Prime rate under scrutiny as Competition Commission investigation draws mixed responses

There is a mixed industry reaction after the Competition Commission of South Africa confirmed that they are investigating alleged cartel behaviour linked to the prime rate among South African banks.

The prime interest rate is the benchmark interest rate that banks and financial institutions use to set the interest they charge you on loans and credit cards.

Siyabulela Makunga, the spokesperson of the Competition Commission, said that the Commission confirms that it is investigating a matter on prime lending rate. “The investigation commenced in 2021 and it is at an advanced stage. The Commission is looking into establishing whether or not there is a contravention in terms of section 4(1)(b) of the Competition Act.”

Daniel Munslow, Absa Managing Executive: Group Communications, said that Absa supports constructive, industry-wide dialogue on matters that affect the financial system, including on the methodologies that guide benchmarks. “As this is a sector-wide issue, any review of the prime rate would need to be led by regulators and industry bodies to ensure consistency, transparency, and stability across the financial system."

Munslow added that they will continue to engage through the appropriate industry forums and are guided by regulatory authorities on any proposed changes.

The Banking Association of South Africa (Basa) said that banks offer each customer, on an individual basis, an interest rate for a loan that is quoted using prime as a reference rate. “This is a mechanism the SARB (SA Reserve Bank) uses to control the cost of funding in the economy, which affects the demand for goods and services, and therefore inflation. The repo rate signals the direction and magnitude of changes in interest rates that are required by SARB to give effect to monetary policy.”

Basa added that to ensure that there is an effective link between the repo rate and the prime rate, for the transmission of monetary policy objectives, the SARB fixed the spread between the repo rate and the prime rate in 2001. “A study, ‘The Role of the Prime Rate and the Prime-Repurchase Rate Spread in the South African Banking System’, in 2010, concluded that: The difference between the repo and prime rates was 3.5% due to the prevailing market conditions and interest rate structures when it was fixed in 2001. Consequently, the spread of the prime rate over repo has remained stable at 3.5% since then.”

Basa said that the study concluded that there was no compelling reason to change the fixed spread of 3.5% between the repo and prime rates. “Central banks often review policy and reference rates. Basa and its member banks will participate in any review of the prime rate. Banks have already worked with SARB on the review of the Johannesburg Interbank Average Rate (JIBAR).”

Basa added that any changes to South Africa’s prime interest rate should not result in any changes to the cost of loans to bank customers. “Basa is aware of reports that the Competition Commission is investigating alleged cartel behaviour related to the prime rate. Basa cannot comment on the Competition Commission investigation as it is not part of the proceedings.”

Professor Waldo Krugell, economist at North-West University, said that he thinks Basa makes their case clear and one does not know yet what kind of price fixing the Competition Commission is alleging. “My worry is that investigations like this (seemingly out of the blue) create uncertainty and take time and resources away from doing business. I support the Competition Commission's work in protecting consumers, but more information upfront will help dispel rumours.”

Efficient Group Economist Dawie Roodt said that he believes the Commission does not understand much about banking. “The Commission is going to waste taxpayers' money and nothing is going to come out. They don't understand what they are doing and this investigation is not going to get anywhere but will cost a lot of money. I do believe there is not a lot of competition amongst banks in South Africa, but they are certainly not colluding and what we need is more banks.”

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