A Bank Hapoalim branch in Tel Aviv.
(photo credit: REUTERS)
Israel’s banking system in its current set up is not equipped to make credit available to poor and underserved populations, according to a study by the Milken Institute.
“Israel’s existing banks will not solve the problems of financial exclusion,” the report on increasing capital to underserved markets said.
About a fifth of Israelis are poor, and have trouble obtaining credit through loans or building up good credit through savings accounts.
Worse, some 40 percent to 50% of Israelis live in “asset poverty,” meaning they don’t have enough available assets to cover three months of basic needs.
“They navigate a world of financial exclusion, often paying dearly for the ‘informal’ credit options that remain open to them. Theirs is a precarious subsistence that they pass on to their children,” the report said.
Just a fifth of bank loans go to small businesses. The government could provide these smaller banks with partial deposit insurance to fend off fears that people would lose their savings in a bust.
The report recommended several solutions that would require financial legislation and reregulation to help Israel’s “under-banked” population.
One was increasing small, community- based savings institutions, such as credit unions and community banks, which could eventually scale up and grow. These models are more focused on their communities than traditional commercial banks.
Another was to promote savings accounts by advancing special accounts for kids in low-income families, and possibly incentivizing them with matching savings from the state of philanthropy.
“These new financial institutions will target a previously unserved market, and the demand in this market must be allowed to ‘pull’ the innovation of new and appropriate services. Eventually, these services could include savings, credit and financial services geared to increase the financial capacity of the customers,” the report said.
It applauded the Bank of Israel and Economy, Finance and Welfare and Social Services ministries, for moving forward in the right direction. For example, the central bank set forth draft guidelines for encouraging credit unions, and one, Ofek, is already raising capital and attracting members.