Study: Change system to enable microcredit

By adjusting specific laws, gov't could add NIS 3b. to GDP and increase social equity.

By adjusting specific laws and policies to allow for non-bank lenders to provide very small seed-loans to potential entrepreneurs, the government could add NIS 3 billion to the GDP and increase social equity, a recent study found. "Microenterprise is one important means for maximizing individual human capital and improving the financial condition of the weakest members of society," asserted Koret Fund research fellow Hanan Nayberg in a study circulated at the fund's recent conference in Akko on economic development. "Encouraging entrepreneurship enables individuals to help themselves fulfill their potential and contribute to Israel's economic expansion." According to Nayberg, if every person wishing to open a micro business had a real opportunity to receive assistance, financing and business guidance, approximately 62,400 businesses could join the Israeli economy, each creating at least one employment position. Assuming the monthly turnover of each microenterprise is equivalent to minimum wage plus value-added tax (about NIS 4,000), the added business activity of these enterprises (and the related businesses) would lead to an increase in Israel's GDP by some NIS 3 billion," he found. A US study suggests that about 8 percent of the approximately 780,000 Israelis of prime working age (25-54) who were jobless or otherwise outside of the civilian work force (according to 2004 statistics) are potential entrepreneurs, Nayberg noted. However, he said, the support available for microenterprise in Israel is minimal relative to the demand within the potential target population. "If the banks themselves are unable or unwilling to supply financial services to weak population groups, other organizations should be allowed to do so." Among the primary obstacles to realizing the potential are a number of regulatory and legal limitations, such as threshold requirements that prevent the creation of small lenders. "In recent years, it has been the Bank of Israel's explicit policy to reduce the number of small banks in Israel and to encourage a consolidation process, resulting in the formation of several large banking groups. This policy reduces the likelihood that a banking license would be granted to an entity planning to engage in microcredit," said Nayberg. Another legal prohibition against granting credit and receiving deposits to over 30 people without a banking license effectively "precludes the potential operation of credit unions in Israel," he added. Additionally, a 1993 legislation that attempts to enable lending by non-banking organizations "by requiring contracts and proper disclosure of charges and interest, as well as setting a maximum cost of the credit," nonetheless fails to provide sufficient legal coverage for lending activity, Nayberg said. Any organization wishing to provide microcredit also would have difficulty raising the initial funding from banks wary of lending to an unproven body using an unfamiliar financial method that intends to pass the credit on to a population the banks themselves are unwilling to serve. "It is thus no surprise that organizations that work to provide assistance by granting loans in Israel do so through philanthropic capital and grants which they receive for that purpose," Nayberg commented. At the conference, Western Galilee College chairman Eival Giladi announced the creation of a NIS 250m. fund to develop and provide credit for small businesses in the Galilee, with the funding of the Koret Fund and the Portland Trust. Nissim Ben-David, senior economics lecturer at the college, said the fund would help potential entrepreneurs set up tourist accommodations and services, restaurants, auto repair garages and other small types of small business. "It is designated for both the Arab and Jewish sectors, but we are aware of the fact that in the Arab sector even very small amounts can make the difference. A woman can set up a toddler care service and then eight women are working," he said.