Handing a loan to Israel’s working poor

Interest-free lending is an effective remedy that needs no legislation or governmental intervention

As the members of Israel’s 19th Knesset prepare to move into their positions and work to identify the policies most important for our nation’s future, one topic sure to be on the agenda is how the impact of constant and growing poverty on an increasing percentage of Israeli society, including parts of the middle class. Specifically, a large percentage of those who define themselves as poor in Israel go to work, but simply do not earn enough to get themselves over the poverty line. They are known as “the working poor,” which describes those who make a genuine effort to better their personal situations, but simply cannot do enough to make ends meet. Recent surveys have revealed that approximately 25 percent of Israel’s employed population is working poor.

While there are numerous explanations for this phenomenon, ranging from allegations that the minimum wage is too low or that people are simply spending beyond their means and thus unable to maintain a viable lifestyle, we cannot ignore the fact that something needs to be changed. We pride ourselves in believing that Israel is a modern land of opportunity where if you work hard, you will be blessed with success. Yet Israel has hundreds of thousands of dedicated workers whose income hovers just above or below the poverty line and are falling far short of anything that could be described as success.

The government has weighed numerous proposals on how to deal with the problem, but to date nothing has really made a dent in lowering the numbers of working poor. The low minimum wage is truly problematic, but there is a very fine line between raising the minimum wage, which might impact on employers to offer fewer jobs thus leading to a dangerous cycle of stagnation or recession. Reducing the tax burden is another way to boost income, but could have negative effects on funding vital services to the public. This is a tremendous dilemma for government policy makers, and also for other sectors in Israel.

It may be helpful to look at non-governmental efforts for a variety of ways to approach the problem of the working poor, including some strategies originating from the non-profit sector. One successful model that we have developed over the years at the Israel Free Loan Association (IFLA) is using major private philanthropic funding to provide interest free loans to low income individuals and struggling small businesses. None of IFLA’s funds have come from government sources.

Interest free loans give the working poor resources to remain financially independent, while paying back their loan in a reasonable time with absolutely no interest. This is the central concept behind the Free Loan movement – identifying those in need, giving them interest free loans and perpetually recycling repayments into new loans for other people in need. The perpetual recycling mechanism is the key to this model, and our default rate is a remarkably low 0.5 percent.

In our experience of over 20 years, IFLA has provided over 47,000 interest free loans totaling $177 million dollars. Apart from financial aid, the greatest help that can be given to a person in need is a sense of confidence in their ability to better their lives for themselves and their families. People do not like to be on the receiving end of charity. But when they receive that support with the understanding that they are being invested in, rather than being supported, they retain a level of self-respect and dignity that encourages them to work that much harder to build a better tomorrow. We further know that in the absence of options like our interest free loans, these determined Israelis would have no other option but to fall victim to unscrupulous loan sharks, a situation likely to only further exacerbate their poverty over the long-term.

Donors, too, derive great satisfaction from knowing that their grant has immediate and long term results, all in a transparent and efficient manner.

Israel needs a better tomorrow and this will require that we take a new and hard look at how we deal with the deeply troubling problem posed by the working poor. Experience has taught us that desperate problems require creative solutions. We firmly believe that our success in helping many thousands of Israelis through interest free loans ranks very high among the nonprofit organizations that are crucial partners with government for achieving a more viable future for Israel.

Professor Eliezer Jaffe is the founder and president of The Israel Free Loan Association and Edward Cohen is the Association’s chairman

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