Ten years ago, the Bachar Committee published its recommendations on separating mutual and provident funds from the banks. Within a few years, the banks had sold all their holdings in these funds and the corporate debt market – i.e. corporate bonds – roared to life. The banks went from controlling almost 100 percent of credit to large companies to controlling only 50 percent, and the market for commercial credit benefited from massive competition.
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But the same thing didn’t happen with regard to consumer credit or credit to small businesses, which remained under the exclusive control of the banks. More than 90 percent of such credit is extended by the banks, either directly or via the credit card companies they own.
An analysis by the Bank of Israel showed that margins on loans to small businesses and households (excluding mortgages) are immeasurably larger than margins on any other type of loan. And even the Bank of Israel said these high margins don’t stem from the risk posed by household borrowers, but from the banks’ exploitation of their market power over them. In other words, the banks abusively exploit the fact that the market is concentrated.
To solve the problem of this enormous concentration, and the consequent robbery of households and small businesses by the banks, Finance Minister Moshe Kahlon set up the Strum Committee, which was tasked with investigating and making recommendations on how to increase competition in the consumer credit market.
The committee submitted its conclusions on Monday. Its main recommendations were to separate the credit card companies from the major banks, Hapoalim and Leumi; to set up a credit rating database, which constitutes the infrastructure that will enable competitors to give loans to new customers; to separate Sheba, the company which holds the monopoly on clearing credit cards in Israel, from the banks; to encourage institutional investors to make loans to households as well, and not only to large corporations; and to encourage consumers to use pricing websites to compare the costs of consumer credit.
In contrast to the Bachar Committee, the success of the Strum Committee’s plan is not guaranteed. Consumer credit is more complicated than business credit, and there are fewer potential competitors in this market. Moreover, even if does succeed, the success apparently won’t be as quick and clear as it was in the case of the Bachar Committee; the fruits of competition will be reaped only years down the line.
Nevertheless, there’s no disagreement that if the steps recommended by the Strum Committee aren’t implemented, competition over consumer credit will never develop in Israel. The massive concentration and high cost of credit here necessitate adoption of the committee’s conclusions.