Johannesburg interbank average rate jibar

What Is Johannesburg Interbank Average Rate (JIBAR)?

The Johannesburg Interbank Average Rate (JIBAR) is a key money market term reference rate used in South Africa. Falling under the broader category of interest rate benchmarks, JIBAR reflects the average interest rate at which South African banks are willing to lend to one another on an unsecured basis for specified terms, typically ranging from overnight to one year. It is primarily constructed using quoted rates for Negotiable Certificates of Deposit (NCDs) by a panel of contributing banks. This rate serves as a crucial determinant for the pricing of various short-term financial instruments within the South African financial landscape.

History and Origin

The calculation of a South African reference rate began in the 1990s with the South African Futures Exchange (Safex) Bank Bill rate. The current JIBAR system was formally established in 1999. Initially, the acronym JIBAR stood for the Johannesburg Interbank Agreed Rate. However, following a review in November 2012, it was changed to the Johannesburg Interbank Average Rate to better reflect its calculation methodology³².

The impetus for reforming interbank offered rates, including JIBAR, gained significant momentum globally after the 2012 London Interbank Offered Rate (LIBOR) scandal. This event exposed vulnerabilities and potential for manipulation in submission-based benchmarks, prompting financial authorities worldwide to seek more robust and transparent alternatives²⁹, ³⁰, ³¹. In South Africa, the Prudential Authority, a division of the South African Reserve Bank (SARB), responded by proposing a transformation of domestic interest rate benchmarks. The SARB is spearheading the transition from JIBAR to a new benchmark reference rate by the end of 2026, aligning with international best practices.²⁷, ²⁸

Key Takeaways

• JIBAR is the primary short-term interest rate benchmark rate in South Africa, reflecting interbank lending costs.
• It is calculated daily based on submitted rates for Negotiable Certificates of Deposit (NCDs) from a panel of banks.
• The three-month JIBAR is the most widely referenced tenor for various financial products.
• JIBAR is currently undergoing a transition and is set to be replaced by the South African Rand Overnight Index Average (ZARONIA) by the end of 2026.
• The move away from JIBAR addresses concerns about its reliance on bank submissions rather than actual market transactions.

Formula and Calculation

The calculation of JIBAR involves a multi-step process, daily undertaken by the Johannesburg Stock Exchange (JSE) acting as the calculation agent, under the administration of the South African Reserve Bank (SARB)²⁵, ²⁶. Contributing banks submit their bid and offer rates for trading in their own Negotiable Certificates of Deposit (NCDs) across various maturities (e.g., one-month, three-month, six-month, and twelve-month)²⁴.

The steps are as follows:

1. Submission of Rates: A panel of JIBAR contributing banks provides bid (borrowing) and offer (lending) rates for NCDs.
2. Mid-Rate Calculation: For each bank's submission, a mid-rate is calculated as the halfway point between their bid and offer rates.
3. Trimming: To ensure robustness and reduce the impact of outliers, the two highest and two lowest mid-rates are typically discarded²³.
4. Averaging: The remaining mid-rates are then averaged to arrive at the daily JIBAR for each tenor.
5. Conversion: The rate is calculated as a yield and then converted into a discounted rate.

The JIBAR rates are published daily by the SARB based on these submissions.²²

Interpreting the Johannesburg Interbank Average Rate (JIBAR)

JIBAR serves as a crucial barometer for short-term interest rate movements and the general cost of funds in the South African money market²¹. When JIBAR rises, it indicates an increase in the cost of borrowing for banks in the interbank lending market, which can then translate into higher lending rates for consumers and businesses. Conversely, a fall in JIBAR suggests a decrease in these borrowing costs.

Movements in JIBAR reflect shifts in prevailing market conditions, liquidity dynamics, and expectations regarding the South African Reserve Bank's (SARB) monetary policy. The three-month JIBAR is particularly significant, as it is widely used as a benchmark for short-term loans, floating-rate notes, and derivative contracts. Its forward-looking nature provides participants with certainty regarding funding costs at the beginning of an interest period, which assists in cashflow management.¹⁹, ²⁰

Hypothetical Example

Consider a South African business taking out a variable-rate loan from a local bank. The terms of the loan state that the interest rate will be calculated as the 3-month JIBAR plus a margin of 2.5%.

Let's assume the 3-month JIBAR on the interest rate reset date is 7.20%.¹⁸

The interest rate applied to the loan for the upcoming three-month period would be:

[
\text{Loan Interest Rate} = \text{3-month JIBAR} + \text{Margin} \
\text{Loan Interest Rate} = 7.20% + 2.5% \
\text{Loan Interest Rate} = 9.70%
]

This 9.70% would be the annualized rate applied to the outstanding principal of the loan for that specific three-month period. At the end of the period, the JIBAR would be reset, and a new interest rate would apply, demonstrating how the financial instruments tied to JIBAR reflect market fluctuations.

Practical Applications

JIBAR is deeply embedded in the South African financial system, serving as a critical reference point across various sectors. Its practical applications include:

• Loan Pricing: Many variable-rate loans, including corporate loans, mortgages, and personal loans, are often priced as a spread over JIBAR.
• Bond Issuance: Floating-rate bonds and other debt instruments may link their coupon payments to JIBAR.
• Derivatives Trading: JIBAR is the underlying rate for a variety of derivatives, particularly interest rate swaps and futures contracts traded on the Johannesburg Stock Exchange (JSE). These instruments allow market participants to engage in hedging against future interest rate movements or to speculate on their direction¹⁷. Information on JIBAR futures is available through the JSE.¹⁶
• Valuation: Financial institutions use JIBAR for the valuation of money market instruments and derivatives in their portfolios.
• Benchmarking Investment Returns: Certain money market funds and short-term investment portfolios may use JIBAR as a benchmark for their performance.

Limitations and Criticisms

Despite its widespread use, JIBAR has faced criticisms and is undergoing reform primarily due to inherent limitations in its construction. One significant concern is its reliance on submissions from a panel of banks rather than actual, observable market transactions¹⁴, ¹⁵. While banks are expected to base their submissions on their assessment of funding costs in the interbank market, the decline in the volume of underlying transactions has meant that submissions may be based, at least in part, on expert judgment rather than concrete deals¹², ¹³.

This submission-based methodology exposes JIBAR to potential vulnerabilities, including manipulation, as highlighted by the global LIBOR scandal⁹, ¹⁰, ¹¹. Such instances erode trust and raise questions about the rate's representativeness and robustness. The structure of JIBAR also embeds a credit risk premium, reflecting the perceived creditworthiness of the contributing banks. This contrasts with a "risk-free" rate that aims to capture only the cost of money without a bank's specific credit component. The South African Reserve Bank (SARB) found JIBAR to exhibit similar weaknesses to those found in the design of other international interbank offered rates (IBORs), such as susceptibility to manipulation⁸. The current transition to alternative reference rates seeks to address these drawbacks by moving towards benchmarks that are more transparent, transaction-based, and inherently less prone to manipulation. This transition may also impact existing yield curve constructions.⁷

Johannesburg Interbank Average Rate (JIBAR) vs. South African Rand Overnight Index Average (ZARONIA)

The key distinction between JIBAR and the South African Rand Overnight Index Average (ZARONIA) lies in their methodology and the risks they reflect.

JIBAR is a forward-looking unsecured funding rate that anticipates movements in the South African monetary policy repo rates, while ZARONIA is a backward-looking overnight rate based on actual, nearly risk-free transactions, closely mirroring the SARB's repo rate movements⁶. The shift from JIBAR to ZARONIA represents a significant move towards a more robust and reliable benchmark rate for the South African financial market, addressing the vulnerabilities inherent in submission-based rates.

FAQs

What is JIBAR used for?
JIBAR is primarily used as a benchmark rate for pricing short-term loans, bonds, and derivatives in the South African financial markets. It helps determine the interest rate at which many financial products are set.

How often is JIBAR calculated?
JIBAR rates are calculated and published daily by the Johannesburg Stock Exchange (JSE) under the administration of the South African Reserve Bank (SARB).⁵

Why is JIBAR being replaced?
JIBAR is being replaced as part of a global reform of interbank benchmarks. Concerns arose regarding its reliance on bank submissions rather than actual transactions, making it susceptible to manipulation. The new benchmark, ZARONIA, is based on actual overnight transactions, offering greater transparency and robustness.⁴

What is the South African Reserve Bank's role in JIBAR?
The South African Reserve Bank (SARB) is the administrator of JIBAR. It oversees its calculation and publication and is leading the transition away from JIBAR to ZARONIA by the end of 2026 to enhance the reliability of South African financial market benchmarks.¹, ², ³