The Bank of International Settlements is located in Basel, Switzerland and is "an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks… In the 1970s and 1980s, the focus was on managing cross-border capital flows following the oil crises and the international debt crisis. The 1970s crisis also brought the issue of regulatory supervision of internationally active banks to the fore, resulting in the 1988 Basel Capital Accord and its "Basel II " revision of 2001-06. More recently the issue of financial stability in the wake of economic integration and globalisation, as highlighted by the 1997 Asian crisis, has received a lot of attention." (Quote from www.bis.org)

In 1988, the first Basel Capital Accord set minimum capital or equity requirements for banks, which in turn set capital requirements for their customers. The Basel II Framework promotes a more forward-looking approach to capital supervision, one that encourages banks to identify the risks they may face. It means that they have to match the return on equity to their customers' risk profiles.

But what does this mean for diamond and jewellery companies? Higher rates of interest and higher equity requirements.

Professor Bart Baesens of the Faculty of Economics and Applied Economics at the Catholic University of Leuven, Belgium, and who lectures on Basel II comments "Basel II is forcing not only banks, but also companies, to understand and identify all of their risks and manage them more effectively. This will mean ensuring sufficient equity to cushion them against adverse conditions"

What most diamond companies do not realise is that in practice, besides banks requiring more equity from their 'risky' customers, they may also charge them higher rates of interest. And, Basel II is not local to Belgium, it affects banks in all jurisdictions, although the timetable to implement it may vary.

But as one senior Indian banker advises, "customers everywhere cannot underestimate the importance of strengthening their balance sheets today, before they close  2007."

Under Basel II, banks will no longer be able to rely on personal guarantees backed only by a phone call to Geneva or on subordinated supplier credit from goods purchased from a Bahamas company in 1995. As the central banks will be responsible for supervising individual banks and inspecting their Basel II procedures, lunch with the branch manager will not be enough to 'sort out the problem.'

Fortunately, Diamond Finance is proud to announce the launch of a Basel II package developed by bankers and diamond CFOs. This is a combination of software and consulting aimed at diamond companies with credit lines. CFO Plus will be offering services to diamond and jewellery companies in all of the major diamond centres.