In the next few weeks, the Knesset Constitution Committee will decide on legislation that could have a profound impact on the cost of living of every Israeli. And few in the public are even aware of that.
In legislating the proposed Fair Credit Law, the committee — chaired by MK Nissan Slomiansky — could take measures that end up reducing the interest rates consumers pay on loans — or raising them. No one knows which way the lawmakers will vote. But public input would help ensure they vote the right way.
The legislation is designed to replace the older Non-Bank Interest Rate Law and the name change is supposed to be more than symbolic. Since 1993, Israel has been in an absurd situation in which non-bank lenders are subject to interest rate ceilings while banks can charge whatever they feel like.
If the government is intent on injecting some more competition into the consumer lending — which accounts for a third of all bank lending today, or 64 billion shekels ($17.7 billion) — it makes no sense to regulate the banks’ weaker competitors while not touching the banks at all.Bank of Israel figures show that even in an age of zero interest rates, then average consumer loan (not counting mortgages) provided by the bank comes with interest of 6.2% annually and can reach as high as 22%. The average comes distressingly close to the approximately 8% cap imposed on non-bank lenders. On overdrafts, the average rate actually reached 8%.
Non-bank lenders can’t effectively compete in a situation like this, even if the cap is supposed to protect the public from usurious rates. It doesn’t.
Non-mortgage consumer lending last year generated some 12.7 billion shekels in profits for the Israeli banking industry. And those are safe profits, too, because the rate of default on consumer loans is very low. Because so many Israelis are in chronic overdraft, outstanding loans held by the banks on authorized overdrafts amount to about 39 billion shekels while unauthorized overdrafts add up to another 17 billion.
Think how much the public would save if the banks were compelled by law to limit how much they could charge on loans.
The Fair Lending Law would impose a single cap on all consumer loans. Lawmakers are moving toward a cap of 15%, with a 3% supplement for unauthorized overdrafts. The rates, which were proposed by the Bank of Israel and the treasury, are a compromise that takes into account the need to allow higher rates that will incentivize lenders to offer loans at greater risk, without soaking borrowers. Does this signal a victory or a loss in the battle to bring down Israel’s cost of living?
It depends on how the market responds to the new ceiling. If nonbank lenders can now compete on equal terms with the banks, there will be more consumer loans on offer and the enlarged supply should help bring interest rates far below the legal ceiling. That is a reasonable scenario because non-bank consumer lending has grown in recent years, helped by measures undertaken by the government, and already has a significant share of the market.
On the other hand, no one should underestimate the market power of the banks and their ability to move interest rates in the direction that they want. We could easily see the average rate on household loans rise from 6.7% today to something closer to the 15% ceiling. The banks use their market power today to charge 14% rates on overdrafts on accounts belonging to wage earners, even though the risk of default is tiny.
Committee chairman Slomiansky is working with the Bank of Israel to design measures that would prevent the banks from exploiting their market power, but to date they haven’t reached an agreement. So, for now at least no one can say with any certainty whether the new law will be good or bad for consumers.
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