Big changes for banks and interest rates in South Africa
South African banks will soon start using a new interest rate benchmark.
The Johannesburg Interbank Average Rate (JIBAR) – one of the most widely used interest rate benchmarks by banks in South Africa – will be replaced by an Alternative Reference Rate (ARR).
The Market Practitioner’s Group (MPG) decided that the South African Rand Overnight Index Average interest rate benchmark (ZARONIA) was the successor rate to replace JIBAR.
The Reserve Bank said that ZARONIA reflects the interest rate at which commercial banks obtain rand-denominated overnight wholesale funds.
It is based on actual transactions and calculated as a trimmed, volume-weighted mean of interest rates paid on eligible unsecured overnight deposits.
Wholesale banking refers to banking services offered to companies with huge balance sheets, so the typical consumer is unlikely to be directly affected by the developments. Wholesale funds ensure that a bank can meet its funding needs in addition to retail deposits.
Absa explained that the key difference between the two benchmarks is their calculation methodologies.
JIBAR is forward-looking and relies on indicative pricing submissions from a selected bank panel.
On the other hand, ZARONIA is backwards-looking and reflects actual observable transactions, which is why it is considered more credible and robust.
JIBAR has been the benchmark rate at which banks are willing to lend unsecured funds to each other. It is derived from quoted rates for Negotiable Certificates of Deposit (NCDs).
However, its reliability has been questioned as it is based on expert judgment instead of actual transactions.
JIBAR is set to end in 2026, with ZARONIA first being used in derivative contracts this year.
In 2025, ZARONIA will be used in cash markets.
“On 3 November 2023, the SARB announced that the observation of ZARONIA had come to an end and that the rate, now endorsed, could be used by market participants,” said Kim Robertson from RMB.
RMB noted the significant impact of ARR on companies and financial service providers, with the new system set to impact a wide range of transactions and products.
Corporations should expect to be affected if they have a floating-rate loan, credit facility, deposit, derivative, or any financial contract with or may have payments linked to JIBAR (or other affected benchmarks) that mature after the JIBAR cessation date.
RMB said that the risk-free rates differ economically from JIBAR and other affected rates, which we will consider as it enhances its product offering.
“We are assessing how the transition may impact JIBAR-linked transactions and products while we are preparing to review and enhance our product offering,” said Robertson.
“We are closely monitoring market developments during this process and benchmarking against the transitions of our global peers during our journey towards reference rate reform.”
“In the meantime, we suggest that companies review transactions they have that are based on JIBAR and other reference rates, consider the potential impact that the discontinuation of JIBAR and other reference rates will have, and consider the impact that the transition to an ARR may have on their business.”
“They also need to start learning about the ZARONIA and how it will work for their transactions.”
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