The end of prime will change nothing for South Africans

Economist Roelof Botha has argued that loans in South Africa are unaffordable, not due to the prime lending rate, but due to the repo rate, with overly restrictive monetary policy to blame.

Botha claimed South Africa’s repo rate is at least 250 basis points higher than it should be, adding that ending the prime lending rate will not make any difference to banks’ lending behaviour.

Speaking to Newzroom Afrika, Botha explained that there was nothing wrong with South Africa’s prime lending rate.

This comes after the Reserve Bank announced plans to replace the prime rate, which is the main reference commercial banks use to price loans in South Africa, with the repo rate.

Since 2001, South Africa’s prime lending rate has been fixed at 350 basis points above the repo rate, also known as the benchmark interest rate.

Banks and other lenders use the prime rate as a reference for pricing loans, with a premium or discount applied depending on the cost of funding, risk appetite, and creditworthiness. For example, a banking client may be quoted “Prime + 2%” on their home loan.

More than 12 million contracts, with an estimated value exceeding R3.2 trillion, are linked to the prime rate, including many South Africans’ home and other consumer loans.

Now, the Reserve Bank has released a consultation paper that marks the first step toward potentially ceasing the use of the prime rate.

Many have criticised the current status quo, arguing that prime is essentially an arbitrary rate, which is why the Reserve Bank is looking to end it.

However, Botha argued that there is “absolutely nothing wrong” with the prime rate, adding that the Reserve Bank’s move to end the rate is a smoke screen being used to deflect from South Africa’s real affordability problem – overly restrictive monetary policy.

Botha explained that, under the previous Reserve Bank Governor, Gill Marcus, South Africa’s real prime rate – which is the prime rate minus inflation – averaged 3.4%. Today, the rate stands at 6.8%.

In essence, this means that borrowers in South Africa are paying significantly more interest than in the past, with restrictive monetary policy, rather than the prime rate, to blame.

South Africa’s real issue

Botha argued that the Reserve Bank’s Monetary Policy Committee (MPC) and its restrictive approach to interest rates are making loans and other expenses more expensive for South African consumers than necessary.

He added that ending and replacing the prime rate will do nothing to address loan affordability in South Africa.

“There is nothing wrong with the prime rate. They want to replace it with repo plus. At the end of the day, the banks will decide on the creditworthiness of a particular person applying for a mortgage loan, applying for credit,” he said. 

“They will decide how much above the prime rate or below the prime rate – that’s how it currently works – they will charge him or her interest. All that happens now is they use the repo rate. Nothing in practice will change as far as I’m concerned.”

KPMG South Africa lead economist Frank Blackmore has made a similar argument, saying that after ending prime, actual loan pricing would remain basically unchanged. However, this is not to say there won’t be some advantages to ending prime.

“Banks would continue to set their lending rates based on the lender’s risk as well as their risk appetite as an institution, the term of the loan, etc., but would now quote them a margin above the policy rate instead of referencing the lending rate as things currently exist,” Blackmore explained.

He said this change could result in interest rates on some loans being lowered in cases where the risk of the individual or the business is perceived to be low.

However, he said the biggest advantage of replacing the prime lending rate is that there will be greater transparency about the premium that the bank charges its clients above that policy rate. 

“It’ll be more competitive as well because, obviously, financial institutions that are able to better calculate the risk of a specific client or loan above the policy rate would be able to provide the best rates in the market,” he explained.

“That competition would help the market in general to price loans at potentially lower rates.”

However, Botha claimed that the only solution to loan unaffordability is to ease monetary policy, arguing that South Africa’s repo rate is at least 250 basis points above what it needs to be.

South African banks at risk

South Africa’s restrictive monetary policy is often attributed to the inflationary effects of the Covid-19 pandemic, which saw CPI inflation peak at 7.8% in mid-2022.

In response to rising inflation during and following the pandemic, the MPC implemented 475 basis points worth of hikes, bringing interest rates to 15-year highs.

These hikes managed to tame and lower South Africa’s inflation, with the latest CPI reading for December 2025 coming out to 3.6%. 

However, since the end of the hiking cycle, the Reserve Bank has only implemented 125 basis points worth of cuts.

This has seen South Africa’s interest rates remain above pre-pandemic levels, which Botha argued is proof that the country’s monetary policy is too restrictive.

This is also why, Botha said, critiques of banks overpricing their loans are misplaced, as they are also hurt by overly restrictive monetary policy.

He explained that local banks play an important role in South Africa’s economy by channelling surplus funds to people who need credit to buy houses and start businesses.

“The point is just that the banks are at risk. They have R8 trillion – I’m going to repeat that, R8 trillion, that’s more than our GDP – of assets. But they also have R8 trillion of liabilities,” he said.

“And they’ve been making profits, but not undue profits. The problem is not the prime rate – the problem is the repo rate.”

“The banks have the responsibility to decide – they have to pay a certain percentage, that’s the repo rate, on the money that they loan amongst each other.” 

“On top of that, they have to charge a higher interest rate so that they can cover their costs and make a small profit.”

“There’s nothing wrong with South Africa’s banking system – the private sector – there’s everything wrong with the Reserve Bank’s monetary policy.”