Increasing Business Credit in Israel
Credit to the business sector in Israel is low in international comparison, and constitutes about 72% of GDP, compared with an average of 111% among OECD countries. The main source of funding for the business sector in Israel is the banking corporations, which give about half of the credit to businesses, with the institutional bodies giving about 20% of the business credit and non-banking companies making up less than one percent. Although bank credit occupies a large share of the Israeli market, in international comparison the credit provided by banks is considered low – the ratio of credit to bank deposits is 73% in Israel compared to an average of 95% in Europe (at the end of 2020).
The fact that credit in Israel is low relative to the world and that the share of banks is so large would not be a problem if businesses in Israel would have been able to get the financing they need, but about a quarter of businesses report a moderate or severe limitation on access to bank and non-bank credit. Since banks already constitute a significant part of business credit in Israel, the increase in credit supply lies in the non-banking entities – the institutional entities and the public non-banking financing companies.
Institutional entities, credit card companies and non-bank finance companies face barriers that make it difficult for them to compete with banks and even prevent them from increasing their credit supply:
Information gaps – Non-banking entities have difficulty collecting information about potential customers, which makes the underwriting process more expensive and sometimes makes it unprofitable for them.
Raising capital and liquidity – Credit companies have difficulty raising capital for their activities and they depend on bank loans for this purpose, the ability to raise debt in the capital market is limited for them.
Regulation – The institutional bodies are subject to the supervision of the Capital Market, Insurance and Savings Authority, whose provisions make it difficult for them to provide loans to the business sector, whether on their own initiative or in participation with another entrepreneurial body.
Advantages of size – Banks are more accessible to customers because they have a wide nationwide deployment, and high operating costs make it difficult for small funding bodies to compete with the banks’ array.
Customer convenience – Difficulty in comparing loan terms in different places may leave customers confused and therefore they will prefer to consume the service at their familiar bank.
Considering the background data and barriers presented in the study, a number of recommendations were formulated with the aim of facilitating non-banking entities in granting credit and in this way increasing the supply of business credit in the economy:
State-guaranteed loans – Expanding the activity of state-guaranteed funds also to loans provided through non-banking entities (and not only through banks), in order to expose them to new customers.
Replacement of designated bonds with guaranteed yields – Replacing designated bonds with other debt assets such as corporate bonds and business loans can greatly help the business sector.
Open Banking – The information gaps barrier is significant and open banking can help overcome it. It enables the concentration of all a customer’s financial information in one body and returns the power to the customer.
Increasing capital-raising options – raising the capital-raising ceiling for non-banking companies.
Promotion of securitization and CLO – The securitization law will allow financial entities to free up sources of credit and liquidate their assets easily, and it will increase the possibilities of raising capital for financing companies.
Regulatory change – providing an option for an institutional body to participate in a loan even without performing an analysis if the initiating body is a bank because the risk is low when a bank performs underwriting and is subject to the same risk.