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New lending will have to be fully asset-backed with true provenance and transparency in the flow of goods and monies

21 january 2019

erik_jens_xx.pngAfter handling Gem & Jewellery (G&J) industry financing as a banker for many years, Erik A Jens sees an opportunity now that numerous banks are withdrawing from the sector. He is exploring opportunities to establishing a financing firm focusing on ‘financial solutions’ for the art and jewellery sector.

However, Erik Jens firmly believes that financing should be asset-based. He also believes that solutions lie in technology, not like the current practice on receivables on paper only. This idea emerged into the initiative around starting up a Fintech company called LuxuryFintech.

Jens, as the former Global Head - Diamond & Jewellery Clients - AMRO BANK N V, comes armed with professional experience in banking, financing and investments. He has specialized in private wealth management solutions, investments in hedge funds, private equity and real estate industry. He had also served as director/advisor to various hedge funds and private equity funds at Fortis, which later became ABN AMRO.

Erik Jens has also held various senior executive positions at Fortis MeesPierson in banking and investment services in the Netherlands, Belgium, Switzerland, Netherlands Antilles, Ireland, United Kingdom, USA and Asia.

Here, in an interview with Rough & Polished, Jens speaks on the current challenges for the global G&J industry and also suggests solutions for the finance/liquidity issues faced by the troubled industry.

At present, industry members claim there is a financial crisis with banks pulling out of the G&J industry. It seems like a more serious situation than ever before, with debt defaults and liquidity issues plaguing the growth of the industry. Can you comment on the current status of the global G&J industry?

First of all, I do not think there is an overall financial crisis in the G&J industry. Companies with a good strategy, growth plan and with a more corporate identity have access to liquidity in general, not only the larger companies but also the relatively smaller ones. Having said so, there are certain markets where there is temporarily lack of liquidity… that’s true.

But I believe that helps in the quest of industry stakeholders towards improved bankability. Like in any other sector, such as real estate and high tech in the past, the ride for free money is over, and the bubble of over financing is coming to an end. Very healthy. Secondly, the other trend I see that the newcomers in financing the G&J industry are only writing tickets with larger companies for sizeable amounts, like $150mln plus. So there is a challenge for the middle and smaller market, the SME type of companies. Not for finance but also the challenge for opening bank accounts for payments for instance due to enhanced compliance regulations. And sadly enough, even great companies, complying with all regulations, get refused as the sector is seen by banks and regulators as increased/high risk. So why bother to allocate scarce balance sheet money is often the question with those institutions. All and all the wording around the financial crisis in the G&J sector needs quite some nuances.

Considering the current environment, is it possible for bankers and pipeline players to explore means to jointly manage the diamond industry's evolving economic/regulatory condition to secure its continued growth? Your thoughts?

Great question, and absolutely a yes. This is an industry which is known for enormous efforts in self-regulation. Look for instance at KP process since 2003. Is it perfect? No, but the basis to build on further. Same for all the guidelines from institutions like CIBJO, RJC, WDC, WFDB as an example and of course local trade organizations like DMCC, AWDC, GJEPC, USJC etc. Let’s not forget all the efforts in the sector around blockchain, think of Tracr, TrustChain and the recent communications from Gubelin, GIA and others.

There is no other industry working so hard on setting standards for creating more transparency and self-regulation. A close dialogue with UN, OECD and the NGO’s is key as well. I know banks and financial institutions look at those efforts as well and take them into consideration in their strategic trade-offs and risk and credit management processes. Transparency and innovation are equal to bankability and sustainability.

MyKYCBank platform of the Gem & Jewellery Export Promotion Council of India (GJEPC) is being recognized across the world for KYC. Recently, the Dubai Diamond Exchange joined MyKYCBank. What’s your opinion about this platform?

As I mentioned these are great efforts and unprecedented actually. I believe AWDC adapted MyKYCBank as well, a while ago as early adopters. So, more good news! Having said so, yes, it’s there, but is it ‘lived through’ thus accepted and adapted by market participants? What is the model to make sure there is compliance, thus filtering and monitoring, and in worse case name and shame and exclude and kick out abusers and fraudulent actors in the industry? The legal framework for that is very complicated.

It is said that of late more new lenders have stepped in to replace banks that pulled out of the diamond business. While banks are claiming that they are scrutinizing diamond industry borrowers much more carefully now, do you think private financial companies/institutions are welcome into the fray? What’s your take?

Yes for sure, I already mentioned that there are new players. Please know though that those players, financial institutions, come mainly from the US. Only interested in big tickets, so again what about the typical SME players? New financial investors are purely looking for yield and the G&J sector offers that now for sure, but other sectors will soon do as well if the rise in interest rates continues. After all, ‘high yield’ becomes a relative principle by then. Plus, I wonder whether those investors are willing to look at the sector long-term like some diamond banks did, or just being opportunistic now, with all respect through.

At various platforms across the world, topics related to financing challenges being faced by the global diamond trade were discussed over the years and alternative financing /forms of credit were looked at as an option. Any progress in this area?

Indeed, but every time it’s the same old story, the G&J sector blames the bank and vice versa. We need to break that impasse. Modern technology like blockchain, for instance, offers great opportunities in that direction. Also, I believe in for instance formalizing with the help of a technology platform the peer-to-peer lending which is current practice in the industry. So again, asset-based financing like in other industries. Thinking out of the box, getting ready for the new age I would say, and take action rather than just talking about problems in the many industry congresses.

As a former banker with experience as a global head servicing diamond and jewellery clients and now exploring opportunities with a fintech, how differently do you think financial companies will service the G&J industry from the present lending Banks?

The main difference will be the fact that new lending will have to be fully asset-backed with true provenance and transparency in the flow of goods and monies and in the underlying players and their counterpart. Make the system waterproof and modern. So, no chances and risks on fake invoices, no round-tripping, returning of goods without disclosure etc. Technology will be an enabler, but culture is even more important… doing the right things right. In such a way inventory finance, for instance, is something which could bring leverage to basically dead money locked up in the safe. Quick digital insights, quick shipping, quick invoicing is all possible. Same for rough, with blockchain tracking finance opens up. Is blockchain perfect? No, it’s a movement, a process, but a strong basis for changing the financing structure of the sector.

Eventually, with the onus being on diamantaires, it is important for them to run their businesses in full compliance with regulatory requirements and improve their risk profile to access finance. A professional (corporatized) and transparent industry would strengthen its bankability. Can trade organisations like diamond bourses/exchanges give a helping hand on this aspect to the industry players? Your comments?

For sure and as I said their efforts are great. However, efforts are one thing, enforcing another. New rules and regulations don’t change an industry, a new culture does. Plus, I do think there is a lot of polarization. Organizations should be willing to cooperate way better and step over certain individual egos. The left-hand doesn’t know what the right hand does, so very confusing towards regulators, NGO’s and organizations like OECD and UN.

We, as an industry, do not communicate with one voice but send mixed signals. We also need new ‘young blood’, the new generation in the industry to change the culture and make it happen. I suggested for instance to map all industry efforts and initiatives for a more sustainable and transparent future against the 17 Sustainable Development Goals of the United Nations, and their underlying criteria. Why not just do that? Perhaps even with Artificial Intelligence tools like an IBM Watson for impartial analyses? I’m sure everybody will be astounded with what is going on in that direction in the industry. Unique, its incomparable to any other industry. Also, let’s compare indeed what other high/increased risk industries are doing, for instance, leather, apparel, etc.

Again, as a former Banker, what are the loopholes that companies misuse to build up their bank credit? How do you think this should be tackled by the lending banks? Are the collaterals enough to keep control of such companies who fail to service their debts and default on the loans?

Well, we have seen in the newspapers recently what went wrong again. Let’s also not forget there is fraud and misconduct in every sector so let's look forward and not backwards. For reason, I don’t know the G&J sector is always highlighted in that context and the industry is communicating about the problems externally often, rather than the solutions. That’s frustrating the necessary change of culture. The straight answer is two-fold: technology backed asset-backed finance products plus a cultural change and desire to innovate, be sustainable and transparent… thus becoming an industry sector like all others.

Wrapping up, can you give more details about your company LuxuryFintech and its activities? Do you service across industries in the luxury sector? What’s the future plan for LuxuryFintech going forward?

I have a dream to develop a Fintech company focused on the luxury sector, art and jewellery in particular. LuxuryFintech is a concept looking at developing a unique opportunity to enter a scalable fintech business in the art and jewellery industry with technology applications creating asset-backed finance solutions.

As I mentioned there is a lack of dedicated financial institutions in the jewellery industry and we see exits of large financiers as well. Hence, and I can’t repeat myself enough, technology-based finance concepts will create new opportunities for fully asset-backed loans, including inventory and receivables finance as well as innovative peer-to-peer lending with potentially digital currency solutions.

The recent introduction of blockchain applications in the jewellery industry forms a good basis to develop transparent financing solutions while reducing credit and reputation risk. Similar new products can be developed for the art industry for bridge loans for auctions, guarantees, and digital currencies, as jewellery and art industry are intertwined and have similar culture and connections. From all the positive conversations I had in the past with relevant parties, I expect buy-in from crucial jewellery industry stakeholders and art industry insiders for such an initiative. Some Asian and European locations offer good conditions for initiatives like this with attractive and competitive offerings economically and financially. But as I said, this is a concept and in an early development stage. Financiers are interested though and its time now to put all pieces of the puzzle together.

Aruna Gaitonde, Editor-in-Chief of the Asian Bureau, Rough & Polished