Aiming for a People’s Bank

An initiative is underway to transform the postal bank into a community development bank.

By ZIV HELLMAN
Israel Post 311 (photo credit: Marc Israel Sellem / The Jerusalem Post)
Israel Post 311
(photo credit: Marc Israel Sellem / The Jerusalem Post)
TZACHI AND NOA, A TELAVIV couple raising three children, both lost their jobs in a short space of time. They turned to living on their savings, but those ran out after a year. Banks refused them any credit and they were threatened with eviction from their home. Having nowhere else to turn, they borrowed money from dodgy loan sharks at exorbitant interest rates just to survive.
Rina, a single mother in Safed, spent most of the money she had buying the public-housing apartment in which she has lived most of her life. But when a pipe burst in the bathroom, she did not have the money to pay for its repair so the apartment suffered major damage.
What Rina, Tzachi and Noa have in common is that they have been shunned by the mainstream banking system, becoming what former deputy attorney-general Davida Lachman-Messer terms the “unbankables.” The three were featured in a slide-show presentation prepared by Yedid, an association for community empowerment, for a forum conducted in Jerusalem, in June, on the need for community development banking in Israel. The forum was attended by Communications Minister Moshe Kachlon.
“People can become unbankable in different ways,” explains Lachman-Messer, a lawyer who specializes in bankruptcy and corporate law at the Justice Ministry. “It may be because they do not have a regular income or assets, because they have a bad financial history record, or they may be small businesses or individuals who have run into economic difficulties and then find themselves on a downward slippery slope. Once someone has become unbankable that means no credit card, no checks, no loans, no savings accounts, no individual pension savings.”
In many countries, “unbankables” can turn to community credit unions and community development banks, established precisely to assist people who have fallen through the cracks of the mainstream commercial banking system. But community banking does not exist in Israel, to the consternation of organizations such as Yedid, devoted to enabling disadvantaged people to access what most people regard as self-evident.
An effort afoot could change this situation and establish the first community development bank in Israel – by forming a consortium to buy the Postal Bank, a relic from the nation’s earliest years, which the government wishes to sell off. The story behind this initiative brings together many different threads of the country’s economic history, from the old socialist ethos, to the push for privatizing government services, to the latest thinking on allying business, philanthropy, government, and social organizations for public goals.
TO SOME, COMBINING THE words “postal” and “bank” into one term may sound strange (although there was a now-defunct US Postal Savings System between 1911 and 1966). The idea of using the postal system for banking services, however, dates back to the 19th century, when many countries adopted it as an instant and cost-effective way to enable rural populations without regular access to banks in the cities an opportunity to open savings accounts and make money transfers to creditors.
Over time, as populations urbanized and commercial banks spread out beyond the major cities, postal banks run as government services found themselves increasingly unable to compete with the large banks. Postal banks are still going strong in some central European countries, as well as India and China, but in many countries they have either gone defunct or been privatized.
Israel’s postal bank has followed a similar trajectory, along with evolving attitudes towards the postal system and the role of government services in general. Following an old British example, postal delivery was originally a service directly run by the Transportation Ministry, handling letter delivery, parcels, telegrams and telephone service at a time when it was rare to find a telephone in a private home. In 1952, a new Postal Ministry was formed, with postal banking added to the services offered at mail branches.
By 1986, as then-current economic thinking called for a moving away from big government, the postal service was reformed as the Postal Authority, a non-profit entity separate from the civil service. After many years of operating losses, the Postal Authority was converted in 2006 into the Postal Company Ltd., a government-owned company with 7,000 employees that, although it is still a not-for-profit corporation, is run along corporate standards, not as a government-dependent entity.
The Israel Postal Bank is today incorporated as a subsidiary of the Israel Postal Company, with its financial services supervised by the government. Every one of the Postal Company’s 720 branches offers basic banking services, including the payment of bills and taxes, foreign currency exchange, and the holding of deposit accounts. Unlike commercial banks, the postal bank does not charge fees for its basic services. To date, the bank has not offered credit (although it recently signed an agreement to roll out Visa credit card offerings to depositors next year), which means that customers with postal bank checking accounts are forbidden from going into overdraft.
The postal bank does not really serve as competition for the commercial banks. Of those who do use its services, most do so to pay the occasional bill, to take advantage of its free service. Nevertheless, it has a significant number of customers with checking accounts – 400,000 – with account deposits totalling about 1 billion shekels ($262 million), translating into an average of a modest 2,500 shekels ($656) per account.
“The postal bank is a service window that is available to all the citizens,” says Lachman- Messer. “Unlike commercial banks, which hold only a fraction of the total deposits they are given with the rest turned into loans, the postal bank makes no loans. It invests deposits on its books in the most solid financial instruments, such as government bonds, and as such is considered almost as safe as a safety deposit box.
“As it is spread around the country in 720 branches, the postal bank is uniquely accessible to many who depend on it for their social security checks and small savings accounts,” continues Lachman-Messer. “Since it charges no fees, as opposed to the commercial banks, even wealthy law offices have discovered that it sometimes pays to hold money temporarily in a Postal Bank account for the savings on the fees. Because it is not a for-profit corporation designed to maximize dividends for the owners, it can allow itself to provide these services to the public.”
THE GOVERNMENT, HOWEVER, has for several years been contemplating privatizing the postal bank entirely by selling it to private investors, as it has done with other assets, such as Bezeq, the telephone company.
That prospect concerns social activists because “unbankables” often rely on the postal bank as a last resort for depositing checks, receiving social security benefits, and holding a checking account. A privatized postal bank might turn the unbankables away, just as the commercial banks have done.
“Suppose the postal bank is privatized and bought by profit-seeking investors,” says Lachman-Messer. “How will it make a profit? By leveraging loans and instituting a cost-cutting business plan, which means closing down unprofitable branches. And that will mean closing branches in the peripheral areas. Proponents of privatization tell me that this can be solved by regulation, but regulation can never really be effective if it operates against economic interest. If it does not make a clear profit, but is required by regulation, then eventually the state will have to subsidize the nonprofitable branches, in which case what is the point of privatization?
 “In Israel, a person who has bounced more than 10 checks becomes a ‘limited customer,’ and if the number of bounced checks passes 20, that individual can be blocked out of the banking system for two years or more. That means no checking account [in commercial banks] is available to them and no credit cards,” continues Lachman-Messer.
“Aside from the stigma, this is a major impediment to daily life. Try ordering Internet service or any of a number of products and services without a credit card or a bank account nowadays. The postal bank gives these people a place to save some money and cash a check. They can begin rebuilding a positive financial history.”
SOME FOUR YEARS AGO, RAN Melamed, deputy director for social policy and communication at Yedid, participated in an ad hoc meeting of social activists that was convened in order to discuss ways of preventing the state from privatizing the postal bank.
“Someone at the meeting said that perhaps the only way to save the bank would be for the social organizations to buy the bank in order to turn it into a social bank,” recalls Melamed. “That suggestion was not made seriously, but I thought it was an excellent idea to engineer a social-oriented purchase of the postal bank. Since then, I have been seeking a consortium that will be interested in buying the postal bank and turning it into Israel’s first credit union bank.”
Melamed has been putting in major efforts to make this vision come true. Buying the postal bank would have several advantages over creating a community bank from scratch, including the postal bank’s existing infrastructure and client base that would come with the purchase and the postal bank’s large number of branches – more than any commercial bank in the country.
The model that Melamed and other activists often look to is ShoreBank, the first community development bank in the United States, established in 1973. That bank, located in Chicago’s economically depressed south shore, came into being after community activists successfully petitioned a federal comptroller to stop the relocation of a bank that would have left the area bereft of banking services. The activists then purchased the bank themselves and turned it into an institution devoted to serving the local residents and spurring economic development in low-to- moderate income groups. In addition to taking deposits, the bank provides investment consulting to segments of the population that generally do not have access to financial advice.
The ShoreBank was also involved in the work conducted by Muhammad Yunus in establishing the groundbreaking Grameen Bank in Bangladesh, for which Yunus was awarded the Nobel Peace Prize in 2006. The ShoreBank has recently run into financial hard times, however, and is currently at risk of being declared insolvent.
Israeli activists also have their eyes on the United States Community Reinvestment Act, a federal law adopted in 1977 to ensure that banks and savings associations throughout the US work to meet the needs of all segments of the communities in which they are located, including low- and moderate-income neighborhoods. The act was passed after years of campaigning by activists to combat “redlining” discriminatory credit policies that banks adopted with respect to low-income areas.
“One of the many benefits of the passage of that act has been the collection of reliable information about the financial hurdles people face across the United States,” says Lachman- Messer. “In Israel we haven’t even got the most basic information on the unbankables – how many are there, what led to them becoming unbankable, what are the most effective ways of getting them back into the banking system.”
“These are our clients – the unbankables,” adds Sari Revkin, executive director of Yedid. “We have been working on getting people to be financially literate, to learn financial management, starting with lessons on how to live on a budget. We also teach children basic lessons in money management. We have seen cases in which people that were unemployed for a long time found themselves in deep debt after they started working because they did not know how to stick to a budget once they had money coming in.”
IF THE POSTAL BANK IS NOT SOLD to for-profit investors and, instead, is bought by a group intent on using its infrastructure for the benefit of low-to-moderate income groups, where will the money for the purchase come from? And how will the new bank be structured?
“There are several possibilities,” says Lachman-Messer. “Some of the shares can be bought and held by the public. Another option is to find philanthropic investors who are not seeking immediate, short-term returns on their investments, or value ‘social profits.’ There are new philosophies in the philanthropic community, going beyond traditional charitable giving, with emphases on supporting sustainable enterprises with elements of long-term investment.”
The general structure that is envisioned for the community-oriented bank is that of a credit union, which is operated by its own members, each of whom will also become a shareholder in the bank. No one seeking to open an account would be turned away, and credit would be readily available, with members of the credit union serving as guarantors for each other. The emphasis will be on meeting the local needs of members, such as financing for home purchase and needed home improvement. Every depositor will be required to save at least a minimal amount every month, and bank resources will be devoted to teaching members budget management and investment and economic principles.
Would a bank openly devoted to individuals from lower-to-moderate incomes, some of whom may have bad credit histories, not be saddled with a stigma? Would its checks always be accepted? Lachman-Messer responds, “If it becomes a bank with a sufficiently broad clientele, the bank will not, in general, bear a stigma. The main point is that the bank’s main focus should not be on giving dividends to shareholders, but that does not mean it cannot be financially successful. For example, it can be a platform for services – insurance companies, financial companies, credit suppliers, and pension brokers can make use of the unparalleled extent of the physical presence of a bank with branches in every post office to reach a broad customer base. It can serve as a base for microfinance.”
Although the initiative to convert the postal bank into a community development bank has been gaining momentum, Yedid and other activists are the first to admit it still has some way to go before becoming a reality. But according to Melamed, the Communications Ministry has been persuaded by activist lobbying to remove the privatization of the postal service from a proposed law before the Knesset. Instead, a bill is being prepared by the ministry to redefine the goals of the postal bank and to enable it to begin paying interest on deposits in order to encourage more people to place savings in postal bank accounts. The bill, however, is still in the early drafting stages.
“Interest in this idea has been growing, from both government officials and philanthropically- inclined business people,” says Melamed. “The consortium can bring together government, business, and the social organizations, all working together for a common goal.”