When the South African Reserve Bank (SARB) said a month ago that it would review the prime lending rate, there were alarming misconceptions.

Some wishful thinkers interpreted it as an effort to reduce the spread between prime and the repo rate, and ultimately reduce the cost of debt to South Africans. Some saw this spread, which has been firmly set at 350 basis points (bps) for a decade-and-a-half, as a profit scrape by the banks, which should finally get their comeuppance.

On Monday the Bank published a discussion paper clarifying it wants to change the language and conventions around interest rates, not the levels. It wants to abolish the prime rate concept entirely and replace the “repo rate” terminology with the “SARB policy rate” (SPR). Your home loan, car loan or overdraft would be specified as “SPR plus x%” rather than “prime plus/minus x%”.

The Bank’s stated rationale is transparency and eliminating misconceptions. However, after reading the 15-page paper, I’m left wondering whether this elaborate transition, affecting at least 12-million contracts worth R3.2-trillion, solves any real problem or creates new ones while the old misconceptions persist.

The Bank devotes substantial space to the persistent misconception that the 350bps spread between prime and the policy rate represents guaranteed bank profit margins. People believe, wrongly, that eliminating this spread would lower consumer debt costs. The Bank is right that this is nonsense. Banks set lending rates based on funding costs, risk appetite and client risk profiles. The prime rate is merely a convenient reference point, not a determinant of bank profitability.

Will changing “prime plus 1%” to “SPR plus 4.5%” eliminate this misconception? Almost certainly not. Those who believe the 350bps spread is pure bank profit will transfer that belief to whatever new spread emerges. If anything, seeing “SPR plus 4.5%” may reinforce the perception that banks are charging excessive margins, now with even more visibly large numbers.

The Bank acknowledges this risk obliquely, noting the need for a “well-designed communication strategy” to prevent consumers from perceiving loans as more expensive. But if extensive communication campaigns are required to prevent a new set of misconceptions from emerging, what have we achieved by eliminating the old reference point?

The Bank’s review of the history of prime shows how it evolved from a bank’s own pricing reference point for its best customers into a mechanical 350bps markup on the policy rate that has existed since 2001. It is no longer a real interest rate measure, just a convention against which to express prices. The Bank’s paper noted banks have discretion to use alternative reference rates: some banks use Zaronia (which replaced Jibar) for wholesale lending, others use internal benchmarks for some home loans.

Instead, the Bank prefers for SPR to become the universal replacement, arguing it “enhances transparency” and creates a “clearer link” between monetary policy and lending rates. The underlying objective seems clearly designed to establish the SPR as the critical consumer interest rate reference point, conditioning economic behaviour more directly. If you hear on the news that the Bank has hiked the SPR by 50bps, your consumption behaviour may be marginally more conditioned because the SPR is more directly linked to your cost of debt.

Some readers may roll their eyes at this apparent hair-splitting. Most economically literate consumers understand prime is mechanically linked to the repo rate. But removing one or two steps in this chain of reasoning could, perhaps, tighten the link between monetary policy decisions and borrower behaviour.

Here’s what the Bank may not have fully considered: by placing its policy rate at the centre of consumer thinking about the cost of debt, the Bank becomes the focus of ire over pricing more than banks themselves. When Standard Bank charges you SPR plus 5% and FNB charges SPR plus 4%, the comparison is stark. But when rates rise, the Bank gets the blame. When credit becomes expensive, it’s the governor’s fault. I’m not sure the Bank has thought through whether it wants to be in that particular spotlight, especially when political pressure on interest rates will inevitably intensify during the next economic downturn.

The Bank does not engage with the behavioural economics of this change. A loan quoted as “prime plus 1%” feels psychologically different from “SPR plus 4.5%”, even though they’re mathematically identical. “Prime minus 1%” sounds even better than “SPR plus 2.5%”. These framing effects are not trivial. One interpretation is consumers will perceive loans as more expensive, thereby shifting down their marginal propensity to consume relative to saving, exactly what the Bank might want during an inflation fight. But behavioural economics is notoriously unreliable at predicting actual behaviour, as the replication crisis in that field demonstrates.

More concerning is the potential for opportunistic lending. If quoting “SPR plus 2.5%” suppresses demand for conventional bank loans, I’m sure innovators will step in with new ways of framing lending rates. Non-bank lenders, over which the Reserve Bank has limited jurisdiction, could market products using whatever reference points make their rates appear most attractive. The result could be a fragmented market that makes comparison shopping harder, not easier — the opposite of the intended transparency gain.

The Bank proposes starting the transition in 2027, sensibly avoiding overlap with the recently completed Jibar transition. But that merely delays addressing the fundamental question: is this enormous administrative exercise worth the marginal benefit of making the policy rate one reference step closer to consumer lending rates?

The Bank may be eliminating prime to meet international benchmark standards, but forcing its universal replacement with SPR, when banks could simply choose their own appropriate references, appears to be solving a problem that doesn’t need this particular solution.

The discussion paper launches a consultation process with input due by March 20. Market participants should think carefully about whether this is genuinely an improvement or bureaucratic momentum driving change for change’s sake.

• Dr Stuart Theobald is founder and chair of research-led consultancy Krutham.
  This article first appeared in Business Day.