You put R50,000 into the bank.

The bank pays you around 8% for letting it use your money.

Someone else borrows R50,000.

The bank charges them 22%.

There appears to be a fairly obvious question:

What happened to the other 14%?

At first glance, banking looks like a spectacular business.

Take Fred’s R50,000. Pay Fred 8%.

Lend Fred’s R50,000 to Mary at 22%.

Keep the difference.

Perhaps buy a very large building with your name on it.

Except that isn’t really how it works.

And the difference between those two interest rates — usually called the spread — isn’t simply the bank’s profit.

First, the Bank Really Does Pay Less for Money Than It Charges for It

There’s no point pretending otherwise.

Banks make money partly by obtaining funds at one cost and lending money at a higher rate.

That’s fundamental to banking.

But your savings account and somebody else’s personal loan are very different propositions.

When you deposit money with a bank, you are effectively providing funds to the bank.

When the bank lends money to somebody, the bank is taking the risk that it might not get all of that money back.

That difference matters enormously.

Let’s Start With the 8%

Even the 8% in our headline needs a little explanation.

Banks don’t simply pay everybody 8% for leaving money in an account.

The rate depends on the type of account, the amount deposited, how long you’re prepared to leave it there and how easily you can withdraw it.

For example, Capitec currently advertises ordinary access savings rates ranging from about 2% to 6%, depending on the balance, while its fixed-term products can pay more.

Absa’s current tables show the same basic pattern: longer fixed periods and less access to the money can attract higher rates.

That makes sense.

If you tell the bank:

“You can reliably use this money for the next three years,”

that money is more useful to it than money you may withdraw tomorrow morning.

So the bank may be prepared to pay more for it.

Now Look at the 22%

A personal loan is almost the opposite arrangement.

The bank gives somebody money today and hopes to receive it back, with interest, over the next few years.

Most borrowers will repay their loans.

Some won’t.

Some will lose their jobs.

Some will fall behind.

Some accounts will have to be chased through collections.

Some debts will eventually be written off.

The interest charged across the bank’s lending business has to help cover that risk.

That’s one reason an unsecured personal loan generally costs considerably more than a home loan.

With a home loan, the bank has an asset standing behind the debt.

With an unsecured personal loan, there isn’t a R50,000 piece of your house that the bank can repossess if you stop paying.

More risk generally means more expensive credit.

But Surely the Bank Still Has 14% Left?

Not quite.

Let’s deliberately oversimplify.

Imagine a bank could obtain R100 million of funding at an average cost of 8% and lend all R100 million out at 22%.

It would be tempting to say:

22% − 8% = 14% profit.

But before anybody orders the yacht, quite a few people want some of that 14%.

The bank has to deal with loans that aren’t repaid.

It has to employ people and operate branches, apps, computer systems, call centres, fraud prevention, cybersecurity and payment infrastructure.

It has regulatory and compliance costs.

It has to assess borrowers before lending.

It has to administer the loan afterwards.

It has to collect overdue debts.

And banks are required to maintain capital and liquidity buffers rather than simply lending out every rand available to them.

What’s left after all of that contributes to the bank’s profit.

So yes, the gap between what banks pay and what they charge matters enormously.

But:

Interest-rate spread is not the same thing as profit margin.

And No, the Bank Doesn’t Put Your R50,000 in a Drawer Marked “For Mary”

This is another useful misconception to clear up.

Modern banking isn’t a simple matchmaking service where the bank waits for Fred to deposit R50,000 before it can lend exactly that R50,000 to Mary.

Banks fund themselves from a mixture of deposits and other sources.

They make loans, receive repayments, manage withdrawals and payments, borrow and lend in financial markets, and constantly manage how much cash and liquid funding they need available.

Your deposit is part of a much larger pool.

So:

Fred saves R50,000 → bank lends Fred’s exact R50,000 to Mary

is a useful cartoon of banking.

It isn’t a very good description of what actually happens.

Why Doesn’t Competition Push the Loan Rate Down to 9% Then?

It does push rates down.

Banks compete for borrowers just as they compete for deposits.

But they don’t all offer everybody the same interest rate because not every borrower represents the same risk.

Capitec’s current personal-loan pricing illustrates this rather nicely. Its published rates start at 12.5%, while its current range can extend substantially higher depending on the loan and borrower. Its representative R50,000 example uses 22%.

That’s why advertisements often say things like:

“from 12.5%”

rather than:

“your rate will be 12.5%.”

Your income, credit history, existing commitments, loan amount, repayment period and the lender’s assessment of risk can all affect the offer.

There Is Another Price in the Background

South Africa’s interest rates don’t exist independently of the rest of the financial system.

The South African Reserve Bank sets the policy rate, and changes in that rate work their way through the cost of money across the economy.

That affects what banks are willing to pay savers and what they charge borrowers.

It doesn’t mean:

SARB sets the rate at X, therefore your personal loan should cost X.

The policy rate is more like part of the wholesale price of money in the system.

Your personal loan is a retail financial product sitting several layers further down the chain.

We’ll come back to that properly in the next MONEY article when we tackle prime, prime plus and prime minus.

So Is the Bank Making Money From the Difference?

Of course.

Banks aren’t charities.

The ability to raise money at one cost and lend it at another is an important part of how commercial banks make money.

The mistake is assuming that:

22% loan rate − 8% deposit rate = 14% bank profit.

Those two percentages describe two quite different financial products carrying different risks, costs, conditions and obligations.

And even our headline comparison is deliberately simplified.

The person earning 8% may have agreed to lock money away.

The person paying 22% may have borrowed unsecured money for several years.

They’re standing on opposite sides of the bank, but they’re not buying and selling the same thing.

The Essentially Bit

If the bank pays you 8% and charges somebody else 22%, it isn’t simply pocketing 14%.

The difference helps pay for the cost of obtaining money, the risk of borrowers not repaying it, running the banking system, regulatory requirements — and, yes, profit.

Perhaps the easiest way to think about it is this:

When you deposit money, the bank is paying you for the use of your money.

When you borrow money, you’re paying the bank for the use of its money — plus the risk it takes by giving it to you.

Same word — interest.

Two very different sides of the transaction.

A quick note

This article provides general information for South African readers and is not personal financial, legal or tax advice. Financial products, fees, interest rates and individual circumstances vary. Check the terms that apply to you and, where necessary, seek advice from an appropriately qualified or registered professional.