The South African Reserve Bank (SARB) announced that the Johannesburg Interbank Average Rate (JIBAR) will be replaced by the South African Rand Overnight Index Average (ZARONIA) as the primary reference rate in 2025. This significant shift aims to enhance the accuracy and transparency of interest rate calculations in South Africa.

JIBAR, the current benchmark rate, has been criticised for its reliance on expert judgment rather than actual transactions, making it susceptible to manipulation and less reflective of true market conditions. As global regulations have reduced unsecured interbank lending, accurately calculating rates like JIBAR has become more challenging.

In contrast, ZARONIA is based on actual overnight transactions in the wholesale funds market, providing a more reliable and stable measure aligned with international standards for risk-free rates. This transition is expected to improve market integrity and transparency, reducing the risk of manipulation.

The shift to ZARONIA will impact the valuation of various assets and necessitate changes in the pricing of loans, derivatives, and other financial instruments. Financial models and valuation methodologies will need updating, and institutions or individuals with existing JIBAR-linked contracts will need to renegotiate terms to incorporate ZARONIA.

Financial institutions must prepare for this transition by updating their systems, valuation models, risk management frameworks, and reporting mechanisms. They will need to reassess risk exposures, hedging strategies, and capital requirements under the new reference rate. To ensure a smooth transition, market participants should collaborate with regulators, educate stakeholders about ZARONIA, and conduct rigorous testing of updated systems and processes.

The adoption of ZARONIA promises to foster greater confidence in financial instruments by providing a more robust and reliable reference rate. Financial institutions should begin preparations immediately to minimise potential instability when JIBAR ends in 2025.