The Banking Association South Africa (BASA) has defended South Africa’s long-standing prime interest rate framework, saying the fixed spread between the South African Reserve Bank (SARB) repurchase rate and the prime lending rate does not determine what individual bank customers pay on loans, as reports emerge that the Competition Commission is investigating alleged cartel behaviour linked to the prime rate.

BASA said on January 16 that banks price loans for customers on an individual basis, using prime as a reference rate rather than as a fixed determinant of borrowing costs. According to the association, the interest rate offered to any customer reflected a range of factors specific to both the bank and the borrower and not simply the level of the prime rate itself.

The association explained that the SARB used the repurchase, or repo, rate as a key monetary policy tool to influence short-term interest rates in the economy. By adjusting the repo rate, the SARB affected the cost of funding, which in turn influenced spending, demand for goods and services and inflation. The repo rate also signalled the direction and scale of interest rate changes needed to give effect to monetary policy.

To ensure a clear and effective link between monetary policy and lending rates, the SARB fixed the spread between the repo rate and the prime rate in 2001. BASA said this was done to align the prime reference rate with the repo rate and to prevent commercial banks from moving lending benchmarks in ways that would undermine central bank policy objectives.

The spread between the repo rate and the prime rate was set at 3.5% in 2001, reflecting prevailing market conditions and interest rate structures at the time. BASA said this spread has remained stable at 3.5% since then.

BASA referred to a 2010 study titled ‘The Role of the Prime Rate and the Prime-Repurchase Rate Spread in the South African Banking System’, which examined the impact of the fixed spread on competition and lending behaviour.

According to BASA, the study found that a single policy rate does not impede competition among banks, but rather provides a benchmark that reflects the central bank’s monetary stance. The study also concluded that the difference between the repo rate and the prime rate was not the same as banks’ net interest margins, meaning a fixed spread did not imply fixed profitability for banks.

The study further found that a single prime reference rate made it easier for customers to compare loan pricing across banks using the same benchmark, and that a uniform spread between the repo and prime rates facilitated, rather than restricted, competition. It also found that banks determined their lending rates independently of the size of the spread between the repo and prime rates.

BASA said any future changes to South Africa’s prime interest rate framework should not result in changes to the cost of loans for customers. The association explained that lending rates were influenced by the cost of funds for each bank, including interest paid to depositors, interest paid on borrowed funds and returns paid to shareholders.

Lending rates are also shaped by the credit profile of individual borrowers, including their income and repayment history, as well as each bank’s risk appetite, which varies according to business models, liquidity positions and exposure to interest rate risks.

BASA said central banks regularly reviewed policy and reference rates and that the association and its member banks would participate in any review of the prime rate. It noted that banks had already worked with the SARB on the review of the Johannesburg Interbank Average Rate.

Separately, BASA said it was aware of reports that the Competition Commission was investigating alleged cartel behaviour related to the prime rate, but said it could not comment on the investigation as it was not part of the proceedings.