The Prescribed Rate of Interest Act (Act 55 of 1975) sets the maximum rate of interest that can be charged on mora interest (over-due payment) and is also used in court orders relating to damages claims.
Mora interest applies where payment is due and the rate of interest has not been agreed between the parties. In order for a creditor to become entitled to such interest there has to be demand made for payment or a due date for payment. The creditor is then entitled to charge mora interest from such date as prescribed in the Prescribed Rate of Interest Act.
In the democratic South African regime, the prescribed rate seemed to get stuck at 15,5% per annum for a long period of time, notwithstanding fluctuations in SA Reverse Banks repurchase rate (commonly called the Repo rate), the rate which had previously influenced changes in the prescribed rate of Interest. This rate of 15,5% per annum operated between 1st October 1993 up to 31st July 2014.
The prescribed rate of interest was then reduced to 9% from the 1st August 2014.
Subsequently a change was legislated to the Prescribed Rate of Interest Act to ensure that the prescribed rate of interest would be automatically linked to the Repo rate at 3,5% above the aforementioned rate, effected these changes to the Prescribed Rate of Interest with effect from the 8th January 2016.
The Amendment was as follows:
“Rate at which interest on debt is calculated in certain circumstances
- If a debt bears interest and the rate at which the interest is to be calculated is not governed by any other law or by an agreement or a trade custom or in any other manner, such interest shall be calculated at the rate contemplated in subsection (2)(a) as at the time when such interest begins to run, unless a court of law, on the ground of special circumstances relating to that debt, orders otherwise.
- For the purposes of subsection (1), the rate of interest is the repurchase rate as determined from time to time by the South African Reserve Bank, plus 3,5 percent per annum.
- The Cabinet member responsible for the administration of justice must, whenever the repurchase rate is adjusted by the South African Reserve Bank, publish the amended rate of interest contemplated in paragraph (a) by notice in the Gazette.
- The interest rate contemplated in paragraph (b) is effective from the first day of the second month following the month in which the repurchase rate is determined by the South African Reserve Bank.
- For purposes of this section-
- “repurchase rate”– means the rate at which banks borrow rands from the South African Reserve Bank; and
- “South African Reserve Bank” – means the central bank of the Republic regulated in terms of the South African Reserve Bank Act, 1989 (Act No. 90 of 1989).”
From this it can be seen that those using the prescribed rate of interest are going to have to keep a very keen eye on the Repo rate and the subsequent government gazettes to ensure that they are charging at the correct prescribed rate of interest, which in turn will have to operate on the basis that the rate of interest will now only change on the first day of the second month following any change in the repo rate. During the intervening period from any change, the previous rate of interest will be of application.
One must also be aware that the prescribed rate of interest is not a variable rate in the sense that they have to vary previously existing mora matters’ interest from time to time when the Minister varies the rate.
In the Appellate Division case of Davehill (Pty) Ltd vs Community Development 1988(1) SA 290(A) it was held that the prescribed rate at the time when mora interest begins to run is fixed at that time and remains constant, notwithstanding that the Minister may from time to time prescribe different rates.
This was confirmed in Crookes Brothers Ltd v Regional Land Claims Commission for the Province of Mpumalanga and others  2 All SA 1 (SCA) at para 22, and it specifically quotes Davehill at 300J-301E, which includes the specification at 301B that the rate is fixed at the time and remains constant at the time when interest begins to run (from the date the Debtor is placed in mora).