Ofek, the cooperative that is planning Israel’s first credit union, said the Bank of Israel’s minimum capital requirement of 75 million shekels ($21.9 million) for the new institution would be impossible to meet.
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“We suggest setting a low initial minimum capital, to be increased gradually as the licensing terms change over time or as a function of the capital,” read an Ofek position paper released on Thursday, suggesting a minimum capital of 10 million shekels would be more appropriate. “It is important to note, that credit unions throughout the world began operations with only simple deposits that did not require any kind of capital. A gradual licensing process as a function of capital would allow for natural growth toward the level of capital required for a full license.”
The response came six weeks after the Bank of Israel issued draft regulations for the new credit union arrangement that include the 75-million-shekel capital requirement, a two-year vetting process before obtaining a license and a capital adequacy ratio of at least 15%. The central bank hopes credit unions will provide new, lower-cost competition to commercial banks.
Another issue raised by Ofek is the charter draft formulated by the Bank of Israel, which it argued was “one-dimensional in that it sets a linear course of action that includes impractical time-frames and expenses.” It said that under the proposed regulations, a credit union would have to recruit tens of thousands of members before obtaining a license in order to meet the minimum capital requirement, but would be unable to offer services until at least a year after being awarded the permit, as a result of the time needed to put all its administrative apparatus into place.
Ofek said the proposed regulations were overly and needlessly stringent, noting that a credit union’s charter will initially allow it to provide limited financial services, but from the outset the institution would face the same kinds of rules as banks that provide a full range of financial services. “There is no correlation between the level of service and the level of regulation and capital requirements,” it said.
Doron Shorer, Ofek’s chairman, said not only Ofek but any other group that wanted to set up a credit union would have difficulty meeting the requirements and that the regulation threatened to strangle the new sector before it gets started. Nevertheless, he called the draft regulations a “significant milestone” in the process of creating a bank to be owned by its customers ... and thus benefit the Israeli people and society.”
A number of groups had approached the Bank of Israel about forming a credit union, but the new cooperatives are expected to appeal mainly to groups such as employees of big organizations such as universities and kibbutzim. Only credit union members will be entitled to open an account and they will be the ones to choose the board of directors.