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Over June and July 2007, the Finance Ministry will be selling one- to three-month government bonds to compete with short-term deposits (pakams) offered by the banks.

The treasury will later expand its distribution system to include the post office, Accountant General Yaron Zelekha announced yesterday.

Zelekha was speaking during a session of the parliamentary inquiry commission into bank fees. He said the Bank of Israel agreed to let him distribute the short-term notes to dilute the Hapoalim-Leumi duopoly's control of the banking sector.

Regarding the concentration of power in the banking system, Zelekha said competition in retail banking is especially pathetic, due to several industry obstacles that need to be removed.

The lack of competition between the banks is due in part to the interest spreads in the banking sector, which are much higher than those in the business sector; parallel interest rate and fee hikes; captive customers; and the lack of incentives to develop new financial tools, Zelekha said.

The first problem in the sector is the absence of an alternative distribution system. This is why Zelekha has suggested adding the post office to the banking sector. The Postal Bank has 700 branches around the country. Zelekha thinks the Postal Bank, along with a partner, could offer the duopoly real competition.

The plan could commence in about a year, he said, with a banking institution offering its services via the Postal Bank.

Four banking institutions have shown serious interest in competing against Hapoalim and Leumi through the Postal Bank, Zelekha said, adding that he has received 15 responses in total. The treasury is studying the suggestions and will draft a plan by the end of March.

Zelekha also said he still intends to publish a tender for public sector banking services, which has been the sole province of Bank Yahav. For years, other banks were kept away from the 140,000 civil servants and pensioners, he said. "They took a very attractive market segment and gave it without a tender, for free, to Bank Hapoalim," one of Yahav's owners. "We are determined to complete the tender, despite the wrath of interested parties," he said.