From Gluttonous Capitalism to Enlightened Capitalism

By Hagit Klein

The rhythm of economic life in Israel is good for everybody. Well, almost everybody. The current situation is very comfortable for the venture capitalists, the tycoons, and the bank executives. The problem is, there are hundreds of thousands of families holding accounts in commercial banks that are forced to pay high fees, unfair interest rates on loans, and earn low interest rates on savings deposits.

Despite this, it remains clear to everyone that the system should continue as it is, as this is how a modern state functions: Commercial banks, essentially financiers doing business and increasing economic growth, while private accounts are actually supporting the banking system. Indeed, contrary to what it seems at first glance, private households serve as a significant source of profit for commercial banks, so we can understand why the banks are fighting in the halls of the Knesset as well as against the Bank of Israel in order to stem the lowering of interest rates and banking fees. Given this situation, the question may be asked: Is it possible to establish an interest-free banking system in Israel, at least for private household accounts?

Interest-free Banking
Islam forbids taking interest, and quite a few Muslim states manage their economies without this basic financial tool of the West. In countries like Pakistan, the whole financial system is customized to fit the value of the prohibition against interest. Malaysia and Indonesia have a normal banking system that runs parallel to an interest-free financial system. It turns out that dozens of countries in the world run interest-free banking in various ways. Malaysia is an example of a country that has one of the highest rates of growth while running an interest-free banking system in parallel with "normal" banking.

One Israeli bank, the Postal Bank, does not exact interest on a credit balance, but on the other hand it isn't possible to overdraw or obtain interest-free loans from them. It turns out that their service fees are higher than the average rate on the market, and even this bank has lately begun to join the market by offering interest-based loans to small businesses. Another model for interest-free banking is the Israel Free Loan Society.

Economic Feasibility
Erel Ben Dov Segal of the Haifa Technion examined the issue of the feasibility of the existence of an interest-free banking system and even built a model for the establishment of such a bank (see below). According to his model, the institution will be a non profit organization, combining the advantages of the Postal Bank with charity funds.

Banking services would be based on a core group of customers with liquid deposits, who obtain financial credit beyond their credit balance. Along with them, those who take out loans would present either collateral or a monetary sum from a guarantor who holds an account at the bank. If he can't provide either, he would still be able to obtain a group loan along the lines of the Grameen banking model (See below). These loans will assist in breaking the poverty cycle. According to this method, the bank will work in cooperation with the Ministry of Social Affairs and with local and national charity organizations like "Pa'amonim" (an organization that assists families in becoming financially stable and teaches household budget management). These loans would only be available to private individuals, not business clients, and the bank would run under the supervision of the State banking Superintendent.

Why would people deposit money into this bank? Segal reasons that many Israelis have an objection in principle to the instrument of usury due to the fact that Jewish tradition prohibits taking interest. Additionally, there have been recent exposures of more and more abuses of commercial banks bordering on fraud and robbery. People with a keen financial consciousness would rather go to a bank that is not infected with such corruption. Another reason is simply kindness; the willingness of people to do good just as they do in their daily lives by making voluntary charitable donations.

"Beyond that, there is a point-system here," Segal says. "If I have money and I allow others to use it for free, I gain rights in the bank, so in the future when I need money for myself, I could take out a free loan. In my opinion a law should be enacted whereby interest-free bank deposits would receive a tax refund just as if the depositor had contributed to a non-profit."

According to Segal, there would indeed be fees - possibly even higher than other banks - but the bank would earn from investments; real estate, businesses, and stocks. In order to do this, he says, the bank would have to determine which of its assets would be directed towards investments and which towards interest-free loans in advance, so that the earnings would be sufficient to cover expenses. Of course, there is also the possibility that the bank would lose money.

"Even today," he says, "there are banks that lose and even go bankrupt."

Here the question arises as to whether a bank that is built solely on a high risk stock portfolio and real estate investments would have sufficient cash flow and the ability to provide immediate and safe returns to investors. Additionally, what would happen if the bank invests in interest-based transactions to business owners and financial institutions, collects fees which may actually be higher than other banks, but on the other hand wouldn't receive interest on private accounts? Could such a bank actually make money?

Professor Eliezer Yaffa, Chairman of the Organization for Interest-Free Loans warns that we shouldn't expect any bank to administer interest free transactions "for the simple reason that a bank wants to profit." He goes on to point out another difficulty related to the registration of a bank as a non-profit organization: "I find it hard to believe that they would get approval as a non-profit if they manage private accounts and operate as a business service provider."

Ben Zion Levy, economist and investment consultant, raises an additional problem: "Because of the high operating costs due to government regulations and wage requirements in the banking system, it is impossible to establish an interest-free bank. Especially when the service is intended for lower income groups in which a certain percentage are unable to repay their debts, and there is a relatively small percentage of idealists relative to the scope of economic activity in the market. An institution like this would only fit into the realm of philanthropy and charity as a complementary product to the banking world."

Worth Looking Into
The system of large banks holding private household accounts that earn those banks the majority of their profits must change. The first step in this long process should be the establishment of a steering committee to examine the economic feasibility of establishing an interest-free bank that would run parallel to the normal banking system. This bank, if it is indeed established, would not harm Israel's financial activity, but it would put those struggling to make ends meet and buckling under the pressure of overdraft and high interest loans back on their feet.

Bank Grameen, Bangladesh - Loans at 0% Interest
On a tour conducted by economist Dr. Muhammad Yunus during the Bangladesh famine there, he met a woman who manufactured small wooden stools. She told him that in order to purchase the required raw material, she took a weekly interest rate loan of 10%, which left her with hardly any profit to make a living. Yunus loaned money to her and others interest-free to help them extricate themselves from poverty. He founded a bank he named Grameen based on a model of "microloans" which he had developed. The model is based on providing small loans of about $50-$100 to small groups of five women who together manage the loan. The shame of not repaying the loan and the concern of the women for one another serve as the guarantees that the loans are repaid, and in the end the percentage of repaid loans topped 98%. The bank took interest from those who could afford to repay loans on a regular basis, but those with no ability to work received zero-interest loans. This method caught on and has been copied in 58 countries worldwide. Bank "Grameen" and Muhammed Yunus won a Nobel Peace Prize together in 2006.


Interest-Free Bank Rules and Regulations

General

The bank will be a non-profit institution, and will encourage people to deposit money (interest-free) and use these funds to lend interest-free to the needy. This bank will combine the benefits of the Postal Bank with charity funds.

Account Management

1. Processes of opening an account, depositing money, and attracting funds to this bank will be identical to a regular bank.
2. Depositors can withdraw some of their money (up to a daily limit) with a magnetic card, in any ATM.
3. Depositors who deposit over a certain sum are eligible for a credit card and cheque book.
1.
Receiving Loans

1. Each customer account that has been active for a certain period (ie: a salary went into the account, there were deposits, standing orders, etc.) will automatically receive a high credit limit to be determined in advance; this credit limit will allow him to have a negative balance without interest.
2. Customers who want to get a loan over the credit limit can get a loan without the guarantors, in exchange for a mortgage (car, apartment or securities).
3. Customers who have no property to mortgage, can get a loan with a guarantor who is one of the bank's other clients (ie, a customer who has a positive balance, could be the guarantor for another customer who wants a loan).
4. Customers without guarantors can get a loan of several groups of borrowers - according to the formula of the Grameen Bank of Bangladesh.
5. The bank will hold a collection mechanism similar to commercial banks, but use it only to collect the debt collection and reimbursement of expenses, not to collect interest. The bank will be allowed to foreclose the borrower's property, but will not be allowed to imprison him.
6. The loans will be granted only for certain purposes to be determined in advance, such as rent, medical care, tuition. Loans will not be provided for the purpose of luxury. The purpose of the loan is to enable a borrower to get out of poverty, and reach a state where he could make a living on his own.
7. The Bank will work in cooperation with the Ministry of Labor and Social Affairs, local charity organizations, national charity organizations (such as "Pa'amonim") to determine the eligibility for a loan.
8. Whoever has deposited a large, long-term sum, and after a certain time has encountered serious difficulties and needs a loan will receive priority over other borrowers who are in a similar situation.

Supervision
The bank will operate under the supervision of the Bank Supervisor of the Ministry of Finance in order to secure proper management and to protect the money of the depositors.