Why are Interest Rates in SA so High?

What is the reason for the prime lending rate in South Africa being so
high? (10.5%)

In the US it’s 3.25%, in Canada it’s 2.25% and in Australia it’s at
3.75% (considered very high).

Is it perhaps just a symptom of not having enough banking competition in SA?

And wouldn’t we have much faster economic development in SA if we had
lower interest rates (closer to 5%) backed up by “good” regulation
such as the National Credit Act?

6 thoughts on “Why are Interest Rates in SA so High?

  1. Interest rates are the price of borrowing money (or reward, depending on which side you’re on), and as such, the price is regulated by supply and demand, just like any other commodity.Investors generally require a larger reward for risky investments in comparison to less risky assets. I’m sure you know this already.Generally speaking , South Africa is deemed a more risky investment than first world countries and therefore investors require a higher return (in the form of interest rates) that they would for a "safe" country, like the US.

  2. @igutur,I would venture a guess that the relative Demand for credit in SA is much, much lower than in the US/Canada/Australia. Therefore, the problem is surely on the Supply side? I.e. we do not have enough banks? But then it gets befuddled a bit with an increasing money supply. I.e. if there is an increase in money supply (inflation), then banks/investors have to charge high interest rates just to keep up with the decreasing value of money.Are South African investments _really_ that much more risky than US/Canada/Australia?

  3. Yes, it sucks.(I originally typed out a long cynical response but in hindsight that’s not going to help anything so I decided to go with those three words instead)

  4. Any interests rate that consumers or even most business will have access to are, to within a small mark-up, set by the central bank (i.e., the Reserve Bank in South Africa). So the prime lending rate is not a factor of supply and demand. Supply and demand would matter only in extreme cases, like the financial crisis in the US, when it was very hard to get loans at the "prime" rate. The rest of the time, banks can fund additional loans by borrowing from the Reserve Bank, so that rate sets the prime rate. (And our financial sector is very well developed for a developing economy).As for why our Reserve Bank sets high rates: rates are set to control inflation. Inflation has historically been higher in SA than in the US or Europe, so interest rates are higher to control this. Inflation was much, much higher in the early 90s at the end of Apartheid, and as it has gradually come down, so have our interest rates. It’ll still be a while before we reach US or European rates — but our rates compare reasonably with other middle income emerging economies.

  5. @Paul, the way I understand it banks don’t actually ever borrow money from the Reserve Bank. Rather, they are licensed by the Reserve Bank to lend out money at a ratio relative to their deposits (reserves) with the Reserve Bank (currently 17:1 in SA, was closer to 60:1 in the US before collapse)The rate set by the Reserve Bank is the rate that banks would lend to each other overnight to cover any shortfall in Reserve Bank deposits and thus ensure that the bank hasn’t lent out (effectively created) more than 17 times the money it has in deposit. (See http://en.wikipedia.org/wiki/Federal_funds_rate)Although the convention is to set the prime rate 300 basis points above the lending rate, I don’t see any real technical reason for this being so.Also, the original definition of "inflation" is simply an increase of the amount of money in circulation. If there was no more money being created, there would be no inflation. Therefore, to say the Reserve Bank sets interest rates to control inflation makes no sense at all! Obviously, this still doesn’t really help to answer the question: Why is South Africa’s interest rate so much higher than the rest of the world?

  6. In Kenya the average interest rate for a loan is about 19.5%, this is despite the fact that the base lending rate the Central Bank offers commercial banks being in the single digit level. Commercial banks have simply refused to lower them even after protests from citizens and the government.

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