By Tlhoni Komako, Fixed Income Portfolio Manager at Ashburton Investments

Ask any homeowner about their bond or vehicle finance, and the answer will almost always be framed as “prime minus” or “prime plus” a margin. For decades, the “prime lending rate” has been the language of borrowing in South Africa. It is deeply embedded in how individuals, businesses, and even policymakers think about the cost of credit.

Yet, despite its familiarity, prime has long ceased to serve its original purpose. What appears to be a meaningful market benchmark is in reality, little more than a formula. Now, the South African Reserve Bank (SARB) is proposing to retire it entirely, a move that could reshape how lending is understood, even if it leaves the actual cost of borrowing unchanged.

This may seem like a technical adjustment, but it represents something far more significant, a shift toward transparency in how credit is priced.

A benchmark that lost its meaning

The prime lending rate was not always a fixed construct. Historically, it represented the rate banks charged their most creditworthy clients, reflecting real funding costs, competitive dynamics and risk appetite. Banks set their own prime rates and these varied depending on market conditions.

Over time however, this flexibility disappeared. As funding costs converged and competition intensified, banks’ prime rates aligned, eventually settling into a standardised industry benchmark. Since 2001, prime has effectively been fixed at 3.5% above the SARB’s policy rate which is known as the repo rate.

In practical terms, this means prime is no longer a market-driven rate. It does not reflect funding conditions, borrower risk, or lending dynamics. It is simply the repo rate plus 3.5%.

Despite this, many South Africans continue to interpret prime as a meaningful base rate. Often assuming it represents the lowest rate available or even a built-in profit margin for banks. Neither is true. Banks price loans based on a range of factors, including funding costs and borrower risk and routinely lend both above and below prime. The result is a disconnect between perception and reality, one that the SARB now wants to correct.

What the SARB is proposing

The proposal itself is straightforward, the SARB wants to replace the prime lending rate with the repo rate itself as the benchmark for all loans currently linked to prime.

In practice, this would simply reframe how lending rates are expressed. For example, a loan priced at “prime minus 1%” would become “repo plus 2.5%.” The total interest rate remains the same but the reference point changes.

For existing borrowers, the SARB has been explicit: there should be no economic impact. Monthly repayments, total interest and loan terms would remain unchanged. The transition is designed to be neutral, ensuring that no borrower is better or worse off.

New loans, however, would be quoted directly as the repo rate plus a margin, making the pricing structure more transparent. The appeal of this approach lies in its simplicity. Because the relationship between prime and the repo rate has been fixed for more than two decades, the transition can happen without introducing hidden gains or losses.

Why this matters

At first glance, replacing one benchmark with another may seem inconsequential. But the real impact lies in how it changes the way borrowers understand their loans.

Under the current system, consumers must interpret their borrowing costs relative to prime, a rate that does not directly reflect monetary policy. This makes it harder to assess whether a loan is competitively priced or to understand how changes in interest rates affect them.

Linking loans directly to the repo rate changes that. It allows borrowers to clearly see:

• The policy rate set by the SARB
• The margin charged by their bank
• How that margin compares across lenders

In short, it separates the cost of money from the cost of risk, something the current system obscures.

This matters not only for individual borrowers but for the broader financial system. A more transparent pricing framework improves competition, enhances financial literacy and aligns lending more closely with monetary policy.

The challenge: Perception and communication

If the economics remain unchanged, the biggest risk lies in how the transition is perceived. A borrower who is used to seeing a loan priced at “prime minus 1%” may be surprised to see it expressed as “repo plus 2.5%.” Even though the total rate is identical, the new formulation can appear higher simply because of how it is presented. This creates a real risk of confusion and potentially mistrust particularly among retail borrowers.

Managing this transition will therefore depend heavily on communication. Banks will need to explain clearly and consistently that nothing has changed in terms of actual borrowing costs. The shift is purely one of transparency, not pricing.

This is easier said than done. International experience shows that while institutional market participants adapt quickly to benchmark changes, retail customers often struggle to understand them. South Africa’s transition is unusual in that it is overwhelmingly retail-focused, which raises the stakes significantly. Getting the messaging right will be critical.

A large-scale operational shift

Beyond communication, the operational scale of the transition is significant. More than 12 million contracts currently reference the prime lending rate, with total exposure exceeding R3 trillion. These span home loans, personal loans, and various forms of consumer credit.

For banks, this means updating systems, recalibrating pricing models, revising legal documentation, and ensuring regulatory compliance while maintaining continuity for customers. This is not a simple switch. It will require careful planning, coordination, and execution over several years.

The SARB has recognised this complexity and is proposing a gradual transition, with implementation likely only from 2027. This timeline allows institutions to prepare adequately while also managing other ongoing reforms, particularly the transition from JIBAR to ZARONIA.

Lessons from global benchmark reform

South Africa is not alone in rethinking its financial benchmarks. The global phase-out of the London Interbank Offered Rate (LIBOR), once the dominant reference rate for an estimated $350 trillion financial contracts, offers important lessons.

The LIBOR transition demonstrated the importance of:

• Early preparation
• Robust legal frameworks
• Clear fallback provisions in contracts
• Strong communication with end users

One of the biggest challenges internationally was dealing with “tough legacy” contracts. Agreements that lacked clear provisions for what would happen if the benchmark ceased to exist. Regulators in the US and UK had to introduce legislation to manage these cases.

South Africa is taking a more proactive approach by incorporating similar safeguards into its proposal from the outset.

Closer to home, the ongoing transition from JIBAR to the South African Rand Overnight Index Average (ZARONIA) provides a real-time example of how such reforms play out. RMB and Ashburton Investments, executed South Africa’s first confirmed trade referencing ZARONIA. The R500-million trade was successfully processed through Strate, South Africa’s central securities depository and collateral platform. It highlights both the complexity of benchmark changes and the importance of sequencing reforms carefully to avoid overwhelming the system.

What happens next

For now, the SARB’s proposal remains in the consultation phase. But it is clear that the direction of travel is set.

Financial institutions will need to begin preparing well in advance by:

• Assessing their exposure to prime-linked contracts
• Reviewing and updating legal documentation
• Building systems capable of handling the new framework
• Developing clear communication strategies for customers

Equally important is ensuring that new contracts are structured with the future in mind, incorporating appropriate fallback provisions.

The transition may still be some time away, but the work begins now.

A simpler, more transparent system

The case for retiring the prime lending rate is ultimately a case for clarity. Prime has not been harmful in a direct sense. Borrowers have not been systematically disadvantaged by its use. But it has created a layer of abstraction that obscures how lending actually works, contributing to misunderstandings about pricing and profitability.

Replacing it with the repo rate does not change the economics of borrowing. But it does change the narrative, making it easier for borrowers to understand what they are paying for and why. In a financial system that increasingly values transparency, that is no small shift.

The bottom line

For borrowers, the message is simple: your loan will not suddenly become more expensive. What will change is how that cost is expressed and understood. For banks, the challenge is far greater. This is a complex operational and communication exercise that will require careful execution. And for the financial system as a whole, this marks an important step toward aligning how credit is priced with how it is understood.

The end of prime may not be dramatic, but it is meaningful. And if handled correctly, it could leave South Africa with a clearer, more transparent lending framework for years to come.