Bank of Israel Refuses to Back Down on Tough Terms for Credit Unions

Central bank says it will not relax capital requirement of $21.9 million, due to lack of federal insurance on bank deposits in Israel,

Tomer Appelbaum

One potential avenue to inject competition into Israel’s highly concentrated banking sector may remain blocked, as Banks Supervisor David Zaken this week declined to relax the capital requirements for credit unions in Israel.

Israel currently does not have any credit unions, but several are attempting to form.

The Bank of Israel submitted draft regulations for potential credit unions this summer, stating that they must meet a minimum capital requirement of 75 million shekels ($21.9 million).

While this figure is not high in banking terms, critics of the regulations have said it will be difficult, if not impossible, to meet – money is raised from members, not investors, and each member of a credit union buys exactly one share.

So if membership costs 3,000 shekels, a credit union will have to sign up 40,000 to 50,000 members in order to meet the central bank’s requirements, since some of the members’ money will go toward operating expenses and won’t be counted toward the capital requirement.

As a point of comparison, the Bank of Jerusalem – which has been operating nationwide for 50 years, with 22 branches and a 10-million-shekel marketing budget – has 30,000 mortgage customers and 70,000 checking account customers. The central bank’s regulations mean that a credit union will have to have a similar number of customers merely in order to open.

Yet on Thursday, Zaken stated in a letter to Meretz MK Zahava Gal-On that the central bank would not be relaxing this capital requirement.

Meretz head Gal-On is also a member of Ofek, a credit union seeking to get off the ground. Ofek has signed up 2,770 members over the past year, raising a total of 8.3 million shekels.

Yet even if the potential credit union were to quadruple its recruitment pace over the next year, it would still be far from meeting the central bank’s requirements, Ofek members were told at a recent general assembly.

The central bank’s regulations have drawn criticism not just from potential local players but from the World Council of Credit Unions.

Michael Edwards, vice president and chief counsel at the international umbrella organization, sent Zaken a letter, stating that the group was concerned that the strict initial capital requirements were unrealistic for a credit union, and would most likely block the formation of any such entities in Israel.

Edwards’ letter came following a request by Shelanu, an Israeli body attempting to form a credit union.

Zaken stated in response to Gal-On that such strict capital requirements are necessary in Israel because there is no insurance on bank deposits here.

In other countries, such as the United States, customers’ deposits are federally insured under various conditions should a bank go bust. However, no such guarantees exist in Israel.

“Israel has unique conditions that necessitate specific oversight for new banking unions,” said Zaken, referring to the lack of deposit insurance.

“In the United States, for instance, banks and credit unions fail as part of the regular course of the banking sector, while mechanisms that don’t exist in Israel enable that to happen without causing damage to depositors or risks to the system,” he said.

A credit union that does not manage to raise 75 million shekels is unlikely to be able to break into the market, he added.

Zaken added that he supports introducing credit unions to Israel’s banking sector in order to increase competition.

Ofek stated in response that it respects Zaken’s decision, and noted that a team was appointed following cooperation between Ofek and Zaken in order to try to find a way to enable credit unions to launch operations here.