There is an important change happening in banking circles that mainly affects how banks transact with each other, but will indirectly affect banks’ business and retail customers.
The change is in the reference rate used to determine inter-bank lending rates. Banks have to replace the current Johannesburg Inter-Bank Average Rate (Jibar) with a new rate, the South African Overnight Index Average rate (Zaronia).
The process is happening in phases. The decision to change the rate was made in 2023, and banks are expected to make the final transition during the course of this year and early next year. The end of 2026 is the cut-off for using Jibar.
So what’s the big deal about changing from one rate to another, you may ask. Surely you just substitute the one figure for the other in your systems?
If it were that easy, banks could make the substitution virtually overnight. But it’s more complicated than that.
Why the change was necessary
Inter-bank lending rates such as Jibar in South Africa and Libor (London Inter-Bank Offered Rate) in the UK and US have been used to determine the value of trillions of dollars’ worth of contracts, from short-term credit instruments to derivatives contracts between banks.
In South Africa, Jibar is set by the five largest banks (RMB, Standard Bank, Absa, Nedbank and Investec), based on their three-month negotiable certificate of deposit rate for the day. Although linked to the repurchase (repo) rate, periodically set by the SA Reserve Bank, Jibar can fluctuate daily. Even a small fluctuation of, say, 0.01%, can make a huge difference to the overall value of your short-term contracts.
A big problem with Jibar and Libor is that they are open to manipulation. The best example of this is the Libor scandal of 2012, when it was found that large global banks had, for years, falsely inflated or deflated their rates to profit from trades. Because these rates are so widely used as a “risk-free” yardstick against which returns on investments are measured, there were significant implications for global financial markets.
Shift in line with global reforms
In the aftermath of the 2008 global financial crisis, and propelled by the Libor scandal, the global banking system began a reform process, moving to rates that are objectively determined and less vulnerable to manipulation.
In South Africa, the Market Practitioners Group, a joint public and private sector body, comprising representatives from the SARB, Financial Sector Conduct Authority and banking industry, was convened for this purpose.
The result is Zaronia, which reflects an average of the rates of actual overnight inter-bank transactions, calculated by the SARB. Instead of forward-looking, it uses real historical data, ensuring a more reliable, stable and transparent pricing system.
But switching is no simple swap. “This isn’t just a technical adjustment,” says Walter Böhmer, principal consultant at Elenjical Solutions, a capital markets technology consultancy. “It’s a complete overhaul of how financial institutions calculate, manage, and book interest-bearing instruments. The shift from a forward-looking rate to a backward-looking, compounded one requires financial models to be re-engineered. Risk management frameworks need to be adjusted, IT systems must be updated or reconfigured. Firms that underestimate the scale of this transition risk liquidity challenges, increased volatility and pricing mismatches.”
How will the change affect you?
In his article “Transitioning to Zaronia”, Zakhele Nyandeni, director of financial services at BDO South Africa, says the adoption of Zaronia will necessitate changes in the pricing of loans, derivatives and other instruments.
“This shift may alter pricing dynamics and necessitate recalibration of financial products tied to Jibar, creating disruptions for financial institutions, corporations and individuals with existing contracts or products. As a result, institutions and individuals could face liquidity issues and other challenges in managing their risk exposures, hedging strategies and capital requirements. Entities with existing Jibar-linked contracts will need to review and potentially renegotiate terms to incorporate Zaronia. Proactive engagement with legal advisers and counterparties is essential to streamline this transition,” Nyandeni says.
