Big benchmark interest rate change for South Africa

The Reserve Bank has announced that it will replace the current benchmark interest rate in South Africa, the Johannesburg Interbank Average Rate (Jibar), at the end of next year. 

It will be replaced by the South African Rand Overnight Index Average (ZARONIA) from 31 December 2026, which promises improved reliability. 

This is a significant shift as the benchmark rate underpins countless financial instruments in South Africa, from loans to derivatives.

In effect, the benchmark interest rate determines the cost of borrowing and the value of various financial contracts. 

For decades, Jibar has been the benchmark rate in South Africa. However, the Reserve Bank has become increasingly concerned about its structural weakness and the decline in the market underpinning it. 

It said that these have created vulnerabilities that cannot be resolved in the foreseeable future, resulting in the need for a new benchmark rate that is more reliable and calculated differently.

The Jibar rate has historically been calculated based on the rates banks are willing to lend unsecured funds to each other. This is based on expert judgement and estimations rather than actual market transactions. 

As a result, it is highly vulnerable to manipulation and may not accurately reflect true market conditions. Banks have also greatly reduced interbank unsecured lending, making it more difficult to calculate rates like Jibar.

PwC previously warned that this could result in banks potentially using their submissions to influence borrowing rates to make it more favourable, distorting the true cost of borrowing. 

This pushed the Reserve Bank to create an alternative that is calculated on actual market transactions in the wholesale funds market. 

This is a more reliable measure of the cost of borrowing as it reflects the rates at which banks are willing to borrow funds from each other on an overnight basis. 

As a result, the new rate, ZARONIA, will become the recommended alternative reference rate for rand-denominated financial contracts going forward. 

Reserve Bank Deputy Governor Rashad Cassim said the process of creating a new benchmark rate has been eight years in the making. 

“Creating new benchmark rates for financial markets is like building a new foundation under a house that you are already living in,” Cassim said. 

On 3 December, the Reserve Bank announced that Jibar will be permanently discontinued immediately after its final publication on 31 December 2026. All Jibar tenors will no longer be provided and will be considered non-representative. 

The Reserve Bank is already beginning to wean financial institutions off Jibar and encouraging them to use ZARONIA in new financial contracts. 

In the first seven months of doing so, the value of contracts using ZARONIA has risen from R6.4 billion to over R200 billion. 

The impact

The shift to ZARONIA is expected to result in greater confidence in the South African financial system, as it improves transparency and reliability.

However, the shift away from Jibar is expected to come with significant changes and disruption for financial institutions. 

“The move from JIBAR, a term rate incorporating a risk premium, to ZARONIA necessitates modifications to existing financial instruments,” PwC’s experts said. 

“These changes, while anticipated to be minor, maintain the original economic substances of transactions, raise related tax questions that impact both corporate and individual taxpayers.”

ZARONIA, unlike Jibar, is a near-risk-free rate. It lacks the built-in credit and term premium components of its predecessor, resulting in a generally lower rate compared to Jibar.

PwC explained that the tax implications of the change are still being debated and will hinge on how various factors are interpreted and applied. 

Its experts said South Africans are unlikely to experience significant tax implications, with the main impact coming from the pricing of financial products tied to the new benchmark rate. 

This shift may alter pricing dynamics and change the price of financial products tied to Jibar, creating disruptions for financial institutions, corporates, and individuals. 

As a result, institutions or individuals could face liquidity issues and other challenges in managing their risk exposures, hedging strategies, and capital requirements.

Entities with existing Jibar-linked contracts will need to review and potentially renegotiate terms to incorporate ZARONIA. 

Financial institutions must also assess and upgrade their systems to accommodate ZARONIA. This includes updating valuation models, risk management frameworks, and reporting mechanisms. 

Under the new reference rate, institutions will also need to reevaluate risk exposures, hedging strategies, and capital requirements.

This could lead to significant changes in the price of financial products offered to South Africans and the repayment terms.