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Israel to Regulate So-called 'Grey Market' Loan Sharks

Draft rules for nonbanking loan market focuses on who controls lenders.

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Israeli shekels are worth more in euro or dollar terms than for many years.Credit: Reuters

Israel’s nonbank lending sector is about to come under government supervision, with a focus on trying to rid the “gray market” in loans of its criminal associations.

The first step in that direction occurred on Thursday, when the Director of the new Capital Market, Insurance and Savings Authority, Dorit Salinger, issued draft rules for licensing nonbank lenders.

The fight against criminal control in this area is two-pronged. The first prohibits the issuing of a license to a nonbank lender with an owner or executive who has a criminal record.

The second element goes even farther, requiring such lenders to report on “persons of influence” in the business, who are defined as any individual with directly or indirect influence over the company’s operations.

That second requirement addresses what officials say is a common industry practice: Often, the individuals who nominally control or manages companies in the gray lending market — often money changers or loan companies — are just front men for organized crime groups that use gray market lenders to launder money.

The second requirement gives regulators the power to deny a license even in cases where the identity of the real owner or owners doesn’t appear in any formal documents. It give the police the power to investigate on the grounds that the gray market lender violated disclosure rules.

For the same reason, the Israel Police seek an amendment to the Fair Lending Law, now in the Knesset, that would define usury and make it a criminal offense to charge interest rates in excess of a specified ceiling. That would give law enforcement agencies an additional tool to use in their fight against unfair lending practices in the gray market, where effective interest rates can reach into the double and even triple digits.

Sources said the legislation will likely set a maximum interest rate at 30% to 40% annually.

It’s no coincidence that the first rules on the nonbank lending market are focused on the criminal element. Concern about the dominant role of underworld figures in the industry was the reasons officials decided to impose regulations to begin with.

The drive to impose rules over nonbank lending is part of a broader government strategy to create new ways for consumers to borrow and create competition for Israeli banks.

The Knesset passed legislation two months ago forcing the two big banks to spin off their credit cards companies in the hopes they will turn into consumer-lending companies and regulators are hoping earlier rules for new banks will have the same effect.

However, as long as the gray market industry suffers the image of being criminal or at least illegitimate, it doesn’t stand a chance of becoming a serious competitor to conventional bank loans.

That still leaves open the question whether the draft rulers are enough to clean up the industry and frustrate what officials admit are come of Israel’s most sophisticated criminals. The Capital Market Authority said it plans to back up the rules by hiring scores of new economist to conduct supervision.

They will cooperate with the Israel Tax Authority and the Public Security Ministry to enhance enforcement.

Another concern is that the focus on law enforcement may come at the expense of creating a regulatory environment that encourages a competitive and consumer-friendly industry.

One way they hope to prevent that is by giving priority to applicants for non-banking license to groups that have been waiting for one, most notably Ofek, which is due to become Israel’s first credit union.

Ofek plans to compete with banks by offering loans at rates of 3.5%, compared with 6.7% on average for consumer loans at the banks. It promises to pay 1.5% on two-week time deposits, versus nil at the commercial banks.

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