Financial Access Solutions for Israel's Unbanked Population

 

Financial exclusion limits access to financial services for personal, community and business needs, usually limiting savings and credit options, as well as resulting in increased costs for alternative products and services. Low income communities and small businesses need to be served by the financial sector with appropriate products, services and sometimes specialized institutions. Some of the key elements of financial exclusion arise from lack of access to formal and appropriate financial services, financial education, information and training, structural barriers such as the lack of a financial history or the ability to build a positive credit identity. Israel also has a very concentrated financial sector with only a few large banks covering the majority of consumer and small business banking in the country and, no current regulatory mechanisms for credit unions, cooperative or community banks, which often reach the under-served in other countries.

 

While the Israeli economy has experienced strong growth and the country is now a member of the OECD, it is estimated that 20% of Israel's population live in poverty, 36% of which are children, and 40-50% of the total population in liquid asset poverty, meaning that without a regular family income families could not cover their expenses with even three months savings. The unbanked typically mostly come from communities with large families such as the ultra-orthodox, the Arab population, and single parent families.

 

Structurally, micro and small businesses represent 96% of all business, employing 60% of the workforce while receiving only 20% of bank credit. Furthermore, 95% of trade credit and 65% of all commercial credit are provided by only five banks. Finally, compared to OECD countries, Israel has a very low use of bank cards, a particularly important tool for access to credit, a higher dependence on loans from families, and a disproportionately low savings rate.

 

The overall approach from the Financial Innovations Lab® is to build a sustainable and financially viable business model to build the infrastructure to create full financial services for the unbanked. The solutions discussed by the panelists and the Lab participants focused on four key areas:

 

1. Capital - Asset building - This involves the development of tools to grow equity through savings programs, including individual savings accounts, child savings accounts, and affordable, low cost savings programs.

 

2. Credit - This involves developing appropriate programs that will allow credit for personal and micro/small business needs. Importantly, this will allow the development of credit histories and the further evolution of the current credit bureaus and regulations.

 

3. Community Development - This involves creating opportunities for community-based, scalable, and sustainable financial institutions that serve specific communities and the financially excluded. These could entail the introduction of legislation providing for the introduction of community banks or credit unions.

 

4. Capacity - This involves the building of financial identity and capabilities of individuals and small businesses through economic participation, financial education, affordable infrastructure, and appropriate technologies.

 

Each of these elements can only come about based on complete data collection, in-depth analysis and targeting and market-oriented regulations and incentives.

 

Momentum has been gaining over the last two years, with a number of Government entities working to introduce new legislation as well as financial incentives and packages to support the under banked. Israel's first Community Development Bank is in its implementation stage and the number of microfinance institutions is growing albeit this sector being in its infancy stage. So too, many NGO's are too looking to provide such social financing solutions to the under banked.

 

Citi will continue to share our experiences, resources and partners, such as those who came from the US to participate in this conference, in support of shared goals for greater financial inclusion.