On February 16 2026 the Reserve Bank published a “consultation paper on the cessation of the prime lending rate”. The paper invited comment from the public by March 20 2026.
The prime lending rate was introduced by, and is set by, South African banks. It is used by the banks to price risk.
Low-risk clients can borrow money at a discount to the prime rate, for instance at “prime minus one”. It simply means the interest rate on a favoured loan is set at a margin of one percentage point below the prime rate. High-risk clients borrow at a premium above the rate.
The rate serves an important role as the benchmark for pricing risk. Low-risk and high-risk clients pay different rates to reflect the riskiness of doing business with them. Their borrowing rates move with the prime rate.
That rate is linked at a margin of 3.5 percentage points above the rate determined by the Bank’s monetary policy committee (MPC). All rates in the commercial lenders’ rate structure therefore move in a synchronised way when the MPC announces a policy change.
The rate set by the MPC used to be called the repurchase (repo) rate, but its name was recently changed to the policy rate. This is an apt description, as the MPC sets the rate used for policy purposes.
Is it indeed the role of the Bank to have any view on the existence and use of this rate, or is this a matter best left to the commercial banks?
The Bank’s discussion about terminating use of the prime rate raises a question: is it indeed the role of the Bank to have any view on the existence and use of this rate, or is this a matter best left to the commercial banks?
It seems logical to conclude that the commercial lenders have a better understanding of their clients and their clients’ requirements than the Bank does. Should the users or the regulator dictate the preference of the users?
At the same time, scant attention is paid to the possibility that the prime rate might be used as a benchmark in the pricing of lending activities outside the banking industry. Microlenders and asset-backed lenders do not have access to central bank accommodation when they must bridge short-term liquidity shortages, as registered banks do. Nevertheless, these institutions might use the prime rate for pricing risk, as is the case for registered banks. These lenders will have to adopt the policy rate for pricing purposes once the prime rate is abolished, though the policy rate is of no use to them.
If the prime rate is abolished, it seems logical that risk pricing will be calculated with the policy rate as the reference point. Rather than a system of “prime minus” and “prime plus”, all lending will be priced off the policy rate, with smaller or bigger positive margins over the rate to reflect risk.
The Bank is therefore correct in stating in its consultation paper that the prime rate is no longer a base rate for pricing credit to bank clients. However, the Bank is incorrect in stating that its current role is largely administrative in nature. On the contrary, it is the benchmark for pricing risk.
The Bank also holds the view, according to its consultation paper, that the prime rate has led to widespread misconceptions about its function. According to the Bank, some people seem to believe that the fixed spread between this rate and the Bank’s policy rate contributes to excessive profits for banks.
The abolition of the prime rate will not remove this perception. There is generally little understanding that banking is a risky business, in which deposits should be protected in the context that the funding costs of banks determine their lending rates, risk appetites and client risk profiles.
Given the wide use of the prime rate in the determination of the interest that lenders charge, the impact of its abolition on existing lending contracts should be considered. It is simply not feasible to expect lenders and their clients to revise all existing contracts.
The abolition of the prime rate will not change the structure of borrowing rates. The only ways in which these can be changed are if the Bank changes its policy rate or the risk associated with a borrower is adjusted, leading to a change in the margin above or below the reference rate.
The benefit of abolishing the prime rate is not altogether clear. It will not lead to lower interest rates or change their structure, which reflects lending risk.
Borrowing rates are, in the final analysis, determined by the policy decisions of the Bank and the risk ratings of clients by financial institutions, regardless of terminology.
Rossouw is an honorary professor at Wits Business School and an economist at Altitude Wealth
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