Understanding Foreign Loans for South African Entities or Individuals

Foreign loans can be a valuable source of finance for South African residents or entities purchasing property. However, navigating exchange control regulations and understanding the associated risks and benefits is essential. This article explores the key aspects of inward foreign loans from non-residents to South African residents, along with the requirements and restrictions when obtaining a foreign loan through Currency Partners.

What is a Foreign Loan?

A Foreign Loan is funding from a non-resident lender to a South African resident (entity or individual), in Rand or foreign currency. These loans, whether interest-bearing or interest-free, require prior approval from the South African Reserve Bank (SARB) and must comply with exchange control regulations.

Foreign Loans can be structured in various ways, such as in South African Rands or foreign currency, and they can be secured or unsecured.

It’s important to note that foreign loan funds cannot be sent to a Foreign Currency Account; they must be converted into Rand before being credited to the local entity or individual. While the lender typically sets the interest rate, SARB imposes certain limits on maximum rates depending on the loan type.

Interest Rate Regulations

The South African Reserve Bank imposes specific interest rate limits on foreign loans, varying by loan type, currency, and lender relationship.

• Third-party foreign currency loans: May not exceed base lending rate + 3% (determined by commercial banks in the issuing country).
• Shareholder foreign currency loans: May not exceed base lending rate (determined by commercial banks in the issuing country).
• Third-party Rand loans: May not exceed SA prime rate + 5%.
• Shareholder Rand loans: May not exceed SA prime rate.

Benefits and Risks

Foreign loans can be an attractive financing option for South African residents, offering access to international capital, often at lower interest rates and with extended repayment terms. A notable advantage is that once a loan is placed on record with the South African Reserve Bank (SARB), repayments do not impact the borrower’s Single Discretionary Allowance.

However, borrowers should be mindful of currency risk, as exchange rate fluctuations between the Rand and the loan currency can affect the final repayment amount.

Key Considerations

• A SARB Approval loan reference number is required before remitting funds.
• Funds must be remitted from the lender’s offshore account in the approved foreign currency.
• Transfers to/from a Foreign Currency Account (FCA) or Customer Foreign Currency (CFC) account are not allowed.
• SARB approval is required to capitalise interest or increase the loan amount.
• Loan security is recorded, but repayment requires SARB approval if called upon.
• If the lender has a South African interest, SARB approval is required.

Processing and Additional Considerations

SARB approval takes approximately 2–6 weeks. Certain applications may qualify for internal bank approval, expediting the process. Additional documentation may be requested by the bank during the process, and approval is at the SARB’s discretion. Once approved, it is valid for 12 months from date of issue.

How we Support Inward Foreign Loan Transactions

Currency Partners can assist with the South African Reserve Bank application process for inward foreign loans. The application requires the client to complete a foreign loan application form and provide supporting documents such as the loan agreement.

We guide our clients through the restrictions, rulings, and application process to ensure that the client is abiding by the SARB exchange control regulation.

Navigating the regulatory landscape and understanding the associated risks and benefits is crucial. By carefully considering the requirements and restrictions, borrowers can make informed decisions and leverage foreign loans to achieve their financial goals.

For more information or assistance on Inward Foreign Loans please email enquiries@currencypartners.co.za or call (+27) 21 203 0081 to get in touch with our expert team.