The South African Reserve Bank (SARB) this week published a consultation paper proposing that the prime lending rate (PLR) be discontinued and replaced with the SARB policy rate (SPR), commonly known as the repo rate, as the reference rate for lending in South Africa.
The proposal forms part of broader efforts to modernise South Africa’s benchmark interest rate framework.
The central bank argues that the prime rate “has evolved into a rate that no longer represents a base rate for pricing credit to bank clients”, and its “current role is largely administrative and detached from its original purpose”.
Since 2001, the prime lending rate has been set as a fixed spread of 350 basis points above the SPR. Although this structure has enabled comparability of lending rates and supported monetary policy transmission, the SARB says it has also “led to widespread misconceptions about its function”.
Many consumers continue to view prime as the base rate from which lending margins are negotiated, and the 350-basis point spread is often perceived as a guaranteed profit margin for banks. The SARB rejects this interpretation, stating the PLR “is not, nor is it intended to be, the basis for pricing credit” and “is not intended to convey messages about the reasonable minimum spread that lenders should charge their clients”.
Instead, the Bank emphasises that lending rates are determined by banks’ funding costs, borrower risk profiles, and institutional risk appetite. “Actual loan pricing would remain unchanged,” the paper states. Under the proposal, banks would continue to determine lending rates in the same way but would quote them as a margin above the SPR rather than above prime.
Part of broader benchmark reform
The proposal comes at the tail end of South Africa’s transition away from the Johannesburg Interbank Average Rate (Jibar) and forms part of the country’s wider benchmark reform programme.
The SARB notes that the PLR fails to comply with the International Organization of Securities Commissions (IOSCO) principles for financial benchmarks because it is “no longer an accurate representation of the economic realities of the interest it seeks to measure”.
Replacing the PLR with the SPR would, according to the Bank, “enhance transparency, create a clearer link between monetary policy decisions and lending rates, and make it easier for consumers to understand how banks price their loans”.
Under the proposed framework, lending rates would be quoted directly as the SPR plus a negotiated spread. The SARB says this spread “should largely reflect funding conditions, the borrower’s risk profile and the lender’s risk appetite”.
Why not ZARONIA?
The SARB considered alternative approaches, including refining the methodology used to calculate prime or replacing it with the South African Rand Overnight Index Average (ZARONIA), which is being adopted as the new benchmark in wholesale markets.
Although ZARONIA is described as a robust benchmark with a high pass-through from the policy rate, the Bank does not recommend using it as a replacement for prime in retail lending. It warns that doing so would “introduce complexity in the rate-setting process for retail clients”.
Unlike the SPR, ZARONIA does not trade at a fixed spread to prime or to the policy rate. Moving retail contracts from prime to ZARONIA would therefore require an adjustment spread to avoid shifting economic value between lenders and borrowers at the point of transition. The SARB concludes that adopting the SPR directly poses fewer transition risks and avoids the need to design new credit adjustment mechanisms.
ZARONIA may remain appropriate for wholesale contracts and instruments where aligning assets and liabilities reduces basis risk, but the preferred approach for retail lending is to reference the policy rate itself.
Scale of exposure
The consultation paper estimates that more than 12 million contracts currently reference the prime rate, with a combined value exceeding R3.2 trillion. Retail mortgages and consumer loans account for approximately 37% of that exposure.
Given the scale and diversity of prime-linked contracts, the SARB emphasises that the transition must be carefully managed.
It proposes three broad steps:
- adding fallback language in new PLR-linked contracts;
- issuing new contracts that reference the SPR directly; and
- transitioning legacy contracts in a structured manner.
For existing agreements, the paper recommends that fallback provisions use the current fixed spread of 350 basis points above the SPR to maintain continuity and eliminate the risk of economic value transfer.
The SARB also acknowledges legal constraints. It says “it might not be feasible to amend existing retail contracts” given the volume of agreements and consumer protection laws. As a result, legislative “safe harbour provisions” may be required to facilitate the migration of legacy contracts and minimise legal uncertainty.
What it means for borrowers
The SARB is explicit that the reform would not automatically reduce borrowing costs. It reiterates that the 350-basis point spread between prime and the policy rate does not, in itself, determine banks’ interest margins, and narrowing or eliminating that spread would not lower consumer debt-service costs.
Instead, the change would alter how lending rates are expressed. For example, a loan currently quoted at “prime plus 1%” would, under the new framework, be quoted as “SPR plus a larger margin”. The total interest rate payable would remain the same.
The Bank notes that the numerical spread above the policy rate would appear larger than spreads currently quoted above prime, which could cause confusion among borrowers unfamiliar with the SPR. It therefore highlights the need for a carefully designed communication strategy to support the transition.
Over time, the SARB argues, referencing the policy rate directly would improve transparency and public understanding of how monetary policy decisions affect borrowing costs.
Timeline
To avoid overlapping benchmark reforms, the SARB recommends that active transition away from the prime rate begin “in 2027 at the earliest”.
In the meantime, the Bank will conduct further data collection, stakeholder engagement and transition planning. The publication of the paper marks the start of a formal public consultation process, which will remain open for one month from the date of publication.
