Davy Blommaert, head of diamond lending at Dubai-based National Bank of Fujairah (NBF) and a former executive of Antwerp Diamond Bank (ADB), took time out recently to speak to Rapaport News. Blommaert spoke about the diamond trade’s increasing risk profile, which has forced players such as ADB, Bank Leumi, and, just this month, Standard Chartered, to exit the industry, contributing to Dubai’s rise as a diamond center.
Rapaport News: How’s the diamond market at the moment?
Blommaert: I’m hoping 2016 will be better than 2015 but I don’t expect too much growth. The first quarter was good and the second quarter okay. We’ve seen difficulties in the diamond sector but we must also look at it in context of the global economy. Compared to other commodities, diamonds are doing okay.
The mining companies started to act responsibly in the fourth quarter of last year when the market demanded profitability from their rough. They reduced supply, prices were amended and profitability was restored at the beginning of 2016. There was also an opportunity to clear out some polished inventory last year since supply was limited in the final three months of 2015. There was some anxiety to get manufacturing going again in 2016 so we had a bit of a spike in rough buying, but the miners continue to act responsibly.
Rapaport News: Are you worried about a potential oversupply in the market?
Blommaert: The market is stable right now. It’s not like it was in the first quarter when everyone went a bit crazy as they resumed production. The second quarter is historically a slower period, but I think we’ve reached a delicate balance which can be sustained as long as the miners act responsibly and the market doesn’t buy rough at crazy prices.
Rapaport News: What role did the banks play in contributing to the increased supply of rough last year?
Blommaert: I think the specialized European banks have acted very responsibly. If a client buys rough and continually makes a loss, and we realize he’s reporting a turnover just to get bank finance, we will exit that client. It’s most likely he’s diverted funds to non-diamond related projects and that’s not someone we want to do business with.
Rapaport News: Is there an imbalance in the lending space whereby some banks are being responsible but others less so?
Blommaert: Of course we see imbalances. We try to maintain an open dialog with other banks to protect ourselves from mishaps. We do quarterly visits to India, for example, to understand the market. I’m a strong advocate for banks to employ industry specialists because it helps mitigate risk. Someone with ill intent will approach banks which have less knowledge about the industry as they feel there are more chances to defraud such organizations.
Rapaport News: Is there a lack of liquidity in the market?
Blommaert: I don’t think there’s a lack of liquidity because whatever [credit] is leaving the industry with ADB has been compensated by new entrants such as ourselves. ADB used to have facilities of $1.5 billion, of which $500 million has already been repaid so there’s still about $1 billion of current facilities which are outstanding. A shortage may arise when that exposure eventually goes out and is not fully replenished. To avoid that, we can only hope new banks enter the market. But they must do so in a responsible manner, applying the proper due diligence before lending.
Rapaport News: Has National Bank of Fujairah benefited from ADB’s departure?
Blommaert: It has given us an opportunity to cherry pick good clients looking for finance. We can only service Dubai based companies. When you are a global group, it is just a business call to decide if you do a trade out of Antwerp or your Dubai office. If you decide to do the trade via your Dubai office, then you can obtain trade finance from a local Dubai bank such as NBF.
Rapaport News: What is the state of bank financing in Dubai?
Blommaert: Currently there are three banks giving finance in Dubai. ABN Amro is the largest, we’re second and Emirates NDB is third. The combined bank credit in Dubai is about $1 billion. We’re relatively new and only sanctioned our first credit facility in June 2015. So, in a year, we’ve taken a substantial share of the market. With finance going out of the market in Belgium, we expect business to shift to Dubai, where finance is still available. As such, we expect levels of financing in Dubai to be on par with Belgium by 2020.
Rapaport News: Are ADB clients looking at Dubai as an option?
Blommaert: Antwerp is the capital of rough trading because it has the supply of goods and financing. Historically, rough came to Antwerp because of the city’s proximity to London where the De Beers sights were located. But since De Beers moved to Botswana in 2013, Dubai has become a more convenient destination than Antwerp.
Rough from other sources such as Angola and the Congo already comes to Dubai while ALROSA and De Beers rough is still going to Antwerp because the financing is available there. The moment the financing shifts to anywhere else, the rough will follow. I believe that shift is happening slowly.
Rapaport News: Do banks in Dubai have the same level of compliance scrutiny as their European counterparts?
Blommaert: Banks in Dubai are subject to the same compliance requirements as Western banks. I’d say we’re even more stringent in applying the rules than ADB was. We’re a non-specialized diamond bank which means our compliance department is extra careful about anything that is diamond related. We recognize the additional risk inherent in the diamonds business and mitigate it by doing all the extra due diligence required.
Rapaport News: What is the typical profile of your clients?
Blommaert: NBF is one of the largest gold bullion banks in the Middle East. We have existing gold and jewelry clients and I bring to the table rough traders, manufacturers and polished dealers. My main focus is on the rough traders. While there is no manufacturing in Dubai, the big Indian manufacturers all have buying offices here.
Rapaport News: How does the risk assessment differ for each type of business?
Blommaert: Each client is assessed according to its individual business model. There are clients that buy rough here and send everything to India for manufacturing and you have traders who just buy and sell on the market here. Then you have manufacturers who buy goods, sort them to take what they need and trade the rest. We make it a point to check the business model of each client and undertake a thorough risk assessment.
Rapaport News: How do interest rates compare among centers?
Blommaert: Interest rates depend on the individual risk profile and that’s because of the Basel regulations. As a bank, you have to allocate a percentage of capital depending on the risk profile. The higher the risk, the more capital the bank has to provide. The higher the capital the bank allocates, the higher the interest rate will be. So there isn’t an average.
We look for a good risk reward ratio because we want the business to be sustainable. I don’t want to be in a business where I have one bad loan that wipes out our entire profit for the year. In recent years, people have been too accustomed to extremely low interest rates so when they come to Dubai, where rates are a bit higher, it’s a little difficult to adjust.
Rapaport News: How do you see Dubai developing in the next few years?
Blommaert: We’re focused on the rough business. That’s where the scale and opportunity lies and that’s where I’m seeing a shift in business from Antwerp. Just a few years ago, there was nothing in Dubai and now we have an active center. We’re not in a race with other centers but I do see businesses coming here and an opportunity for growth.