Why the debate over prime does and doesn’t matter

In this article on the benchmarking around the prime rate, Radebe Sipamla, Portfolio Manager at Mergence Investment Managers, argues that while prime is only a reference rate, the debate around it reflects deeper structural issues in South Africa’s banking market. He notes that dominant banks continue to earn high returns on equity, suggesting limited competition despite new entrants. Radebe says the SARB’s renewed review signals recognition that its historically hands-off approach may have allowed incumbents to dominate credit pricing, to the detriment of retail clients and SMMEs. However, he cautions that reducing the repo-prime spread alone will not materially lower borrowing costs. Instead, he believes improved affordability will come mainly from a lower cost of capital driven by lower inflation and interest rates.