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The Antwerp Diamond Bank and the Crisis of Diamond Governance

22 december 2014

Affordable access to credit has often been challenging for small enterprises in Europe, but the problem of financing has risen to an emergency level in recent history. Diamond traders are particularly exposed to the discrepancy between the demand and supply of credit caused by the economic crisis.

Due to its nature of transaction-based business, the diamond industry relies heavily on banking institutes. Across the past century, several large banking groups have gone as far as creating specific branches to accommodate the peculiar necessities of diamond companies.

Today though, the industry is entangled in a dangerous credit crunch. Specialised credit institutes are curbing their activity dramatically. This trend is particularly visible inside the European Union, where financing policies have become particularly strict. The most illustrious victim of this situation is of course the Antwerp Diamond Bank (ADB), second largest diamond bank in the world, which closing for business after 80 years of activity.

Europe tightens its grip on financing

When at the end of the last decade numerous banks had to ask for financial support by national governments to fight the effects of the economic crisis, the European Commission forced them to comply with tight regulations in exchange. In particular, institutes receiving state money were pressured to implement a divestment program of all non-core activities, with the aim of containing losses and limiting future risks.

In 2009, the Belgian national executive, together with the Flemish local government, launched a €3.5 billion bailout of KBC. Accordingly to its policy, the European Commission requested KBC to proceed with the sale of some of its subsidiary, ADB included. Selling the ADB would have helped KBC to reduce its exposure and obtain fresh resources to repay the state loan.

In December 2013, KBC announced to have found a potential buyer for the ADB in China. Yinren Group, a diversified enterprise group active in real estate developing and with a growing interest in diamond financing, had agreed on the terms of an acquisition plan. Under the agreement, KBC was supposed to take care of all high-risk and non-performing loans in its portfolio. In return, Yinren guaranteed that ADB’s activity would have “gone forward, securing the future of its staff and ensuring that quality service will continue to be provided to its customers”, as declared by Johan Thijs, CEO of KBC Group.

The agreement was short-lived. This autumn ADB released a press statement declaring that the sale could not be completed, and that as a consequence KBC was proceeding “to run down the loan portfolio and activities of ADB in a gradual and orderly manner”. In other words, ADB began to close down for good.

KBC reportedly refused to go into details on why the operation could not be successfully completed, which left the door opened to speculation from both press and operators in the diamond industry.

The most likely explanation is that Yinren group was not able to convince the European Banking Authority into guaranteeing regulatory approval for the acquisition of ADB. This is not surprising, as Yinren has no experience in banking and would have never been able to comply with strict EU regulations without large and extensive reforms.

Industry not attracting investments

Regardless the reason that caused Yinren to pull out, the fact that ADB –a bank with such a long history and reputation– could stay on sale for 5 years straight, at extremely favourable conditions, and receive only such an unlikely offer from China is a clear symptom of a serious disease: diamonds are not attractive for banking institutes anymore.

Part of the reason lays in the structural limitations of the diamond market which, being high-value and transaction-based, is considered inherently risky. Large European banks have been basically forced out of this kind of investments due to tighter financing regulations. Apart from ADB there are other examples, such as ABN AMRO’s Diamond and Jewellery group, the largest diamond bank in the world, which is awarding less loans and at tougher conditions than in the past.

But old banks pulling out are not the worst part of the story. Even more worrying is the fact that, while they are retreating from the diamond industry, nobody is coming in to fill the gap. The ability to attract new investors is an indicator of good health in a market, and the diamond one is obviously lacking of it.

The problem is that investors seem afraid of the diamond industry, which from the outside appears often too opaque and secretive. Moreover, the industry seems incapable of dealing with growing criticism for its lack of transparency. Allegations such as those published in 2013 by the Financial Action Task Force on the vulnerability of the diamond pipeline to money laundry schemes and terrorism financing should not have been dismissed with a shrug by the industry, but rather dealt with resolutely.

Diamonds need an Antwerp 

The city of Antwerp is definitely bearing the brunt of this credit crisis. According to the Antwerp World Diamond Centre, around one-third of the city’s diamond activities are financed by the ADB. Without its most important bank, Antwerp will not be able to maintain its previous trading levels, and its role as diamond centre is going to diminish vis-à-vis its competitors.

One might be tempted to think that what is happening is a form of natural selection: while the old diamond markets shrink, new markets are rising, and for every activity that is going out of business in Europe, another one will be opening in the roaring East.

But describing Antwerp’s decline in mere economic terms misses the point on what the city of diamonds really means for the industry. Antwerp is not only a diamond hub, but also most importantly a centre for global diamond governance.

The atomisation of the diamond industry, which seems to be an irreversible trend in this decade, is resulting in a situation where manufacturers are more scattered and alone than ever. The more they are apart, the less they will be able to coordinate their efforts and protect production and price.

Recent events have proven that without proper coordination, manufacturers are less effective in defending their interest. Today they are squeezed between producers who want to keep rough prices up and a consumer market that, due to lack of an effective diamond marketing strategy, is reorienting itself towards luxuries other than diamonds. The worrying phenomenon of the “commoditisation” of diamonds, and the problem of keeping prices at the level of other luxury goods has its roots exactly in this lack of coordination.

Marketing studies, advertising campaigns, training programs, they all require a high degree of financing and coordination. So far, the most serious efforts in this sense have been led by organisations based in Antwerp, such as the World Federation of Diamond Bourses or the Antwerp World Diamond Centre (just to mention the most prominent). If these institutions weaken down, and new ones are not created to support them in their policies, the diamond sector as a whole is going to suffer.

While money, goods and markets are free to move, the diamond industry will always need an Antwerp.

Matteo Butera, Rough&Polished