This paper examines the continued use of the prime lending rate (PLR) as a reference rate in financial contracts as part of ongoing reforms to modernise domestic benchmark interest rates and promote alignment with international best practice.

The PLR has evolved into a rate that no longer represents a base rate for pricing credit to bank clients. Its current role is largely administrative and detached from its original purpose, having become a fixed spread (currently 350 basis points) above the South African Reserve Bank (SARB) policy rate (SPR) since 2001.

While the simplicity of the PLR has enabled the comparability of lending rates and better monetary policy transmission, it has also led to widespread misconceptions about its function. Many still perceive the PLR as the base rate for loan pricing and believe the fixed spread contributes to excessive bank profits, despite lending rates being determined by banks’ funding costs, risk appetites and client risk profiles.

Consequently, the SARB prefers that the use of the PLR as a reference rate ceases. Instead, the PLR should be replaced with the SPR. This approach would enhance transparency, create a clearer link between monetary policy decisions and lending rates, and make it easier for consumers to understand how banks price their loans. Actual loan pricing would remain unchanged; banks would continue to set lending rates based on risk and funding considerations, quoting them as a margin above the SPR rather than the PLR.

The transition from referencing the PLR to referencing the SPR, however, must be carefully managed due to the extensive use of PLR-linked contracts in retail and commercial lending. It is envisaged that the transition process will entail incorporating robust fallback language in new contracts and establishing safe harbour provisions to facilitate the migration of legacy contracts. Lessons from the recent Johannesburg Interbank Average Rate (Jibar) benchmark transition will inform the strategies needed for an orderly transition. While stakeholder engagement and public consultation commence now, the transition is only expected to start after the official cessation of Jibar in order to avoid overlaps.