Central Bank Sets Terms for Operation of Credit Unions in Israel

Member-owned financial cooperatives expected to increase banking competitiveness and 'improve well-being of members.'

Tomer Applebaum

The Bank of Israel on Tuesday laid out the terms that will enable credit unions – member-owned financial cooperatives – to operate in Israel for the first time ever.

Draft regulations issued by David Zaken, the supervisor of banks at the BoI, would require credit unions to have at least 75 million shekels ($21.7 million) in capital and require them to undergo a two-year vetting process before obtaining a license. In addition, they would need to have a capital adequacy ratio of at least 15%, although Zaken has yet to detail how this equity will be calculated.

In 2010, the World Council of Credit Unions estimated that 52,945 credit unions operate in 100 countries around the world, but Israel isn’t among them. As it seeks to create more competition in the banking sector, the central bank hopes that credit unions will provide savers with an alternative to commercial banks.

"In parallel with the many measures we have taken in recent years to remove obstacles that hampered the development of competition in the banking system, it is very important to also create the conditions that will make it possible for new players to enter the market," Zaken said.

"The document that we are publishing today will make it easier for potential credit unions to undergo the process and start operating as a cooperative banking entity. At the same time, we will insist that all of the unions have the stability required of an entity that manages the public’s money."

The Bank of Israel made clear it didn’t seem them as purely businesses. “Credit unions will operate based on a social orientation and will set for themselves the objective of improving their members’ well-being. Profits will be invested in improving services to the members, in order to ensure their well-being and the growth of the credit unions themselves,” the regulations stated.

Under the draft regulations, a credit union would be allowed to provide limited services such as checking and savings accounts, as well as short-term loans.

A credit union that wants to provide other services, such as credit cards or securities accounts, would be required to do so in conjunction with outside organizations.

Zaken will require the new credit unions to meet all the business standards applying to commercial banks. For example, credit unions would be required to set up independent computer operations that meet the very strict requirements of the central bank. He did say, however, that he was considering allowing them to purchase such services from an existing commercial bank.

Zaken said a number of groups had already 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.

The credit unions will be required to be structured as nonprofit organizations, usually in the form of a “cooperative association,” although they will be allowed to incorporate as other forms of nonprofits if necessary. Any profits will be reinvested in the bank to provide more and better services for members.

The draft regulations are now open for public comment.