Publications
Partners
Johannesburg - There is no reason to change the current 350 basis-point band between the repo and prime rates.
This is according to a joint report issued on Thursday by the Reserve Bank and the Banking Association of South Africa.
It is also advisable to have a single prime rate for all banks, the report suggests.
The report's findings follow criticism in May last year by Tito Mboweni, the then-governor of the Reserve Bank, that banks did not offer clients different prime rates. He had said that banks did not compete with each other sufficiently.
His remarks caused a commotion in banking circles since it was an established practice in banking circles for them to adjust their prime rates in response to changes in the Reserve Bank's repo rate.
Following meetings with banking executives an undertaking was given that an investigation by Cas Coovadia, the head of the Banking Association, together with senior Reserve Bank management would investigate Mboweni's criticism and proposed changes.
Gill Marcus has since succeeded Mboweni as Reserve Bank governor.
According to the report, it would be expedient for all banks to have a uniform prime rate so that clients can themselves compare prices using a single standard of comparison.
The prime rate is used as a standard of comparison only for fixing the price of loans.
Any change in the standard tariff would not change the methodology banks use to determine real interest rates, the report continues.
The semi-formal link between the repo and prime rates dates back to the 1920s. Ever since the 1980s, the prime lending rate has increasingly shaken off its traditional role as banks started to determine their own rates.
The current spread of 350 points between the repo and prime rates arose after 2001, when the central bank narrowed the gap between the repo and banks' overnight rates.
Banks were not asked to follow this technical adjustment. Consequently, the band between the repo and prime rates increased from 300 basis points to 350 basis points.
If the banks reduce the spread between the repo and prime rates, it is improbable that clients would ultimately pay less interest on loans because banks would still determine rates on risk considerations, says the report.
- Sake24.com
For business news in Afrikaans, go to Sake24.com.
