Israel's Small Business Face Uphill Battle in Bid for Loans

Send in e-mailSend in e-mail
Send in e-mailSend in e-mail

Small businesses in Israel receive loans on less generous terms than those in most other countries belonging to the Organization for Economic Cooperation and Development, a report published by the OECD’s Center for Entrepreneurship, SMEs and Local Development has found.

The OECD report compared the size of credit granted to small businesses with more than one employee in 31 developed countries. Compared to other countries, the report found that Israel provided relatively little in the way of government loan guarantees for small businesses.

Government backing is provided in Israel by the Small and Medium-size Business State Loan Guarantee Fund, which has operated through four banks -- Bank Hapoalim, Mizrahi Tefahot Bank, Bank Otzar Hayal and Mercantile Discount Bank -- since 2012. In its first year, the fund helped small and medium-sized businesses receive 1.7 billion shekels in loans.

While the figure was 10 times the level of state-guaranteed loans to small business in 2007, it amounted to just 1% of the total small-business lending nationwide. By contrast, in countries such as the United States, Italy and France, government-guaranteed loans to small business comprised 4% of all lending to small businesses.

Small businesses in Israel also pay significantly higher interest for loans than large businesses, the OECD report found. Based on data provided from Israel’s major banks, the OECD estimated the average rate of interest paid by large companies is 3.66%, for medium-sized companies 4.6% and for small businesses 7.36%. According to the OECD report, the difference between the average interest rate paid by small and medium-sized businesses and large ones in Israel was 1.95 percentage point higher than Italy’s 1.8 points, France’s 1.5 points and Britain’s 1.1 points. The spread, which reflects the greater risk of lending to small enterprises, was higher in Canada at 2.1%.

“The turnover of small businesses equals about 40% of gross domestic product while its share of total borrowing is less than 15%,” said Arbel Levine, head of finance at the Economy Ministry’s Small Business Administration. “The rate of interest they pay for that 15% is high ... and the figure doesn’t include charges, so we can assume the effective rate is higher still.”

Nevertheless, the OECD said the report’s findings must be qualified by differences in data collection between countries. In the case of Israel, the data from the OECD report were culled from financial statements of banks, whose 400 billion shekels in lending accounts for only about half of total business loans in the country. Additionally, many countries defined small and medium-sized business differently. Even within Israel the banks’ figures on loans to businesses cannot directly be compared to each other because each bank defines small, medium and large businesses differently as do different government ministries.

Finance Minister Yair Lapid.Credit: Ofer Vaknin

Click the alert icon to follow topics: