In a move that regulators believe will increase competition in the banking sector and help consumers, Israel’s first credit union Ofek is attempting to raise NIS 90 million in capital for what it calls a “social bank.”
“The introduction of a new player that operates differently will shake things up. Banks won’t be able to ignore it,” Ofek Banking Services director Ira Friedman said to The Jerusalem Post on Sunday.
Ofek has set itself a goal of nine months to attract 30,000 “founding members” for a bank, who will have to put a minimum of NIS 3,000 each for a slot. Unlike traditional banks, credit unions are owned by their customers, who own equity in the bank and elect its board.
In July 2012, the Bank of Israel issued a report recommending the introduction of credit unions and Internet banks to compete with Israel’s highly-concentrated bank sector.
“Such unions are socially oriented and consider it their purpose to see to their members’ well-being. Credit unions invest their earnings in the improvement of services for members in order to assure members’ well-being and the unions’ own continued growth,” an earlier BoI study found.
The institutional interest is aligned with its members, a credit union does not face conflicts of interest between its board and its customers.
“Because credit is so profitable for banks, they push it even though people don’t need it,” Friedman said.
Israel, she continued, is an anomaly for its lack of credit unions; half of Canada’s bank accounts are with credit unions, and nearly a third of Americans are credit union members as well. But figuring out how to make it work in Israel has been a group effort.
With the exception of the three staff who run its call center, Ofek is relying on professional volunteers to put together its structures.
Friedman joined up with other finance veterans including Doron Shorer, who sat on the Brodet Committee for Structural Changes in the Capital Market, to move forward with the project.
Teams of former bank executives, financial experts, economics students and ordinary people have gathered to build the credit union’s foundational structures, starting like so many Israeli start-ups in people’s homes and coffee shops, but now it has moved to a dedicated space in Petah Tikva.
“I’m blown away by the ability of people to give of themselves and volunteer,” said Friedman.
As a new entrant to the field, it faces many challenges.
For one, there is still no legislation codifying the credit union into law, so Ofek is relying on US-based rules as a guide. For now, it will not be able to pay dividends to its members, or risk falling under Israel Securities Authority regulation.
In order to cut costs and increase efficiency, Ofek is considering creative solutions – from pop-up branches to mail and Internet banking – to staying accessible without establishing numerous offices across the country. It must convince customers unfamiliar with it, and who don’t mind that it offers circumscribed services, to make their initial deposits. Fortunately, unlike other financial institutions, credit unions can accept donations to help build up their capital base.
“Donors don’t get any influence or anything back, other than helping the bank give credit,” Friedman said, but donors who identify with the more social nature of the bank happily give anyway.
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