Who Uses Interest Rate Swaps in Africa? (Who Uses Derivatives in Africa? — Part 5)

Introduction

Interest rate swaps are the backbone of Africa’s institutional derivatives markets. While retail investors trade equity futures and importers use FX forwards, interest rate swaps operate largely out of public view — flowing between banks, corporates, pension funds, and governments in a vast, mostly invisible market that underpins the pricing and risk management of trillions of rands, naira, and other African currency obligations.

In Part 1 of this series, we examined currency swaps. In Part 2, we covered futures. In Part 3, we explored options. In Part 4, we looked at forward contracts. In this fifth installment, we turn to interest rate swaps — the largest OTC derivatives market in Africa by notional value — examining who uses them, why, and how they function in the specific context of South African and broader African financial markets.

What is an Interest Rate Swap?

Interest rate swaps occur when two parties agree to exchange interest payments on a notional principal amount. For example, imagine Company A has a loan with a variable (floating) interest rate but wants to pay a fixed rate instead. Company B has a loan with a fixed interest rate but prefers a variable rate because it thinks rates will fall. They make a deal in which Company A pays a fixed rate to Company B, and Company B pays a floating rate to Company A. This swap lets both companies receive the interest payments they want without changing their original loans.

The critical insight is that no principal changes hands. Only the interest payment streams are exchanged — both are calculated on the same agreed notional amount. This makes interest rate swaps extremely capital-efficient instruments for managing interest rate risk.

Interest rate swaps have become an essential tool for many types of investors, corporate treasurers, risk managers, and banks, thanks to their wide range of uses. These include portfolio management — interest rate swaps allow portfolio managers to adjust interest rate exposure and offset the risks posed by interest rate volatility. By increasing or decreasing interest rate exposure across the yield curve through swaps, managers can either ramp up or neutralize their exposure to changes in the curve’s shape and can also express views on credit spreads.

The South African Interest Rate Swap Market — A Critical Transition Moment

South Africa’s interest rate swap market is Africa’s most developed — and it is currently undergoing its most significant structural change in decades.

JIBAR — The Benchmark That Underpinned Everything

The Johannesburg Interbank Average Rate (JIBAR) is a money-market reference rate used in South Africa. JIBAR was introduced in 1999 and has since been used to calculate interest and other payments under many loans, derivatives, bonds, and other financial transactions. ZAR-denominated loans for large corporates are typically linked to 3-month JIBAR. An interest rate swap is a contract in which a stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate. The South African market evolved into a 3-month fixed versus floating convention for swaps because of the historic dominance of the 3-month maturity.

For over two decades, JIBAR was the reference rate for virtually every rand-denominated interest rate swap in South Africa. A corporate borrower at a floating rate linked to JIBAR could enter into a swap — paying fixed and receiving JIBAR — to convert its floating-rate exposure into a predictable fixed-rate cost.

The JIBAR-to-ZARONIA Transition — A Market-Wide Upheaval

The global benchmark reform movement, which saw the replacement of the London Interbank Offered Rate with risk-free rates in major jurisdictions, has now reached South Africa. JIBAR will soon be replaced by ZARONIA, a backward-looking overnight near-risk-free rate based on actual transactions in the wholesale overnight deposit market. ZARONIA will serve as the primary reference rate for rand-denominated financial instruments, including floating-rate bonds, syndicated loans, and derivatives.

The South African Reserve Bank (SARB) estimates that, as of June 30, 2025, approximately R2.5 trillion in assets, R1.66 trillion in liabilities, and R38.9 trillion in derivatives JIBAR-linked exposures remain outstanding. The formal announcement of JIBAR’s cessation was made on December 3, 2025. The MPG confirmed that all JIBAR tenors will either cease to be provided by any administrator or will no longer be representative immediately after December 31, 2026.

R38.9 trillion in JIBAR-linked derivatives is the scale of the transition challenge — every one of those contracts must be renegotiated, amended, or transitioned to reference ZARONIA instead of JIBAR. This represents one of the most significant operational and legal challenges in the history of South African financial markets — and an enormous amount of work for banks, legal teams, and corporate treasurers managing these positions.

Standard Bank of South Africa successfully issued a 100 million 3-year bond priced at ZARONIA plus a 102bps margin on 21 May 2025 — the first ZARONIA-linked bond issuance in South Africa — marking a significant milestone in the transition from JIBAR to the new benchmark rate.

Financial institutions are required to cease originating new JIBAR-linked products by 1 May 2026. For the bond market, this creates a dual challenge: ensuring new issuances reference ZARONIA and addressing the significant stock of outstanding JIBAR-linked bonds that must be actively amended or rely on a legislative backstop.

This JIBAR-to-ZARONIA transition is the defining story of South Africa’s interest rate derivatives market in 2025 and 2026 — and understanding it is essential for any African finance professional working with rand-denominated debt or derivatives.

Commercial Banks — The Largest Users and Market Makers

The main end-user segments in interest rate swap markets are funds, including hedge funds and other asset managers, pension and insurance companies, banks, corporations, and public and sovereign institutions. Funds hold the largest stock of outstanding net positions, followed by pension and insurance companies and banks.

In the African context, commercial banks are the most important participants in the interest rate swap market — both as end-users managing their own balance sheet risks and as market makers providing interest rate swap products to their corporate and institutional clients.

Balance Sheet Asset-Liability Management

South African banks — Standard Bank, FirstRand, Absa, Nedbank, and Investec — use interest rate swaps extensively to manage the interest rate risk inherent in their balance sheets. A bank that takes in deposits at floating rates and lends at fixed rates has a structural interest rate mismatch: if rates rise, the bank’s funding costs increase while its lending revenues remain fixed. Interest rate swaps allow the bank to convert its fixed-rate lending revenues into floating-rate revenues (or vice versa) to match its funding cost structure.

An interest rate swap is a contract in which a stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate. ZAR-denominated loans for large corporates are typically linked to 3-month JIBAR.

Client Market-Making

South African banks also act as the primary market makers for interest rate swap products to their corporate and institutional clients. When a South African property company wants to convert its floating-rate mortgage debt into fixed-rate obligations, it approaches its bank — Standard Bank, Absa, or Rand Merchant Bank — which structures and executes the interest rate swap on the company’s behalf. The bank then manages the resulting interest rate risk on its own trading book, either by entering offsetting swaps with other banks in the interbank market or by hedging with JSE-listed interest rate futures.

Nigerian banks perform a similar function in the naira interest rate market, though the Nigerian swap market is less deep and liquid than South Africa’s.

South African Corporate Borrowers — Converting Floating to Fixed

South African corporate borrowers are significant users of interest rate swaps — primarily to convert floating-rate bank debt into fixed-rate obligations, providing certainty over their borrowing costs.

The South African corporate sector is well versed in using risk management tools to mitigate interest rate risk. The main avenues are either an interest rate swap or an interest rate cap. A good way to think about hedging interest rate risk is by comparing it to insurance — most of the time it will end up costing you money, but you can sleep a little easier at night knowing that your assets are adequately covered. The balance is in choosing the amount of risk that you are comfortable taking and hedging only the risk or portion of the risk that you are most concerned about.

Property Companies — The Most Active Corporate Swap Users

South African listed property companies (REITs) are among the most active corporate users of interest rate swaps, given the capital-intensive, debt-heavy nature of property investment. A property fund that borrows R5 billion at a floating rate linked to JIBAR (transitioning to ZARONIA) faces significant risk if interest rates rise — higher borrowing costs directly reduce the fund’s distributable income and share price.

By entering an interest rate swap — paying a fixed rate and receiving the floating JIBAR/ZARONIA rate — the property fund converts its variable borrowing cost into a predictable fixed-rate obligation. This allows accurate forecasting of interest costs, dividend projections, and property valuations.

Major South African REITs — Growthpoint, Redefine, Emira, Vukile, and others — all use interest rate swaps as a core treasury tool. Their annual reports typically disclose the notional value of their swap positions and the weighted-average fixed rate on their hedged debt portfolio.

Infrastructure and Project Finance Companies

Large infrastructure businesses — toll road operators, power utilities, telecoms companies — use interest rate swaps to hedge the interest rate risk on their long-term project finance debt. These companies typically borrow at floating rates to fund capital-intensive infrastructure, then use long-dated swaps (5 to 20 years) to convert that floating-rate exposure into predictable fixed-rate costs that can be matched against long-term regulated or contracted revenue streams.

Eskom, South Africa’s national power utility, has historically been a significant user of interest rate swaps as part of its massive debt management program — though its financial difficulties in recent years have complicated its derivatives activity.

Pension Funds and Long-Term Insurers — Liability-Driven Investment

Pension funds and long-term insurers are among the most strategically important users of interest rate swaps globally — and South African pension funds are no exception.

Pension funds use interest rate swaps to hedge against the risk of lower interest rates: they pay a floating rate and receive a fixed rate so that any decline in market rates results in a mark-to-market gain on their positions.

Why Pension Funds Use Interest Rate Swaps

Falling interest rates might be good news for borrowers, but they are very bad news indeed for pension schemes. A 1% drop in interest rates means a 20% rise in the value of scheme liabilities over 20 years. It is little wonder schemes are keen to hedge out interest rate risk through liability-driven investment strategies, using interest rate swaps. In an interest rate swap, a pension fund enters into a transaction with an investment bank, paying a floating rate to the bank and receiving a fixed rate in return. If long-term interest rates fall, pushing up the value of liabilities, the value of interest rate swaps rises, offering protection.

This is the core logic of Liability-Driven Investment (LDI) — a strategy in which pension funds use interest rate swaps to match the duration of their assets to that of their long-term liabilities. When interest rates fall, pension liabilities increase in value — but so do the interest rate swaps on the asset side, providing an offsetting gain that protects the fund’s funded status.

South Africa’s largest pension fund — the Government Employees Pension Fund (GEPF), with assets exceeding R2 trillion — and major private-sector funds administered by Old Mutual, Sanlam, Liberty, and Discovery all use interest rate derivatives, including swaps, as part of their asset-liability management frameworks.

Long-dated interest rate swaps can increase a portfolio’s duration, making them an effective tool in Liability-Driven Investing, where managers aim to match the duration of assets with that of long-term liabilities. Swaps can also act as substitutes for other, less liquid fixed-income instruments.

Asset Managers and Hedge Funds — Expressing Rate Views

Asset managers and hedge funds use interest rate swaps not just for hedging but as active investment instruments — expressing views on the direction and shape of the yield curve.

Fixed Income Portfolio Management

South African fixed-income portfolio managers at Coronation, Allan Gray, Ninety One, and Prescient use interest rate swaps to manage the duration and interest rate sensitivity of their bond portfolios. When a portfolio manager believes South African interest rates will fall, they can use receiver swaps (receive fixed, pay floating) to increase the portfolio’s duration and profit from falling rates — without buying long-dated government bonds directly.

Interest rate swaps allow portfolio managers to adjust interest rate exposure and offset the risks posed by interest rate volatility. By increasing or decreasing interest rate exposure across the yield curve through swaps, managers can either ramp up or neutralize their exposure to changes in the yield curve’s shape.

Yield Curve Trading

Sophisticated hedge funds use interest rate swaps to express views on the shape of the yield curve — not just the level of rates. A hedge fund that believes the South African yield curve will flatten (long rates falling relative to short rates) might receive fixed on a long-dated swap and pay fixed on a short-dated swap — profiting from the convergence of long and short rates without directional exposure to the overall level of interest rates.

South African Government and State-Owned Entities

The South African National Treasury and state-owned entities use interest rate swaps as part of their debt management programs.

Government debt is typically issued in fixed-rate bonds — but the government may wish to convert a portion of its fixed-rate obligations into floating-rate debt if it believes rates will fall, thereby reducing its total interest cost. Interest rate swaps allow this conversion without requiring the government to buy back existing fixed-rate bonds and reissue floating-rate notes — a far more expensive and disruptive process.

South African state-owned companies — Transnet, Eskom, SANRAL (South African National Roads Agency) — have large infrastructure funding requirements that they finance through both domestic and international bond markets, using interest rate swaps to manage the interest rate risk arising from the mismatch between their floating-rate borrowing costs and fixed-rate contracted revenue streams.

Nigerian Banks and Corporates

Nigeria’s interest rate swap market is significantly less developed than South Africa’s, but it is growing in importance following the CBN’s FX and monetary policy reforms of 2023 and 2024.

The approved hedging products under the FX Derivatives and Modalities for CBN FX Forwards Guidelines include cross-currency interest rate swaps. Naira-settled non-deliverable forwards have been used to hedge against volatility in the naira’s exchange rate against other major currencies.

Nigerian banks use interest rate swaps primarily in two contexts:

Cross-currency interest rate swaps — combining interest rate and FX risk management in a single instrument. A Nigerian bank that has borrowed in dollars at a floating rate but lends in naira at a fixed rate uses a cross-currency interest rate swap to convert its dollar floating-rate liability into a naira fixed-rate liability — simultaneously managing both interest rate and currency risks.

Naira interest rate risk management — as the CBN develops the FMDQ interest rate derivatives market, Nigerian corporates with large naira debt portfolios are increasingly using naira interest rate swaps to manage their exposure to CBN monetary policy decisions and the resulting movements in the Monetary Policy Rate (MPR).

Nigeria’s MPR has been among the most volatile in Africa in recent years — rising from 11.5% in 2020 to over 27% by early 2024 as the CBN aggressively tightened monetary policy to combat inflation and stabilize the naira post-float. This volatility creates significant demand for interest rate risk management tools from Nigerian corporates with floating-rate borrowings.

Development Finance Institutions in Africa

Development finance institutions (DFIs) operating across Africa use interest rate swaps both for their own balance sheet management and as part of the financing structures they offer to African borrowers.

The African Development Bank (AfDB), Development Bank of Southern Africa (DBSA), and other pan-African DFIs raise funds in international capital markets — often at floating rates linked to SOFR or EURIBOR — then lend those funds to African governments and corporates at fixed rates. Interest rate swaps convert the DFIs’ floating-rate funding into fixed-rate assets that match their lending books.

The World Bank’s International Finance Corporation (IFC) has been particularly active in using interest rate swaps to structure local-currency lending to African businesses, using swap markets to convert its dollar- or euro-denominated funding into local-currency fixed-rate loans that African borrowers can service in their domestic currency.

JSE-Listed Interest Rate Derivatives — The Exchange-Traded Complement

Beyond the OTC interest rate swap market, the JSE offers exchange-traded interest rate derivatives that provide a regulated, centrally cleared complement to OTC swaps.

JIBAR Futures (STIR) are Short-Term Interest Rate Futures Contracts. The underlying instrument is the three-month Johannesburg Interbank Average Rate (JIBAR) rate. JIBAR is used as the barometer of short-term interest rate movements in South African financial markets. JIBAR Futures are an efficient way to obtain exposure to the South African interest rate markets. When investors expect interest rates to move up, they can sell STIRs. When they expect rates to move down, they can buy STIRs. The instrument can be used by investors seeking to enhance the long-term performance of a portfolio of assets, hedgers seeking to protect an existing portfolio against adverse interest-rate movements, speculators hoping to profit from short-term interest-rate movements, or arbitrageurs.

JSE interest rate futures — including bond futures on South African government bonds — are used by a similar but slightly different set of participants compared to OTC interest rate swaps:

• Retail and active traders who want short-term interest rate exposure without the credit requirements of OTC swaps
• Asset managers managing portfolio duration efficiently and cheaply
• Arbitrageurs exploiting pricing differences between exchange-traded futures and OTC swap rates
• Banks use futures to hedge the market risk on their OTC swap books

The JIBAR Transition — What It Means for Interest Rate Swap Users

The cessation of JIBAR at the end of 2026 is the most important structural event in South Africa’s interest rate derivatives market in decades. Every participant with a JIBAR-linked interest rate swap must take action. Financial institutions are required to cease originating new JIBAR-linked products by 1 May 2026. For the bond market, this creates a dual challenge: ensuring new issuances reference ZARONIA and addressing the significant stock of outstanding JIBAR-linked bonds and derivatives that must be actively amended or rely on a legislative backstop

What this means for different participant types:

Corporate borrowers with JIBAR-linked swaps: Must work with their bank to amend existing swap documentation to reference ZARONIA, including agreement on the Credit Adjustment Spread (CAS) that compensates for the structural difference between JIBAR and ZARONIA.

Pension funds with long-dated JIBAR receiver swaps: The transition is particularly complex for long-dated positions — a 20-year swap entered in 2015 that references JIBAR for its entire term must be transitioned to ZARONIA with an appropriate CAS to preserve the economic equivalence of the original hedge.

Asset managers: Must ensure that their bond funds and swap books are transitioned in a coordinated way — transitioning bond holdings to ZARONIA while simultaneously transitioning the swap hedges on those bonds.

SARB’s approach leverages the International Swaps and Derivatives Association (ISDA) methodology. ISDA has provided the MPG with support and included the JIBAR fallback methodology in the April 2025 Benchmark Module to the ISDA 2021 Fallbacks Protocol, with ZARONIA as the replacement rate, and created a JIBAR fallback protocol.

Conclusion

Interest rate swaps are the largest and most structurally important OTC derivatives market in Africa. While invisible to retail investors and rarely discussed outside specialist finance circles, interest rate swaps are working continuously — helping South African banks manage their balance sheets, enabling property companies to forecast their borrowing costs with certainty, protecting pension funds from the devastating impact of falling interest rates on their liabilities, and allowing asset managers to actively manage portfolio duration and yield curve exposure.

Interest rate swaps are commonly used by banks, corporations, and institutional investors. They aim to control borrowing costs and match asset-liability interest profiles more effectively.

The JIBAR-to-ZARONIA transition — with R38.9 trillion in derivatives exposures to be transitioned before the end of 2026 — is the defining challenge for South Africa’s interest rate derivatives market right now. Finance professionals and corporate treasury teams across South Africa need to understand this transition and take proactive steps to ensure their JIBAR-linked obligations are managed smoothly through it.

As Africa’s capital markets continue to develop and deepen, interest rate swap markets will grow in importance across the continent — providing the essential risk-management infrastructure that allows businesses, governments, and institutions to borrow and invest with confidence in an uncertain interest-rate environment.

Next in the series: “Who Uses Credit Derivatives 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. Derivatives trading involves significant risk of loss. Always conduct your own due diligence and consult a qualified financial advisor before entering into any derivatives transaction.