Report: Banks need fair credit policy

Small- and medium-sized businesses account for 50% of the nation's gross domestic product but receive only 23% of all bank credit.

The Industry, Trade and Labor Ministry wants legislative reforms to enforce a fair bank-credit policy to help small- and medium-sized businesses. It believes the move will support job creation and boost economic growth. "Today 71 percent of the credit volume in Israel is distributed to 1% of borrowers," according to Zvia Dori, director of the ministry's Domestic Commerce Department. "This data highlights the inequality inherent in local lending distribution." At a meeting this week, the US-based Milken Institute, a publicly supported economic think tank, presented a fair credit policy report for Israel to the Industry, Trade and Labor Ministry and representatives from the Finance Ministry, the Knesset Finance Committee and the Bank of Israel. "The combination of bank concentration and high banking fees in Israel leads to a relatively high cost of borrowing and high concentration of lending to the largest bank customers," Prof. Glenn Yago, director of capital studies at the Milken Institute and editor of the report, told The Jerusalem Post this week. "Maximizing capital access to small- and medium-sized businesses and enabling an equal geographical distribution of lending could assist financing into projects in the periphery and distressed communities, thereby creating more jobs to help close social gaps and sustain sufficient rates of economic growth." According to the report, small- and medium-sized businesses represent 96% of all local businesses, which account for 50% of the nation's gross domestic product and employ 60% of all private-sector workers. But this important engine of growth receives only 23% of all bank credit, according to the report. In addition, when small- and medium-sized businesses do receive credit, their costs are 2.8% higher than the rest of the business sector. The report examines the US Community Reinvestment Act, which was enacted in 1977 in response to discrimination in lending. Similar legislation in Israel would enhance fair credit access and encourage a more equal demographic, socioeconomic and geographic lending distribution, according to the report. "There is a problem of transparency in the local banking system," Yago said, "as banks are not required to provide loan distribution disclosure, and therefore it is very difficult to measure and monitor lending discrimination." The report recommends legislative changes to ensure that the banks would provide loan distribution disclosure and accountability. The banks would submit an annual report to the bank regulator including regional information on the number, type and purpose of loans and their sums, and the number of loans approved and rejected. The data would enable analysis of the availability of banking services to communities of limited means and follow-up on advances made in combating credit discrimination. "The loan test examining relative loan composition, distribution and performance could become part of the banks' strategy as a yardstick rewarding those banks that best respond to the credit needs of the community," Yago said. The report also recommends the adoption of tax incentives similar to those introduced in the US and the UK to ease credit problems and encourage investment in low-income areas. "Sticks as regulatory requirements, and carrots as tax incentives," Yago said. "Tax credits similar to the British model would give community development, urban revival and fair credit a boost, and encourage future economic growth contributing to Israeli society and the commercial environment within which the banks and other financial institutions operate." Over the coming months, the recommendations of the report will be examined by a special committee established by the Ariav Committee, which was set up to modernize the local financial market and boost efficiency.