Israeli regulator calls for more competition as large banks cash in on hefty loan fees

Israel’s banking supervisor, Daniel Hahiashvili, said Monday that more competition was needed in the banking system, as lenders rake in massive profits fueled by high interest rates and costly fees levied on an increasingly debt-burdened public during war.

“The high interest rate environment continues to have an impact on the profitability of the country’s banks this year… they have been enjoying high profitability over the past three years, which raises questions about competition,” says Hahiashvili, speaking at a press conference in Tel Aviv. “For profitability to moderate, competition and the entry of new players are the key.”

The country’s concentrated banking system is largely controlled by five large banks, which have been accused of profiteering thanks to high interest rates for loans and mortgages, posting record profits as much of the rest of the country struggles to make ends meet amid the rising cost of living and an economy battered by war.

Over the past years, the central bank steadily hiked interest rates from a record low of 0.1 percent in April 2022 to 4.75% in July 2023 to prevent inflation from climbing too high. Despite the outbreak of war, the Bank of Israel has cut borrowing costs only once since then, in January 2024, with the rate remaining at 4.5% since then.

A growing need for credit and loan fees paid by increasingly debt-ridden Israelis have fueled a wartime windfall for Bank Hapoalim. On Monday, Hapoalim, one of Israel’s two largest lenders, said its net profit jumped 25 percent to NIS 2.42 billion ($682 million) in the first three months of the year, propelled by income from net interest and fees paid by mortgage and loan holders.

Data shows that large numbers of Israelis spend more than they earn each month, with more than one-third of households in 2024 stuck in a chronic overdraft trap. Many are falling ever deeper into debt as they struggle with a series of war-related tax and price hikes, and interest rates remain high.

People withdraw money from a Bank Hapoalim ATM machine in Tel Aviv on December 9, 2024 (Miriam Alster/FLASH90)

With little competition, the country’s banks are also able to charge excessive fees with little fear of blowback. When it comes to interest paid on deposits and savings, the lenders have been criticized for sluggishness in offering customers higher rates accordingly, or for failing to do so altogether.

For Hapoalim, net interest income in the first three months of the year rose 12% to about NIS 4.28 billion ($1.21 billion) year-over-year. Fee income amounted to NIS 1.06 billion ($299 million) in the first quarter, a 9% increase compared with the same quarter last year.

“One of the reasons for the high profitability of the banks is the high proportion of funds that Israelis are holding in [non-interest-bearing] checking accounts, [which are a cheap source of financing for lenders],” said Hahiashvili.

At the request of the central bank, Israel’s main commercial banks at the end of March started to introduce a series of temporary benefits, fee waivers, improved interest rate terms, and interest on credit balances that hinge on various conditions. The banks agreed to put aside NIS 1.5 billion ($434 million) in 2025 and in 2026 for a program that includes leniencies in credit and fees for war-affected households and small and medium-sized businesses, including reservists, evacuees from conflict zones and families of war casualties.

Hahiashvili said that the regulator will continue to seek to improve the level of fairness and trust in the banking system by increasing data transparency on banking services, to provide comparison tools — for example, on bank fees — to strengthen the bargaining power of customers.

“In the coming year, we will continue to examine bank fees, and consider additional steps to increase the level of fairness,” said Hahiashvili. “We are working on a licensing framework to remove barriers to allow the entry of new players within and outside the banking system, including nonbank entities that will be able to offer deposits and provide credit.”

A man stands at a cash machine of the Israel Discount Bank in Jerusalem, on July 1, 2013. (Nati Shohat/Flash 90)

“The emerging framework is expected to increase the number of players and increase competition, which in turn will force current players to improve the level of services and lower prices,” he added.

Hahiashvili called on the country’s banks to adapt current account services, loan and savings tools to the individual needs of their customers, similar to building a mortgage financing structure. In a similar vein, he urged the public to gather available information on banking services and to be in the know about their entitlements vis-à-vis the lenders.