Racheli Amar, a cosmetician from Ashdod who has been doing eyebrows, facials and laser treatments for the past 17 years, saw her income plunge when the coronavirus struck in Israel, sending her clients into lockdown at home along with the rest of the nation’s businesses and households.
That was in March, before Passover, and she had just stocked up on creams and lotions ahead of one of her busiest times at work — as the weather in Israel turns mild and customers throng her business to spruce up before the festival.
“That is a time when I usually work from 8 a.m. to 11 p.m.,” she said in a recent phone interview with The Times of Israel.
Instead, because of the lockdown, her business dried up. Running out of money, she found herself compelled to ask her bank for a line of credit to help her pay her bills.
“I called, I emailed, but no one got back to me,” she said.
Casting around for help, her business consultant suggested she try to get a loan from Ogen, a nonprofit provider of low-interest and interest-free loans to small businesses. Within a few days of applying, she got a loan of NIS 50,000 ($14,400). It kept her worries at bay, she said.
“I am a small business,” said Amar, a single mother and the sole provider for her two sons. “How do you pay, if you have no cash flow? I didn’t work for months. I was under a lot of pressure — and the loan brought me peace of mind. When you have peace of mind you can think out of the box and find solutions. So, I started selling cosmetics. Thanks to the loan I got, I found peace of mind. ”
Amar’s story reflects those of many others — the owners of bars, restaurants, falafel shops, event halls and stores that have been among the hardest hit by the crisis, forced to shut down and among the last to reopen.
The pandemic, which has infected over 7.1 million people around the world and killed over 400,000, is causing economic havoc as governments have implemented lockdowns in a bid to curb the spread of the virus.
Israel, where the virus has infected more than 18,000 and killed 298, has seen unprecedented levels of unemployment, which jumped to some 28% in late April, surpassing 1 million for the first time. Unemployment was at a record low of under 4 percent at the beginning of March.
Many struggling businesses, deemed too risky, were turned down for loans by their banks even as the government set up an emergency NIS 8 billion fund for business loans backed by state guarantees.
To make it safer for the banks to lend money, the central bank lowered the capital requirements lenders must have in their coffers — a ratio of equity as a percentage of risk-weighted assets — to enable the system to increase credit to the economy. The central bank also eased regulations to allow banks to enable customers to postpone loan repayments, and announced a NIS 50 billion purchase of bonds to provide liquidity to the market.
The former supervisor of banks, Hedva Ber, also called on banks to take into account “the needs of the economy and customers, even if this will hurt the profit margins of the banking system in the short term.”
But banks say the 15% government guarantees are not high enough compared to those provided by other nations. The crisis created a greater risk of loan defaults, they say, and their job is to safeguard their customers’ money.
Israel’s five largest banks all reported a dip in first quarter profit as provisions for credit losses spiked, though four of the five were still in the black and all five are expected to maintain their financial strength in the year overall.
Bank Hapoalim Ltd., Israel’s largest lender, reported a net profit of NIS 192 million for the quarter, down 77% from NIS 821 million in the same period a year earlier. In 2019, Hapoalim earned NIS 1.8 billion.
Bank Leumi Le-Israel Ltd. posted a loss of NIS 232 million in the quarter, compared with a net profit of NIS 1.09 billion in the same quarter a year earlier. In 2019, Leumi’s profit totaled NIS 3.5 billion. Israel Discount Bank Ltd. said net profit for the first quarter of the year totaled NIS 279 million, down from NIS 405 million a year earlier. In 2019, the bank posted a profit of NIS 1.7 billion.
Critics have the lenders’ reluctance to grant business loans “piggish,”, especially in light of the fact that these same banks were bailed out by the government with taxpayer money in the early 1980s.
The CEOs of the nation’s two largest banks, Bank Hapoalim and Bank Leumi Le-Israel, Dov Kotler and Hanan Friedman, earn an annual salary of some NIS 2.5 million, after Israel in 2016 passed a law capping executive compensation in financial institutions at that level, or no more than 44 times the net salary of the lowest worker in the company. Before the cap, top CEO banking salaries reached as much as NIS 8 million a year.
“In good times, banks have made huge profits on these same businesses on which they are now turning their backs,” said Roee Cohen, the president of the Israel Federation of Small Business Organizations. “It is not fair toward their customers. They have always made a profit from loans to event halls, travel agents, hotels. These were all very strong sectors. Suddenly the coronavirus has changed everything. Banks knew how to make a profit then, but now they are turning their backs on these same clients. I’d expect them to show more sensitivity toward their customers in this time of need.”
In a presentation dated May 12, the Bank of Israel said that the fund for small businesses with a government guarantee of 15% “does not provide an answer to most of the businesses at high risk.”
Data compiled by the central bank shows that in March and April the banking system provided a “significant rise” in credit by some NIS 20.9 billion, but closer inspection shows that this did not mean more help for small business. It was bigger and commercial businesses that saw a rise in credit, whereas smaller businesses actually saw a drop.
Prioritizing shareholder interests over customer needs
The credit crunch these small businesses are experiencing has highlighted how private commercial banks are prioritizing shareholder interests over those of many of their customers. Non-banking lenders, meanwhile, which entered the financial arena in the past five to 10 years to compete with banks, have also clamped down on lending, and have not provided a real alternative nor a bigger variety of credit options.
Aiming to fill the gap is Ogen, a nonprofit organization that is pursuing — and hopes to soon be granted — a license to become the nation’s first social bank. The lender has been giving out loans to small operations, like Rachel Amar’s, that have been turned down by banks and are seeking credit in order to survive.
The funds it can provide, however, are minute compared to the billions of shekels of credit needed to get the economy out of the woods in light of the unprecedented crisis.
Increasing risk, providing more funds
Ogen is undergoing a transformation from a nonprofit that provides interest-free credit to new immigrants and marginalized segments of society into a nonprofit impact-investment bank that gives low-interest credit to small businesses, non-profit organizations and individuals who struggle to get funding from commercial banks.
During the pandemic, Ogen has received a deluge of requests for funding.
“We are totally filling a gap,” said Sagi Balasha, the CEO of Ogen, in a phone interview. “The people who come to Ogen are mostly people who have been refused by the banks, and they have no other solution.”
The funds Ogen has available for loans are part philanthropic money — which does not need to bear returns — and part impact investments — which do require returns to investors. The philanthropic part of the funds will be those that allow Ogen to absorb the defaults if there are any, explained David Angel, director of Strategic Partnerships at Ogen.
It is this “semi-philanthropic” financial model that differentiates Ogen from other lenders, he said, enabling the nonprofit to more easily accept risk.
“It is known that low income people don’t always have higher default rates than high income people,” he said. “But, of course, banks will always prefer high income people and bigger businesses. It is natural. Because they perceive bigger businesses as less risky.” Bigger businesses and individuals are also more profitable: almost the same amount of work goes into giving a NIS 1 million loan as a NIS 100,000 loan and banks can make more money on the higher loan, he explained.
As the coronavirus struck, leaving many in a credit crunch, Ogen expanded its activities. “We acted just in the opposite way to everyone else,” Angel said. We understood that our role in this crisis is not to close our gates but to open our gates even more — and take more risk. And how can we take more risk? We needed to raise money and a cushion to absorb risk and this is exactly what we did.”
Earlier this month, Ogen said it raised $30 million to provide emergency loans and financial mentoring to small businesses, nonprofits, and unemployed and furloughed workers, and is hoping to raise an additional $70 million to further expand its activities.
Ogen gives out loans to three main sectors: low interest loans to small businesses and nonprofits, and no-interest loans to families in need.
The interest rate for small businesses and nonprofits has been reduced from an annual 5% from 3%. The loans are given out within seven business days and there is no guarantor required.
The loans given to families are interest-free and also come without a need for guarantors.
“Our model is a blended finance model,” said Angel. Its advantage is that it places conventional philanthropy alongsideh investment capital. “By blending together these two asset classes, we are able to take risk and cover risk in a way that no bank or commercial lender is built to do… unless they take an enormous interest rate spike.”
Unlike the US, with its credit unions, Community Development Financial Institutions Fund (CDFI Fund) and community banks forming a sophisticated infrastructure to bring people into the mainstream economy, Israel has no organized systematic solution for social banking and financial inclusion, said Angel.
“What we learned from this crisis is how much a social bank is needed,” said Balasha. “Because a private bank in this type of situation must continue to be profitable, they are giving fewer loans at a high price to less risky businesses or families. A social bank is not driven by the amount of dividends” it needs to give to shareholders.
The money Ogen can provide today is still a “drop in the ocean” in terms of total credit needed, however, said Angel.
Since getting its license in January to provide for-profit loans via its Ogen Social Loan Fund, Ogen has given out some 2,000 loans and hopes by the end of the year to have dished out at least NIS 140 million, double the amount it gave out in non-interest loans in 2019.
“While we are delighted with our growth and the $30 million we have raised, we remain around 0.5% of Israel’s credit market,” said Angel. “We are still small and we need to grow, because the need has been proven by the situation.”
Veronika Gal-Tzur, a 50-year-old divorced mother of three, in 2016 opened a freight business, Lemon Deliveries, that transports equipment and merchandise for large businesses.
Her once-profitable company owns four trucks and employs five people. Prior to the coronavirus crisis, she applied for a bank loan to purchase two additional trucks and was denied.
The coronavirus crisis caused a cash flow problem for her business, as customers took time to pay and demand fell.
She again applied to the bank for a loan, under the government’s loan guaranteed program, and was again denied.
Ogen provided Veronika’s business with a loan of NIS 100,000 within days of her application.
The loan “has helped me get through this period,” she said in a phone interview. Even after she put her workers on unpaid leave, she still had high fixed costs, including insurance and maintenance on her trucks.
“I have been working for years with my banks and I expected them to come to my help in my time of need,” she said. “But that didn’t happen. I am disappointed.”
Her work is trickling back, she said, but her business is seasonal, and this year she missed the booming pre-Passover period, when her trucks make many deliveries to stores ahead of the festival. “Work has come back, but not as much as before the crisis.”
Not mature enough
Israel has been trying to increase and diversify its credit providers by creating the legal and capital markets infrastructure to encourage the expansion of non-bank financial lenders, such as Nawi Brothers Group and Peninsula, which have attracted equity investments from large institutions, and by separating the credit card companies from the banks, which have traditionally had a monopoly on local lending.
The nation has also seen the emergence of a nascent peer-to-peer lending industry which is increasingly being institutionalized as insurers and asset managers provide them credit lines.
“All of these, including the banks, are now in defensive mode because of the coronavirus crisis,” said Terence Klingman, chief investment officer at the Heritage Family Office Partners Ltd., which advises wealthy families on where to invest their funds. “The economy runs on credit, and as soon as the economy picks up, all of these players will be back in the market.”
“The competition between banks and non-banking lenders is still new, and has been around for the past 5-10 years,” he said. “If it was more mature, there would have been more credit options. Even so, there is definitely room for third sector funding to help people build up their lives, which can have a huge social payoff.” Klingman is also a former head of sell-side research at Psagot Investment House where he covered Israeli banks.
What the banks say
The banks, for their part, say that they have increased the total amount of credit they have extended, unlike non-banking lenders, which have halted credit completely, concerned about the higher risk in the economy.
Banks have also been allowing customers to defer loan payments. From the beginning of the crisis through the end of April, the banks deferred loans for approximately 450,000 customers, for a total of NIS 5.2 billion, an “unprecedented” level, the Bank of Israel said in a statement in May.
The central bank said in its May presentation that it expects loan losses at banks to “grow significantly” this year, due to the high unemployment triggered by the coronavirus crisis. These losses totaled 0.3% of the banks’ credit portfolio in 2019.
These losses along with other market factors are expected to significantly affect “the bottom line of bank profit,” the central bank said.
Notwithstanding this, the banks’ capital ratios, a key measure of a bank’s financial strength, are expected to remain high, and the banking system will be able to withstand the hit, it said.
Help on the way?
Meanwhile, aware of the acute shortfalls of its small and medium-sized loan guarantees program, the Finance Ministry last week presented the Knesset Finance Committee a proposal to increase the loans guarantees program to a total of NIS 22 billion, of which NIS 4 billion will be earmarked for high-risk businesses, and will come with guarantees of 60%, as opposed to the 15% for the other loans.
Finance Ministry data as of June 3 showed that of 63,000 requests for government-backed loans, some 33,000 have been approved for small and medium businesses, for a total of NIS 12.6 billion, out of the NIS 14 billion approved as part of the program (raised from the original NIS 8 billion).
The NIS 4 billion government-guaranteed loan track for high-risk businesses “will enable rapid cash flow to all businesses in the economy, even those that have not been able to get it within the tracks to date,” said Rony Hizkiyahu, the accountant general at the Finance Ministry, in the June 3 statement.