Who Uses Forward Contracts in Africa? (Who Uses Derivatives in Africa? — Part 4)
Introduction
Forward contracts are the most widely used derivatives instrument in Africa — and the most misunderstood. While futures contracts get more attention from traders and options attract sophisticated investors, forward contracts are quietly doing the heavy lifting of risk management across the continent every single day. They are used by Nigerian importers paying for goods in dollars, South African mining companies locking in rand revenues, Ghanaian cocoa cooperatives fixing export prices, and East African coffee producers securing seasonal income — all before a single unit of goods changes hands.
In Part 1 of this series, we examined currency swaps. In Part 2, we covered futures contracts. In Part 3, we explored options. In this fourth installment, we turn to forward contracts — Africa’s most pervasive but least glamorous derivatives instrument — examining who uses them, why, and how they work in the specific context of African markets.
What is a Forward Contract?
A forward market is a type of financial market in which contracts are made to buy or sell an asset at a predetermined price on a specified future date. These contracts are known as forward contracts. Unlike other financial instruments traded on exchanges, forward contracts are typically customized agreements between two parties and are traded over-the-counter (OTC), meaning they are not standardized or traded on formal exchanges. In forward markets, the underlying assets can range from commodities such as oil and gold to currencies and financial instruments such as bonds and stocks. The primary purpose of these markets is to help participants manage price risk by locking in future prices.
An FX forward contract, also known as a currency forward, is an agreement between two parties to exchange a specific amount of one currency for another at a set exchange rate on a future date. Currency forwards are traded over-the-counter (OTC) and are binding contracts, meaning the buyer and seller are obligated to fulfill the agreement regardless of market conditions. Their pricing is based on the current spot exchange rate, interest rate differentials between the two currencies, and the time to expiration. The terms of the contract can be customized to specific amounts and maturity or delivery periods.
The key distinction that makes forward contracts different from futures — and what makes them so widely used in Africa — is their flexibility. Unlike standardized futures contracts with fixed sizes, dates, and specifications, a forward contract can be tailored to exactly the amount, date, and currency pair required by the user. A Nigerian manufacturer needing $2.3 million in 73 days can get exactly that through a forward contract with their bank — no standardized futures contract can match this precision.
Forwards vs Futures — The Critical Distinction
| Forward Contract | Futures Contract | |
| Trading venue | OTC (private, bank-to-bank) | Exchange-traded (JSE, CME) |
| Standardisation | Fully customisable | Standardised (fixed size, date) |
| Counterparty risk | Yes (no central clearing) | No (central clearing via JSE Clear) |
| Margin requirements | Typically, none (credit-based) | Daily mark-to-market margin |
| Liquidity | Depends on bank relationship | High (exchange order book) |
| Typical users | Businesses, corporates, banks | Traders, investors, institutions |
| Settlement | Physical delivery at maturity | Cash settled or physical |
1. Nigerian Importers and Manufacturers — The Largest Users
Forward contracts are arguably more critical in Nigeria than in any other African market — a direct consequence of the naira’s extreme volatility following the CBN’s decision to float the currency in June 2023.
The Naira Float and Forward Contract Demand
In mid-2023, the CBN began closing gaps in the FX market, clearing backlogs and allowing the market rate to play a larger role. For businesses, the reform replaces unpredictability with transparency, but also exposes them to real market forces — importers can now access dollars more easily, but they must plan for price swings.
This exposure to real market forces — where the naira can move 10-20% in a matter of weeks — has made forward contracts an essential tool for Nigerian businesses with dollar obligations.
How Nigerian Importers Use FX Forwards
A Nigerian pharmaceutical importer must pay a Chinese supplier $5 million for raw materials within 90 days. The current USD/NGN rate is ₦1,550 per dollar — the total naira cost is ₦7.75 billion. If the naira weakens to ₦1,800 per dollar by the payment date, the cost rises to ₦9 billion — an unforeseen cost of ₦1.25 billion that could eliminate the company’s entire annual profit.
By entering an FX forward contract with their bank today, the importer locks in the ₦1,550 exchange rate for the full $5 million payment in 90 days. Regardless of what the naira does in the interim, the cost is fixed at ₦7.75 billion. The importer can now price their pharmaceutical products to the market with certainty — building in the correct naira cost without the gamble of exchange rate movements.
Where a customer has trade obligations to settle in a foreign currency — this is most likely the case where the customer is an importer and requires foreign exchange — FCMB offers foreign exchange products and services built consistently over the years to provide multinationals and other clients in-depth analysis and innovative solutions to their foreign exchange needs, involving prompt foreign exchange deliveries at best possible rates as well as managing risks associated with cross-border trade using various hedging products.
Nigerian banks offering FX forward products to their corporate clients include Access Bank, GTBank, Zenith Bank, First Bank, UBA, Stanbic IBTC, and FCMB — all of which are CBN-authorized FX dealers with FMDQ trading membership.
The CBN’s FX Forward Market
One of the most significant catalysts for the development of the Nigerian derivatives market in recent times was the CBN’s floating of the Nigerian naira in June 2023 and the consequent meteoric rise in the exchange rate between the Nigerian naira and other major currencies. The total turnover in the FX derivatives segment of FMDQ was NGN 2.85 trillion (approximately USD 1.8 billion) in May 2025, up 12% from June 2024.
The approved hedging products under the FX Derivatives and Modalities for CBN FX Forwards Guidelines are FX options, forwards (outright and non-deliverable), FX swaps, and cross-currency interest rate swaps. The maximum tenor allowed for FX forwards is five years, but authorized dealers may seek specific approval for longer tenors.
This regulatory framework — established by the CBN and implemented through FMDQ-registered authorized dealers — underpins the Nigerian corporate FX forward market. Any Nigerian business with a legitimate trade-backed FX obligation can access forward contracts through its commercial bank.
The CBN’s Own FX Forward Contracts
The CBN itself has been a major issuer of FX forward contracts — using them as a market intervention tool to provide forward dollar commitments to Nigerian businesses during periods of dollar scarcity.
The CBN used to sell about $200 million in FX forward contracts every two weeks. FX forwards are like promissory agreements by the CBN to allocate FX, but will not deliver the real FX until a date in the future — typically 90 days, 180 days, or 360 days forward. With this, companies can expect that forex will be delivered on the agreed day to settle their offshore obligations, such as Letters of Credit. Nigerian businesses, from manufacturers to equipment importers, used these CBN forward contracts to manage their dollar obligations.
The CBN’s experience with FX forward contracts — including a period of significant settlement delays that damaged investor confidence — is a critical case study in the importance of counterparty risk management in OTC derivatives. The CBN’s settlement default on earlier months’ forward transactions undermined investor confidence and was a probable factor in the parallel market overshooting the official rate.
Nigerian and African Exporters — Locking in Dollar Revenue
On the other side of the FX forward market are Africa’s exporters — commodity exporters, manufacturers, and service providers who earn in hard currencies but need naira, cedis, shillings, or rand to pay their local costs.
Nigerian Oil and Gas Exporters
Nigerian crude oil exporters — both the national oil company NNPCL and independent producers — use FX forward contracts to lock in the naira value of their future dollar revenues. With a producing well generating known volumes of crude at a known future delivery date, the dollar revenue stream is predictable. An FX forward locks in the exchange rate, converting that dollar certainty into naira certainty for budgeting and cost management purposes.
West African Cocoa and Coffee Exporters
Ghanaian and Côte d’Ivoirian cocoa exporters, Ethiopian coffee exporters, and Nigerian sesame and cashew exporters use both commodity and FX forward contracts to manage the two key risks they face — commodity price and exchange rate movements.
A farmer might enter into a forward contract to sell a certain quantity of crops at a fixed price, protecting themselves against market price drops. Companies that import raw materials from another country may enter into a forward contract to lock in the exchange rate between their home currency and the foreign currency, helping them avoid the risk of exchange rate fluctuations that could increase their costs.
A practical example: a Ghanaian cocoa exporter has contracted to deliver 500 tonnes of cocoa beans to a European buyer for payment in euros in 6 months. The exporter faces two risks simultaneously:
- Cocoa prices may fall between now and delivery
- The EUR/GHS exchange rate may move unfavorably
By entering a commodity forward (fixing the cocoa price) and simultaneously an FX forward (fixing the EUR/GHS exchange rate), the exporter locks in both the dollar value and the cedi value of their future receivables — complete certainty on the profitability of the transaction.
South African Corporates — ZAR/USD Forward Hedging
South African companies are among the most sophisticated users of FX forward contracts on the continent, reflecting both the rand’s significant volatility and the depth of South Africa’s banking and derivatives market infrastructure.
Mining Companies and Commodity Producers
South African mining companies that sell gold, platinum, palladium, chrome, and coal in dollars while paying rand-denominated operating costs face a structural FX mismatch. FX forward contracts are the primary tool for managing the short- to medium-term portion of this mismatch (with currency swaps used for longer-dated exposures, as covered in Part 1 of this series).
A South African gold mining company expecting to deliver 10,000 ounces of gold in three months can enter an FX forward to lock in the ZAR/USD exchange rate — converting the known dollar gold revenue into a known rand amount for cost and dividend planning.
Retailers and Consumer Goods Companies
South African retailers — including major listed companies — import significant volumes of consumer goods from China, Europe, and the US. Their dollar procurement costs are exposed to rand weakness. FX forward contracts are standard treasury practice for South Africa’s largest retailers, allowing them to lock in import costs months in advance and price their merchandise with certainty.
Technology and Service Companies
South African technology companies with offshore revenue streams — and there are an increasing number, given the growth of South Africa’s tech sector and the prevalence of rand-dollar payment structures for software services — use FX forward contracts to manage the timing uncertainty of converting offshore revenues into rand.
Multinational companies also use FX forward contracts to hedge against currency risk when managing overseas revenues and expenses. Businesses operating in international trade use FX forwards to hedge against exchange rate fluctuations and provide greater financial stability and predictability.
African Commercial Banks — Market Makers in Forward Contracts
African commercial banks are not just intermediaries for their clients’ forward contracts — they are active principals in the FX forward market, using forward contracts to manage their own balance sheet currency exposures and to profit from the bid-offer spread on client transactions.
How Banks Price FX Forwards
The pricing of FX forward contracts is derived from three market factors: spot exchange rates, interbank interest rate differentials, and cross-currency basis swap rates.
In Africa’s context, this means the forward rate between the naira and the dollar reflects the Nigerian interest rate differential — since Nigerian naira interest rates are significantly higher than US dollar rates, the naira typically trades at a forward discount to the dollar. This means a naira importer locking in a forward rate is effectively paying for dollar access at a cost that reflects the interest rate differential between the two currencies.
South African banks — Standard Bank, FirstRand, Absa, Nedbank — operate large FX trading desks that act as market makers in ZAR forward contracts, quoting bid and offer rates to corporate clients and managing the resulting book of forward exposures through hedging in the interbank market and on the JSE currency futures market.
Nigerian banks — Access Bank, GTBank, Zenith, First Bank, UBA — perform the same function in the naira forward market, operating under the regulatory framework established by the CBN and FMDQ.
Development Finance Institutions and International Investors
International investors in African assets face significant currency risk when converting local-currency returns back into hard currencies. FX forward contracts are the primary tool for managing this risk.
Forward contracts are widely used for their simplicity and cost-effectiveness, particularly for short- to medium-term exposures. Investors who use FX forwards to manage risk on foreign investments typically observe that their forward contracts lock in a loss or a gain relative to current spot exchange rates. This loss or gain represents a drag or an enhancement on overall investment returns, which should be factored into deal underwriting.
Practical example — an international private equity fund investing in Nigeria:
A London-based private equity fund invests $50 million in a Nigerian FMCG company in 2024, converting dollars to naira at the prevailing rate. When the investment is exited in 2026, the fund will receive Naira proceeds that need to be converted back to dollars. An FX forward contract — locking in the naira/dollar exchange rate at exit — protects the fund’s dollar return from naira depreciation between the time the exit is agreed and the time the proceeds are received and converted.
FMDQ Clear Limited has successfully cleared and settled OTC FX Futures contracts with maturities spanning over 43, totaling circa $25.53 billion. The robust legal and regulatory framework, which guides the OTC FX market and is complemented by this track record, enhances investor confidence in Nigerian forward and futures instruments as tools for hedging currency risk.
Agricultural Commodity Traders and Grain Companies
Agricultural commodity trading companies operating in Africa use forward contracts as their primary pricing and risk-management tool for their physical commodity trading books.
An agricultural trading house that buys maize from South African grain silos for export to regional markets in East or West Africa enters into multiple simultaneous forward contracts:
- A commodity forward with the South African grain producer — agreeing to buy a specific quantity of white maize at a fixed rand price on a specific future date
- An FX forward to convert the rand purchase cost into dollars for international settlement
- Potentially another commodity forward with the end buyer — agreeing to sell at a fixed price in the buyer’s currency
This “book of forwards” — multiple offsetting forward contracts that lock in the buy price, sell price, and exchange rates simultaneously — is the core risk management framework for agricultural commodity trading in Africa.
Non-Deliverable Forwards (NDFs) — For Illiquid African Currencies
A critical and growing area of African forward contract usage involves non-deliverable forwards (NDFs) — a variant of forward contracts specifically designed for currencies with capital controls or limited convertibility.
The Naira-settled OTC FX Futures are a variant of NDFs where parties agree to an exchange rate for a predetermined date in the future, without the obligation to deliver the underlying US Dollar (notional amount) on the expiry date. Naira-settled non-deliverable forwards have been used to hedge against volatility in the naira’s exchange rate against other major currencies.
NDFs are particularly important for currencies like the Nigerian naira, Kenyan shilling, Ghanaian cedi, and other African currencies, where:
- Capital controls restrict the physical delivery of foreign currency
- The forward market is thin and illiquid beyond short tenors
- International counterparties are unwilling to hold physical local currency positions
In an NDF, rather than exchanging the actual currencies at maturity, the parties simply settle the difference between the agreed forward rate and the prevailing spot rate at maturity — in a freely convertible currency, such as the dollar. This allows international investors and multinationals to hedge African currency exposure without the complications of physical currency delivery in restricted markets.
The Cleared Naira-Settled Non-Deliverable Forwards product was introduced on FMDQ in 2016, with the Central Bank of Nigeria as the pioneer seller of the Cleared USD/NGN NDFs contracts. The apex bank currently offers non-standardized amounts for different tenors, ranging from 13 months to 60 months, to Authorized Dealers, who in turn offer the same to customers for trade-backed transactions.
Project Finance and Infrastructure Investors
Large infrastructure projects in Africa — power plants, roads, ports, telecommunications networks — typically involve long-term financing structures in which construction and operational costs are in local currency, while the project debt is denominated in dollars or euros.
Forward contracts play a role in the early stages of these projects — during construction, when contractors incur local-currency costs while drawing down on dollar-denominated project facilities. Forward contracts lock in the exchange rate for converting dollar drawdowns into local currency to pay contractors, ensuring the project budget is not derailed by currency movements during the construction phase.
For the longer-term operational phase — where the currency mismatch becomes structural rather than transactional — currency swaps (covered in Part 1 of this series) are typically more appropriate than rolling forward contracts.
The Forward Contract Landscape in Africa — Key Regulatory Frameworks
Understanding the regulatory framework for forward contracts in each major African market is essential for businesses seeking to access these instruments:
Nigeria: Forward contracts are regulated by the CBN under the FX Derivatives and Modalities for CBN FX Forwards Guidelines. Authorized dealers (commercial banks) offer forward contracts to clients with legitimate trade-backed FX obligations. The maximum tenor is five years. FMDQ provides the reporting and clearing infrastructure for standardized NDF products.
South Africa: Forward contracts are OTC instruments arranged through FSCA-regulated banks. The South African Reserve Bank (SARB) monitors cross-border forward flows as part of its exchange control framework. No specific exchange control permissions are required for most commercial FX forward transactions.
Ghana: FX forward contracts are available through Bank of Ghana-licensed commercial banks. Ghana has experienced periods of severe cedi depreciation where forward markets have been difficult to access — underscoring the importance of established banking relationships for accessing forward hedging.
Kenya: The Central Bank of Kenya regulates FX forward contracts. Kenyan commercial banks offer USD/KES forward contracts to corporates with documented FX exposures. The Nairobi Securities Exchange is developing its derivatives market but most FX forwards remain OTC.
Risks of Forward Contracts — What African Businesses Must Understand
While forward contracts help hedge against certain risks, they do not eliminate exposure to market movements. If the market moves in favor of the party that entered into the forward contract, they may miss out on potentially more favorable prices. Forward contracts come with risks, including counterparty and liquidity risks.
The key risks of forward contracts that African businesses must understand:
Counterparty risk — Unlike exchange-traded futures cleared through a central counterparty, OTC forward contracts expose both parties to the risk that the other party defaults. In the Nigerian context, the CBN’s FX forward settlement delays provided a real-world lesson in this risk at the sovereign level.
Opportunity cost — A forward contract is a binding obligation. If the naira strengthens unexpectedly (as it did briefly in 2024 after the CBN’s FX reforms), a company that locks in a forward rate misses out on the stronger naira. This is the fundamental trade-off of hedging — certainty in exchange for the potential upside of favorable market moves.
Roll risk — For long-dated exposures managed through a series of rolling short-dated forwards, the rate available at each rollover is unknown. If the forward curve steepens significantly — which can happen during periods of market stress — rolling forward costs can increase substantially.
Documentation and legal risk — OTC forward contracts require proper documentation under the relevant ISDA or local master agreement framework. In markets where legal enforceability of netting provisions was uncertain — as was the case in Nigeria before the 2020 CAMA and BOFIA amendments — this created additional risk for market participants.
Conclusion
Forward contracts are the unsung workhorses of Africa’s risk management landscape. While futures and options attract more attention from traders and financial markets professionals, forward contracts are quietly protecting millions of dollars of business value every day across the continent — locking in import costs for Nigerian manufacturers, securing export revenues for Ghanaian cocoa cooperatives, hedging rand exposure for South African retailers, and managing currency risk for international investors in African assets.
Forwards are identified as the most common hedging contracts globally. Non-standard contracts allow companies to better match their specific needs, and both swaps and forwards are more cost-efficient than other options for most corporate hedging applications.
For African businesses with any cross-border trade or investment exposure — in currencies, commodities, or interest rates — forward contracts represent the most accessible, flexible, and cost-effective starting point for a hedging program. The instrument is available through every major commercial bank on the continent, requires no special trading account or margin management, and can be tailored precisely to the amount, date, and currency pair required.
Understanding forward contracts — who uses them, why, and how they are priced — is foundational knowledge for any African finance professional, corporate treasurer, or investor operating in today’s volatile currency and commodity environment.
Next in the series: “Who Uses Interest Rate Swaps in Africa?” — coming soon on netfinai.com
Disclaimer: This article is for educational and informational purposes only and does not constitute financial or investment advice. Forward contract trading involves risk of loss. Always conduct your own due diligence and consult a qualified financial advisor before entering into any forward contract.
