Big change to interest rates in South Africa

The key benchmark interest rate, the Johannesburg Interbank Average Rate (JIBAR), is set to end by 2026 and be replaced by a new index, which will significantly impact the calculation of interest rates in South Africa. 

Currently, JIBAR is used as the benchmark for short-term interest rates in South Africa’s financial markets. It is used as a reference rate to calculate the value of financial assets and contracts. 

In September, the Reserve Bank’s Prudential Authority (PA) and the Financial Sector Conduct Authority (FSCA) gave an update on the transition to a new benchmark rate and its potential impact. 

The Reserve Bank began reviewing the JIBAR in 2018 as part of its efforts to improve the calculation of interest rates on all financial products. 

RMB said this was driven by the London Interbank Offer Rate scandal in 2012, in which several financial institutions colluded to influence short-term interest rates to their benefit. 

Through this evaluation, the Reserve Bank found that the JIBAR exhibits several weaknesses that have been found in other interbank rates around the world. 

As a result, the bank now plans to discontinue the benchmark rate and transition South Africa’s financial markets away from it. 

For decades, the JIBAR has been the key benchmark interest rate in South Africa, influencing the pricing and valuation of financial instruments like loans, derivatives, and bonds.

The JIBAR is calculated based on the rates at which banks are willing to lend unsecured funds to each other. 

Its reliability has been increasingly questioned because it is calculated based on expert judgment rather than actual transactions. 

The underlying market from which the JIBAR is derived is no longer used in significant volume. Therefore, banks’ submissions to determine the rate are often based on expert judgement rather than actual transactions.

This makes it vulnerable to manipulation and less reflective of true market conditions. A shift in global regulations has led to less unsecured interbank lending, which has made it harder to calculate rates like the JIBAR accurately. 

The Reserve Bank’s alternative is the South African Rand Overnight Index Average (ZARONIA). Its observation period has been completed, and its implementation is set for sometime in 2026. 

The ZARONIA does not face the same issues as the JIBAR because it is calculated based on actual overnight transactions, making it more accurate and reliable. 

By reflecting the actual cost of borrowing on an overnight basis, the ZARONIA offers a stable and transparent measure that aligns with international standards for risk-free rates. 

This means that going forward, the ZARONIA will be the recommended alternative reference rate for rand-denominated financial contracts, including loans, derivatives, and other instruments. 

The impact

The PA and FSCA said this transition is a significant event that will impact nearly every financial product and market segment. 

“The extent to which the JIBAR is deeply embedded in current business practices means the transition will be complex and will require significant time and effort,” they said in a statement. 

“Insufficient preparations for the transition to alternative rates could have a negative impact on the safety and soundness of financial institutions and cause harm to their clients and to the markets in which they operate.” 

BDO director Zakhele Nyandeni said the shift will require updating financial models and valuations according to the new reference rate. 

The shift will alter the pricing of financial assets and change the value of products tied to the JIBAR, creating disruptions for financial institutions, companies, and individuals with existing contracts. 

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 the ZARONIA, Nyandeni explained. 

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. 

The move to the ZARONIA is also expected to enhance market transparency and reduce the risk of manipulation. 

Other major rates managed by the Reserve Bank are also seen as not complying with international standards and may be discontinued in the near future. These are listed below: 

• SABOR (South African Benchmark Overnight Rate) is calculated and published by the SARB daily. The overnight deposits for the top 20 clients of each bank are submitted and account for 95% of the rate, while the other 5% is attributed to the interest rate in foreign currency swaps.

• The SAFEX (South African Futures Exchange) Bank Bill rate was started in the 1990s. It is the weighted average rate received from banks for the margins and default fund contributions placed by the JSE with high-credit quality local commercial banks (not more than 30% with a single institution).

• STeFI (Alexander Forbes Short-Term Fixed Interest Index) is a recognised benchmark of the returns earned in the South African money market.

RMB echoed some of Nyandeni’s concerns, saying the transition to alternative rates may impact the operation of certain financial products and result in cashflow issues.