Following more than 20 years of inactivity, change is afoot with regard to the prescribed rate of interest which creditors can claim.

The Prescribed Rate of Interest Act 55 of 1975 (Act) prescribes the maximum rate of interest that may be claimed by a creditor, in respect of interest-bearing debts where the rate of interest is not governed by another law, an agreement or trade custom. Interest-bearing debts include debts which are expressly claimed by creditors, that is, putting a debtor in mora, as well as judgment debts.

The Act allows the Minister of Justice and Constitutional Development, following a consultation process, to prescribe the rate of interest from time to time. The prescribed rate itself should be market-related. Between 1976 (when the Act came into effect) and 1993, the prescribed rate was altered five times and varied between 11% and 20% per annum.

In 1993 the interest rate was set at 15.5%. This rate remained in place for more than 20 years until recently when it was replaced by a rate of 9% per annum. The new prescribed rate officially came into effect on 1 August 2014.

It is unclear why the previous rate of 15.5% remained in place for so long, given that such rate was no longer market-related. The new rate of 9% per annum was calculated by using the current repo-rate of 5.5%, and by adding a margin of 350 basis points.

The Supreme Court of Appeal has confirmed that in the context of interest-bearing debts, the prescribed rate of interest is not a variable rate. This means that the prescribed rate of interest, which applied at the date when the debtor was placed in mora, will remain applicable to that debt.

As such, the previous rate of 15.5% per annum will apply to all debts for which interest began running between 1 October 1993 and 31 July 2014. For all debts where interest begins running after 1 August 2014, and until the prescribed rate changes again, the new prescribed rate of 9% will apply.

Issued by Webber Wentzel