Bad news for anyone with home loans and other debt in South Africa
The Reserve Bank is looking to review the prime lending rate used to determine home bonds and other debt in South Africa, but experts say it is unlikely to make loans any cheaper.
The South African Reserve Bank (SARB) revealed in mid-January that it is reviewing the main reference rate commercial banks use to price trillions of rands of loans to clients.
The prime interest rate is a rate that has been set 350 basis points (3.5 percentage points) above the country’s monetary policy (repo) rate since 2001.
When applying for loans from banks, clients are typically given personalised rates centred around this point, ie, “prime plus X” or “prime minus X”.
Banks offer premiums or discounts to the rate depending on the cost of funding, risk appetite and the creditworthiness of clients.
According to Krutham managing director Peter Attard Montalto, the prime rate is a “bizarre hangover” from history that overplays the costs to banks and others.
He added that reviewing the rate is long overdue, and removing it would have a positive impact on markets.
However, Krutham chair, Dr Stuart Theobald, stressed that the impact is unlikely to be what consumers expect, such as making their loans cheaper.
In an explainer on the review and potential changes, Theobald noted that the prime rate is a convention, not a regulation.
“That means it is a reference point that everyone understands. It allows people to easily compare quotes from different lenders. It is not a mechanical pricing mechanism,” he said.
He added that banks already price around prime, so the rates they offer consumers differ. While prime-linked loans are offered, they are offered as a product, not mandated.
Critically, Theobald said that the SARB review of prime “is not about reducing the spread between repo and prime,” which means that prime-linked debt is not going to get cheaper.
“Sorry to those with prime-linked debt,” he said.
Changes coming, but impact may be small
Theobald noted that the SARB has historically been hesitant to touch the prime convention as it “wants everyone to be in line to protect the monetary transmission mechanism”.
If banks ignored prime, it would undermine monetary policy. However, prime is only one factor banks look at when lending. Other factors include:
- Economic conditions
- Bank risk appetite
- Competitive pressures
- Statutory capital costs
- Shareholder hurdle rates
- The overall cost of funds
- The riskiness of the borrower
The Krutham chair added that the repo rate actually has a limited impact on banks’ actual cost of funds, because banks don’t borrow or deposit much at the repo window with the SARB.
“They have much cheaper sources of funding – such as your lazy deposits on which they pay less than repo.”
Because of this, the SARB prime review may not be as significant as it seems. However, there is still reason to do it.
“There does remain a lingering concern about the tightness of the monetary transmission mechanism and the signalling effect of the repo,” Theobald said.
“SARB wants this to be very clear and direct so that it has a tight rein on the economy, able to accelerate or decelerate through its monetary policy committee decisions.”
This may result in a tighter convention being established around the repo rate rather than prime (i.e., “repo plus X”).
The Reserve Bank may also want to turn the 3.5 percentage point margin from a convention to a regulation, just to limit the risk that some future bank may want to try to break with convention, he said.
Notably, the 3.5 percentage point margin is not that far off the actual interest rate spread most banks earn, he added.
For the June 2025 results, for instance, these ranged from 3.9% to 4.9% among the big four.
Whatever the change, Theobald said the SARB will not want to mess with how banks price relative to the benchmark, as that would be wading into price-setting and dampening competitive dynamics between banks.
“Changing the benchmark does not change the economics of lending. It may alter optics and signalling, but it will not reduce borrowing costs in any durable way,” he said.
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