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Banking on Beneficiation
 

Beneficiation for Beginners – Part 2

One of the main professed aims of beneficiation is to create a sustainable and long term diamond manufacturing industry which will in turn lead to the establishment of peripheral enterprises and, hopefully, fully fledged diamond trading.

A basic requirement which underpins any such aspirations is finance.  In our industry, finance normally means bank finance, very few companies have gone for equity funding.  The following study shows that facilitating financial fluidity in a country like Botswana is not so simple.

Banking and Finance

As many readers will be aware, diamond manufacturing is a cash intensive industry because of the long time from purchasing the rough goods,

      cash up-front

      polishing – two months

      certification – two months

      selling – one month minimum

      receiving payment from the customers at least three months. 

This is, on average, an eight month cycle which requires assistance from banks.  In Botswana, there are three main banks:

      Fist National Bank of Botswana - FNB

      Standard Chartered

      Barclays

None of these banks have the in-house diamond expertise, which is a proficiency in itself.  The obvious solution would be to encourage the Belgian, Israeli and Indian diamond banks to come to Botswana – not an easy proposition, and is one that can take years to materialise.  At the same time, the enough banks have to be enticed to come to Botswana to create competition on rates and bank fees. 

On the basis that the industry is carrying $13bn of bank debt, a potential market of $400m to be split between a few banks, is not very interesting.

And, the total amount of financing required for the diamond manufacturing sector in 2009 could be as much as $400m or 4% of total Botswana’s GDP, or the total current loan book of FNB[1].  This would constitute a 45% increase in total Botswana lending[2].  To this should be added a further $30m to $50m for factories and fixed assets.  And this is before providing financing for the peripheral enterprises and other infrastructural projects to support beneficiation.

Injecting such large sums of money without a suitable macro-economic policy can wreak havoc on a small economy like Botswana’s.

The diamond banking challenge for Botswana is:

      The ensure sufficient supply of credit and liquidity for the industry;

      Create a competitive environment with three or four diamond banks;

      Develop fiscal and macro-economic policies to

On the other hand, if the banking infrastructure is not in place, then the local industry will be dependent on long term financing brought in from outside the country, which is less beneficial to the local economy and less suited to the industry’s needs.  And, the local diamond industry will be restricted in its ability to grow.

An alternative solution would be to go back 73 years.  Then De Beers founded the Antwerp Diamond Bank together with three other banks.  History repeats itself?

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Copyright © 2008 Diamond Finance - Last modified: 11/23/08