Israel’s first new bank in 47 years will be making interest-free and low-interest loans, continuing the social impact tradition of its successor organization.
Non-profit lender Ogen Bank, which is in the late stages of the process to get its banking license, plans to serve borrowers rejected by other institutions, making low-cost banking and interest-free loans to individuals and low-interest loans to small businesses.
Despite its highly developed economy and educated workforce, research shows that more than 20% of the country’s population has limited access to loans with single-digit interest rates.
Jerusalem-based Ogen is seeking to help “low-income families and small businesses and to provide them with affordable credit that they cannot get in the commercial market,” CEO Sagi Balasha told Karma.
Ogen is the successor to the Israel Free Loan Association, a non-profit founded by Cleveland native Eliezer Jaffe in the early ‘90s to help the working poor and small businesses with zero-to-low interest loans. The association has lent $330 million to 62,000 poor families and small businesses unable to get loans elsewhere, with a default rate of less than 1%.
Ogen bank will be a wholly-owned non-profit subsidiary of the original non-profit foundation. Incorporating the bank permits it to raise funds from depositors and impact investors as much as 10 times faster than if it took charitable donations, Balasha said. The aim is to grow to 10 times its current size within five years, reaching $500 million in equity and deposits that can be lent.
In an initial phase before finalizing its banking license, Ogen is taking up to 29 deposits — the maximum allowed for a non-banking institution — of $1 million or more. Deposits, which will pay 1% to investors, are tax-deductible for foundations under the U.S. tax code as a project-related investment.
“We believe that in the first period most of the capital will come from big impact or institutional investors that will put their money here to help low-income people,” Balasha says. “Most impact investing in Israel will provide a higher return, but the risk is tremendously higher.”
Among the initial depositors are Bob Gottesman, CEO of First Manhattan Co. and the Max and Marjorie Fisher Foundation based in Southfield, Michigan.
Added to equity from the parent non-profit foundation, the bank has already raised $36 million in capital for new loans.
“We are waiting for the final license from the ministry of finance, which is imminent, but we are totally ready to start,” Balasha says. “Once we get the banking license next year, we can increase the number of deposits, we can provide other banking services and we can decrease the amount of the minimum we take as a deposit.”
“The goal is to provide business loans at the same rate of 3-5% that the highest deciles in the economy get. We want to provide more fairness in this financial system,” he says.
Once fully operational, Ogen aims to reach its clients, many of whom live in isolated parts of the country, through digital platforms that will enable loan applicants to submit documents online. Bank officers will use the premises of local non-profits and community centers, eliminating the need to rent office space.
While there are various models for social lending in the U.S., U.K., India and elsewhere, Balasha, a former official at the Israeli ministry of finance, says he is unaware of an existing non-profit bank with the same structure and mission to target the poorer population.
“We are working on a very adventurous mission here,” he says. “If we succeed it’s going to change the lives of low-income people and maybe also influence the whole banking sector in Israel.”
That remains to be seen, says David Rosenberg, business editor of Haaretz, the Hebrew-language daily. Even at 10 times its current size, Ogen will be a minnow compared to the country’s five dominant commercial banks.
“In order to do that, you need players that are big, well-capitalized and addressing markets the banks are competing with,” Rosenberg says. “If they are going after clients that the banks would normally ignore, they are performing a public service but they are not really increasing competition.”
Jerusalem electrician Yochanan Yarden, 35, approached Ogen after taking courses to get skills to set up his business. Despite his knowledge, experience and business plan he couldn’t get an affordable loan from the handful of commercial banks that dominate the Israeli market. He got a loan through Ogen.
“Launching a business requires a significant investment in equipment and marketing to build name recognition and a clientele,” Yarden said. “Ogen gave me the resources I needed to purchase supplies and develop my marketing strategy.”