As virus strikes small businesses, social bank seeks to provide credit lifeline
Ogen, a nonprofit, takes on added risk to allow hairdressers, tour guides and the like to get loans to tide them over during coronavirus crunch
Shoshanna Solomon was The Times of Israel's Startups and Business reporter
As Israeli businesses face a credit squeeze, and banks and the government squabble over the amount of guarantees that should be given to special credit funds for small and medium-sized operations, a group that provides credit to small businesses and non-government organizations is hoping to step in and fill part of the void.
Ogen is a nonprofit organization that provides interest-free credit to marginalized segments of society. It also recently got a license from the Israeli capital markets regulator to start providing low-interest loans, via its Ogen Social Loan Fund, to small businesses and nonprofit groups.
Formerly known as the Israel Free Loan Association (IFLA), Ogen was founded by Prof. Eliezer Jaffe, an immigrant from the US. He set up the organization in the early 1990s when Israel took in many immigrants, mainly from the former Soviet Union and Ethiopia, and it quickly became a resource to provide funds for low-income people.
The organization is now undergoing a transformation into a nonprofit impact-investment bank. Its financing is raised from donations and impact investors — individuals and foundations from the US, Israel, Canada and the UK, among others.
Now, with the coronavirus pandemic sending unemployment levels to record highs in Israel as businesses are shuttered in a bid to curb the virus by means of social distancing, Ogen is receiving a deluge of requests from small operations seeking the financial oxygen to survive.
The Ogen Social Loan fund has made its lending criteria more flexible and can now give up to NIS 100,000 ($28,000) to small businesses that lack a business plan provided they have a short, one-page recommendation by a business adviser that says they have the ability to repay their loans.
While other institutions, like banks, are making it harder to get loans because of the higher risks in the economy, “we are opening our gates,” said Sagi Balasha, the CEO of Ogen in a phone interview. “This is our time to help.”
Banks may be completely justified in the measures they take to ensure they only give out loans that will be repaid, because they owe their shareholders a profit, Balasha said. But since Ogen is a nonprofit organization, it can shoulder a greater than usual to help people in their hour of need.
“We need to keep our lending secure,” Balasha said. “But because we are a nonprofit, we also need to help people stand up in this time of crisis. We plan to increase the number of loans we give, even if this means increasing the amount of risk we take.”
Because the funds Ogen has available for loans is 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.
Ogen has also set up a fund of NIS 30 million with a philanthropic safety net of some NIS 6 million to help nonprofit groups through the corona crisis, he said. The UJA Federation of New York and the Jewish Agency have contributed to this safety net.
Last month, Israel announced an economic rescue package worth NIS 80 billion, the largest in Israeli history, to prop up its economy as unemployment surged to record levels of some 25% from a record low of 3.6% pre-coronavirus. This rescue package was later upped to NIS 90 billion.
Part of the rescue package includes a fund earmarked for small and medium-sized businesses. These businesses are the engine that keep economies chugging, but are the most vulnerable to social distancing policies and quarantines.
This so-called Corona Fund consists of NIS 8 billion that will be made available to businesses via the banks, and will be backed by government guarantees.
The loans will be given to businesses with an annual turnover of up to NIS 400 million that have been hit by the coronavirus crisis. There will be no interest for the first year, and a charge of prime rate plus 1.5% for the following years — better than market terms. The loans will be for a period of five years. Applications will be processed by the banks within seven days, the Finance Ministry, in charge of the scheme, promised.
The money guaranteed by the government is not new money. The funds will come from the banks, with the government providing guarantees for 15% of overall losses on the total loans given out under the program.
So, banks, which have been overwhelmed by the huge demand for these loans, have been reluctant to hand out the funds, calling on the government to provide guarantees that match the higher loan-default risks they fac, in light of the economic crisis raging on the ground. The 15% in guarantees offered by Israel compares with 90% provided by the German government, 85% provided by Switzerland, and 80% by Spain, the bankers say, demanding similar conditions.
The government’s stimulus package has good terms “on paper,” said Ogen’s Angel. “But the system to distribute these funds is not for the smallest businesses.”
Banks that are tasked with handing out these funds are “overwhelmed” and choose to provide credit to those businesses that will provide them with a bigger profit margin, Angel said.
“But there are many tiny businesses, like barbers, cosmeticians, tour guides,” with an annual revenue of up to NIS 5 million and four or five employees, who will not make the banks’ cut, Angel said. This is where Ogen hopes to fit in.
Since mid-March — when the crisis struck in Israel, Ogen has given out 40 loans to small businesses, at a flat interest rate of 5%, and six loans to nonprofits, at a flat interest rate of 3%, Balasha and Angel said. The organization has also handed out over 100 personal loans since crisis erupted, from a fund of some NIS 160 million, of which NIS 4 million is still available. These personal loans are up to NIS 30,000 per household, totally interest-free, they said.
“We have seen a 30% increase in demand for these interest-free loans,” Balasha said. The NIS 4 million fund allows Ogen to provide some NIS 20,000-NIS 30,000 per family, interest free, which offers them a “lifeline,” he said.
Ogen is also in talks with the government to get guarantees for the funds it will make available for small businesses. “We think not only banks should get these guarantees,” said Angel, and that there should be guarantees in place for loans to really small businesses too, which face higher risks because of the coronavirus.
“Everyone is very positive,” he said. “I’m optimistic it will happen. But we are not waiting for the government. We are already giving to those who need.”
