The South African Reserve Bank’s Financial Surveillance Department (FSD) has removed the interest rate cap for inward foreign loans and foreign trade finance facilities (together, foreign borrowings) extended to South African residents by non-residents.
This change was first signalled in the Minister of Finance’s 2026 Budget Speech and is effective from 8 April 2026. In practice, the reform means that South African borrowers will now be able to negotiate pricing on a market-related basis without regulatory caps.
Background and rationale
Previously, the exchange control framework imposed specific interest rate thresholds on loans and facilities made available by non-residents to South African residents. These thresholds were intended to prevent the externalisation of capital through inflated interest payments. However, they also introduced rigidity, limiting the ability of South African borrowers to negotiate competitive pricing in international debt markets. Although deviations were possible if properly motivated with appropriate third party support and direct approval from the FSD, such approvals were discretionary and uncertain.
As part of the broader efforts to promote foreign trade and investment into South Africa and the taxing provisions and reforms that focus on cross-border funding arrangements and interest deductibility concerns, the FSD has now removed interest rate caps entirely for new foreign borrowings. For South African borrowers raising funding offshore, this change brings welcome flexibility to secure market-aligned financing terms.
The new requirements
Under the finalised Circular, Authorised Dealers may approve applications by residents to avail of foreign borrowings from non-residents, provided the interest rate is:
- market related in the country of denomination; and/ or
- normal in the trade concerned.
All other existing criteria for foreign borrowings remain in force and are to be applied by Authorised Dealers. Criteria include, amongst others:
- a minimum tenor of one month;
- restrictions on the use of loan proceeds (including the prohibition on foreign sinking funds); and
- limitations on fees, with upfront costs effectively deferred until funds are received and converted into Rand, and capped at 5% of the principal.
Also note that foreign borrowings (including the issue of preference shares which is still regarded as ‘debt’ for exchange control purposes) that benefit from local security and/ or guarantees, still require FSD approval.
Related party transactions and transfer pricing
The finalised Circular introduces strengthened requirements for related party transactions. Where foreign borrowings involve connected persons, Authorised Dealers must
- receive confirmation from senior management of the applicant South African company that transfer pricing documentation is maintained as prescribed by the South African Revenue Service; and
- refer to SARS Interpretation Note No. 127 dated 17 January 2023, titled ‘Determination of the Taxable Income of Certain Persons from International Transactions: Intra-Group Loans’, which deals with the transfer pricing and interest limitation rules in relation to cross-border loans between connected persons.
This is a notable refinement from the draft Circular, which required Authorised Dealers merely to ‘have regard to’ transfer pricing rules. The finalised Circular imposes a more prescriptive obligation, requiring positive confirmation from senior management that appropriate documentation is in place.
Whilst the removal of the interest rate caps is welcomed, parties need to be mindful and pay careful attention to the transfer pricing rules applicable to any cross-border shareholder and other intergroup loans.
Key refinements from draft to finalised Circular
The finalised Circular closely mirrors the draft proposals released in March 2026, but two important technical refinements were introduced following the public consultation process:
- Meaning of ‘market related’: The draft Circular required that interest rates be ‘market related and/or normal in the trade concerned’. The finalised Circular refines this to ‘market related in the country of denomination and/or normal in the trade concerned’, thereby anchoring the pricing benchmark to the relevant jurisdiction. This narrows the scope for interpretation and provides greater certainty for both borrowers and Authorised Dealers when assessing whether a proposed rate is compliant.
- Transfer pricing obligations: The transfer pricing obligations for related party transactions described above have been materially strengthened compared to the draft.
Impact on finance documentation
The removal of interest rate caps has practical consequences for transaction structuring and documentation.
- For new transactions, drafters should ensure that finance documentation reflects the updated position and incorporates appropriate references to the transfer pricing requirements for related party transactions, where relevant.
- For existing facilities, the position is more nuanced. For legacy transactions, the previous regime continues to apply. However, borrowers and lenders may wish to revisit existing pricing provisions to determine whether they are artificially constrained by now-obsolete thresholds. In some cases, refinancing may present an opportunity to achieve more competitive terms. Parties that previously obtained specific Authorised Dealer approvals or FSD dispensations to exceed the former caps should consider whether fresh confirmation is required under the new framework.
Ongoing reporting and monitoring
The FSD will continue to monitor foreign borrowings availed of by residents from non-residents and will continue to administer the Loan Reporting System. Authorised Dealers must ensure accurate and comprehensive reporting of loan data for the compilation of foreign debt statistics and repayment profiles.
The removal of interest rate caps represents a significant, but carefully calibrated, reform of South Africa’s exchange control framework. By allowing South African borrowers to access offshore funding at market-related rates, the reform should facilitate greater cross-border capital flows. The retention of all other prudential criteria – together with the strengthened transfer pricing requirements for related party transactions – underscores that significant regulatory oversight remains in place.
The amended Authorised Dealer Manual and guidelines document can be accessed on the South African Reserve Bank website at www.resbank.co.za.
