The Knesset Economics Committee on Monday approved the final version of legislation to create Israel’s first-ever credit history database, a move that officials say should bring more competition to household lending and reduce costs to borrowers.
“The database will serve as another tool to increase competition and expand access to credit while minimizing the discrimination that comes from a lack of information,” Bank of Israel Governor Karnit Flug said after lawmakers approved the bill, which will now go to the full Knesset for its final votes before becoming law, probably by the end of the month.
“In addition, the database and the anonymous information included in it will enable the Bank of Israel to better monitor developments in the credit market from the viewpoint of financial stability,” she said.
The credit database is part of a wide-ranging effort by the Bank of Israel and the Finance Ministry to improve access to loans for consumers. Earlier this month the central bank launched its “bank ID,” a short-form report showing a bank client all the activity that has taken place in his or her account in a comprehensible and easily comparable format.
More controversially, the government’s Strum committee on consumer credit is due shortly to make recommendations on spinning off the credit-card issuing subsidiaries of Israel’s two biggest banks and turn them into independent players that compete with the banks to make consumer loans. However, the central bank and the treasury are at loggerheads about how this should be done.
The database law authorizes the government to create a massive database encompassing some 12 million Israeli bank accounts as well as each person’s history of paying bills to Israel Electric Corporation, telephone and cellphone providers and municipalities (arnona). For now, at least, water bills won’t be included and there is still the possibility that electricity bills also won’t be for technical reasons.
The data will be used to build a credit history based on a borrower’s record for repaying debts and current bills. From that, a banker can assign a credit rating and a rate of interest based on the risk.
If this sounds like it would go against the interest of borrowers, that isn’t the case. As things stand now, a banker has little or no credit history on which to base his or her risk assessment, except what is available from the bank’s one-on-one history with the borrower. Therefore a banker is likely to assume the borrower is a poor risk and either deny a loan or charge a high rate of interest on it.
Moreover, the database will give an edge to medium-sized and smaller banks, which under the current system can only draw on credit histories from their own very limited client base. The database will be available to all banks – as well as non-bank lenders – which will be able to better compete for consumer loans from clients of the bigger banks.
More competition for household lending should also pressure interest rates lower and improve terms. That was a key reason why Israel’s two biggest banks, Hapoalim and Leumi, fought hard to block a law creating a database. The original legislation was originally written 14 years ago.
Moreover, as Eitan Cabel (Zionist Union), the Economics Committee chairman, said, the law offers help to the needy because it calls for creating a 50 million-shekel fund for people whose credit rating is too low for them to get a loan. “I expect the treasury will increase it,” he added.
The startup day for the ambitious project is another two years or more away. The Bank of Israel will have to choose a contractor to build the database, a 50 million-shekel ($12.9 million) undertaking that will take until June 2018 to complete, according to the current time frame. A tender for the contract will be published in July or August.
One issue that has aroused concern among consumer and legal activists is the privacy issues surrounding a large and widely accessible database containing so much personal financial information. Flug, however, said she was confident that safeguards were in place.
“We are aware of the responsibility we have in connection with creating and operating the database. We are confident that a commissioner for protecting privacy who will be appointed in accordance with the draft law will fill the role, and will help ensure the best possible protection.”
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