it will have achieved something far more valuable than simply changing the way interest rates are quoted.
It will have made our economy a little simpler. And perhaps, a little stronger.
• Van Doesburgh is head of economics at CPUT, CEO of Economics Investment Group and a regular commentator on the economic landscape, focusing on financial markets, policy, and business strategy. vandoesburghm@cput.ac.za
- Sometimes the most meaningful economic reforms are not the ones that change interest rates.
- They are the ones that make the financial system easier to understand.
- This week, South African Reserve Bank Deputy Governor Rashad Cassim outlined the Reserve Bank’s plans to move away from the traditional prime lending rate and, over time, have loans quoted directly against the SARB repo rate as part of the modernisation of South Africa’s interest-rate benchmark framework.
- At first glance, this sounds like a technical change.
- It isn’t.
