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Foreign loans and the Reserve Bank

Michael Heath

When offshore funds are introduced to South Africa and the funds represent a loan to a resident, Reserve Bank approval is required to introduce the funds.

The Reserve Bank maintains a database of all loan commitments by South African residents to non-residents, be they bank or other third-party loans, shareholders’ loans, government borrowing or even small personal loans. Redeemable preference shares and bond issues also fall within these directives.

The Reserve Bank also manages the maximum interest rates payable, thereby effectively keeping international “loan sharks” out, e.g. the maximum interest rate a resident may pay on a third-party foreign Rand-denominated loan is the SA prime rate plus a margin of 3%.

Approval needs to be obtained in advance; thereafter it is a relatively painless process. The exchange control department of your South African bank has direct access to the Reserve Bank’s loan record system. A South African borrower will be asked for certain information on the loan, a copy of the agreement if there is one, some confirmation about the source of funding and the relationship between the parties. If all the criteria are met, the system will automatically generate an approved loan reference number, which you will receive via your bank. The duration of this process is almost solely dependent on how efficient your bank is.

Where something complicates the loan so that it cannot be automatically approved, your bank needs to “manually” apply to the Reserve Bank so that a SARB official can make a decision on the case.

While many people are aware of the fact that approval is needed before introducing loan funds to South Africa, they don’t realise that the creation of such a loan, even where no cash flowed, also falls within the ambit of the loan policies. Should a non-resident, for example, render services to a South African resident who only needs to pay a year later, it creates a loan commitment.

Accountants should ideally check for the necessary foreign loan approvals when preparing or auditing financial statements of companies and close corporations. The ideal time to reconcile the current balance with the Reserve Bank database is after draft financial statements have been prepared. All entries passed over the general ledger loan account during the year, final adjustments, and the capitalisation of interest require additional Reserve Bank approval. If this is not done timeously, applicants may encounter problems with the Reserve Bank, especially in the case of “repeat offenders”.

The other single most important step is to ensure that the Reserve Bank is given the drawdown details. This is done by recording the inflow as a loan on the Balance of Payments (BoP) form when it arrives (category 999) and quoting both the bank application number and the loan number. Most problems on future repayments arise because incoming funds are reported as payment for services or some other incorrect category.

Finally, the general rule for South African residents making loans to non-residents is that this is only allowed within the ambit of the R750 000 single discretionary allowance or a specific Reserve Bank pre-approval.

XConsult, in association with Exceed, can assist clients with obtaining either current or retrospective approvals. For additional information please contact Michael Heath on tel. 021 873 1128 or 082 326 8480 or e-mail