Jewellers seek gold pawning facility

Jewellers in Dubai feel the time has come to revisit the landmark events of September 1999, when prominent bullion banks in the emirate began taking jewellery as collateral to save jewellers from the adverse impact of a steep 20 per cent rise in gold prices within days.

With prices recording even steeper gains in 2009 (23.4 per cent annually) and 2010, they now suggest that a step slightly more revolutionary may unlock a huge loan market.

Bullion traders and jewellers in the city are calling for the introduction of a form of pawn brokerage in the emirate that has existed in India for years. In brief, it involves depositing gold in any form, including jewellery, as collateral for a loan. They say that such a move could unlock the monetary potential of 250 to 300 tonnes of gold that exist in the emirate at any point in time.

At least 50 per cent of this gold is thought to exist in the form of jewellery.

"Such a facility has huge prospects for Dubai. Jewellers, who have not been able to sell enough jewellery, could pledge their gold as collateral and use the money they raise for expansion," said Hitesh Dhakan, Director of Dhakan Jewellers, a chain with several outlets in Dubai.

"The decision by bullion traders [banks] in Dubai years earlier to accept jewellery as collateral to prevent jewellers from margin calls had come as a great relief. The idea of a bank or a financial institution accepting gold as collateral for loans will also have a good impact," said Sanjay Jain of Al Mowaiji Jewellers, a Deira-based wholesale dealer in 21- and 22-carat jewellery.

"Such a scheme will bring benefits to jewellers, but then there are several aspects of it that need to be studied in detail," said Anwar Habib, CEO of Al Bogari Islamic Gold.

In India, where this gold pawning practice started, the continuing boom in gold prices has seen the years-old pawn brokerage companies revamp themselves as dealers of an "Indian version of gold ETFs". Of late, television channels in India have seen a steady stream of advertisements that call upon individuals to take "loans in just five minutes" on depositing gold, at interest rates beginning from just one per cent a month. The facility also makes it easier to extract gold as a scrap, of which India is the world's most important source.

Some of the largest bullion traders in the region feel that such a scheme could work well in Dubai as well, considering the emirate is the largest re-exporter of gold in the world.

"Such a facility in Dubai could unlock a trade that seemingly has a tremendous potential. Dubai is the largest re-exporter of gold in the world. A large volume of this gold exists in the form of jewellery," said Jeffrey Rhodes, CEO of Dubai-based INTL Commodities.

"It certainly has tremendous potential. It remains to be seen as to who taps this opportunity first – the commercial banks or the financial institutions," said a top Dubai-based banker on condition of anonymity.

As per latest available figures, Dubai saw gold trade worth $8.33 billion (Dh30.57bn) in the first quarter of 2010. While the total import of gold into Dubai in the first three months of this year stood at 160 tonnes, the total exports stood at 90 tonnes. In 2009, Dubai's gold trade was worth $29.32bn, with 576 tonnes of gold imports and 403 tonnes of exports.

Jewellers and financial institutions are clueless about whether such a business will require permission from the Central Bank. In a different form, such a practice has continued in Dubai at an institutional level. Dubai Gold Receipt (DGR), an electronic receipt system operated by the Dubai Multi Commodities Centre, has enabled companies to secure loans worth millions of dollars.

In India the modus operandi of such pawn brokerage involves loaning out less than the worth of jewellery deposited at interest rates lower than the expected percentage rise in gold prices.

In several cases, the gold is auctioned when customers fail to return the amount with interest, leading to huge returns for the lender or financial institution concerned.

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