South African banks remain significant beneficiaries of high interest rates, even as the South African Reserve Bank (SARB) on Thursday opted for a modest 25 basis point cut to the repo rate, bringing it down from 8.0% to 7.75%. Consequently, the prime lending rate will also decrease from 11.5% to 11.25%.
While this adjustment provides minor relief, the SARB’s cautious decision reflects its concern over global inflation risks, particularly the impact of a strong US dollar—bolstered by figures like US President-elect Donald Trump—on South Africa's economy.
However, the decision continues to favour banks’ profitability while leaving ordinary South Africans, particularly the poor, to shoulder the burden of stagnant economic growth and high unemployment.
Banks Thrive on Higher Rates
The gap between the repo rate and the lending rates set by banks remains a significant driver of profitability. While the prime lending rate is now 11.25%, many consumer loans, especially unsecured credit, are priced significantly higher, often exceeding 20%. This substantial margin allows banks to generate billions in revenue, particularly during periods of elevated interest rates.
Despite economic stagnation and high unemployment, South African banks have consistently posted strong profits, buoyed by these wide interest rate spreads. This profitability contrasts sharply with the challenges faced by the broader economy, where growth remains sluggish and households struggle to make ends meet.
Impact on the Poor
For low-income households, the modest repo rate cut provides little tangible benefit. Many rely on high-interest unsecured loans or informal lending to meet their daily needs, where borrowing costs remain exorbitant. Even with the reduced prime rate, the overall cost of borrowing is far beyond the reach of many South Africans living on the margins.
At the same time, inflation continues to erode disposable incomes, particularly through persistent increases in food, energy, and transport costs. While the SARB’s focus on inflation targeting aims to prevent a potential spike in prices, it offers little immediate relief to the poor. The fear of a strong US dollar driving up import costs has clearly influenced the SARB’s cautious stance, but this approach does little to address the structural inequalities in South Africa’s economy.
Missed Opportunities for Growth
By prioritising inflation control, the SARB risks neglecting the urgent need to stimulate economic growth and job creation. Lower interest rates could encourage borrowing for investment, enabling businesses to expand and hire more workers. However, the SARB’s relatively conservative monetary policy limits such opportunities, leaving economic growth stagnant and unemployment persistently high.
High interest rates also discourage entrepreneurship and small business development, which are critical for creating jobs and reducing inequality. Instead, banks benefit disproportionately, profiting from the wide margin between their cost of funds (repo rate) and lending rates.
The Case for Reform
The stark difference between the repo rate and lending rates highlights the need for reform. Banks often justify this wide margin by citing operational costs and credit risk, yet their consistently strong profit margins suggest room for more equitable lending practices.
Policymakers and regulators must push for a financial system that balances profitability with accessibility. Introducing caps on lending rates, incentivising affordable credit for low-income earners, and promoting loans to small and medium-sized enterprises could help bridge the gap. These steps would not only alleviate the financial burden on the poor but also stimulate economic activity and job creation.
Thus the SARB’s decision to cut the repo rate from 8.0% to 7.75%, resulting in a prime rate reduction to 11.25%, reflects a cautious approach to managing global economic risks.
However, this decision underscores the urgent need to reconsider the monetary policy priorities in South Africa. While inflation control remains important, the SARB’s actions continue to enrich banks while offering little relief to the poor and doing little to spur growth or job creation.
To build a more inclusive economy, a balanced approach is required—one that promotes growth, job creation, and financial accessibility alongside inflation control. Without bold reforms, the gap between banks’ profits and the hardships faced by ordinary South Africans will only continue to widen.
Independent Media’s editor-in-chief Adri Senekal de Wet.
BUSINESS REPORT