What Is the Johannesburg Interbank Average Rate (JIBAR)?
Let me explain what the Johannesburg Interbank Average Rate, or JIBAR, really is. It's the money market rate used in South Africa, serving as the benchmark for short-term loans and instruments. You can find it in one-month, three-month, six-month, and 12-month discount terms, but the three-month JIBAR rate is the one that's most widely used and accepted.
If you're an individual or business looking to borrow money from a South African bank, you'll typically get quoted a rate tied to the three-month JIBAR, which is the go-to option. For instance, a mortgage rate might be presented as 'JIBAR + 7%.' As rates in the money market go up, your borrowing costs increase, and the same happens in reverse when they drop.
Key Takeaways
- The Johannesburg Interbank Average Rate (JIBAR) is the benchmark for short-term interest rates in South Africa.
- Derived from the bid and offer rates from eight major banks, JIBAR comes in terms ranging from one to 12 months, with the three-month rate the most commonly used reference.
- JIBAR rates are used in setting bank certificate of deposit rates, loan rates, and futures contract rates.
Understanding the Johannesburg Interbank Average Rate (JIBAR)
Today, I want you to understand that JIBAR is the benchmark for short-term interest rates in the South African markets. It's determined as an average of the borrowing and lending rates from a mix of local and international banks. We calculate JIBAR as a yield and then convert it into a discount.
The rate gets calculated daily by the Johannesburg Stock Exchange for those one-month, three-month, six-month, and 12-month discount terms, right after all the bid and offer rates come in from participating banks. Banks then use this derived rate to buy and sell their own Negotiable Certificates of Deposit (NCDs).
The bid and offer rates for JIBAR come from eight banks that deal with NCDs of at least 100 million rands, which is the South African currency. We find a mid-rate as the halfway point between each bid and offer provided by these contributors. Then, we discard the two highest and two lowest mid-rates, and average the remaining four to get the final JIBAR.
While JIBAR mainly represents NCD rates, it also reflects, to a lesser extent, the cost of funding in the foreign exchange forward market and the domestic market for fixed bank deposits. As of January 2, 2020, the three-month JIBAR stood at 6.8%.
Johannesburg Interbank Average Rate (JIBAR) and Derivatives
JIBAR plays a crucial role in the interest rate derivatives market, and I'll tell you why. JIBAR Futures, or STIR, are short-term interest rate futures contracts that use the three-month JIBAR as the underlying instrument. This exchange-traded contract has a value at expiration of 100 minus the three-month JIBAR rate on that date.
It's an efficient way for you to gain exposure to the South African interest rate market. Hedgers use it to protect against adverse interest rate movements, while speculators aim to profit from short-term rate shifts. The value of the STIR contract decreases as the expected three-month JIBAR rate at expiry increases. If you expect interest rates to rise, you'd short the contract; if you think they'll fall, you'd go long.
Example of the Johannesburg Interbank Average Rate (JIBAR)
The calculation of a South African reference rate began in the 1990s with the South African Futures Exchange (Safex) Bank Bill rate. The current system was established in 1999. Before November 2012, the acronym meant Johannesburg Interbank Agreed Rate.
According to the South African Reserve Bank, the three-month JIBAR averaged 8.19% from 1999 to 2020, hitting an all-time high of 16.96% in February 1999 and a record low of 5.06% in September 2012. Remember, you can find the current JIBAR rate daily from sources like Thomson Reuters and Bloomberg.
Other equivalent short-term reference rates around the world include the London Interbank Offered Rate (LIBOR), Euro Interbank Offered Rate (EURIBOR), Nigerian Interbank Offered Rate (NIBOR), and Norwegian Inter-Bank Offered Rate (NIBOR).
