If all goes as planned, Israel will be soon be getting its first social bank — Ogen, which will give out low-interest loans to small businesses, first-time home buyers and nonprofit organizations that would otherwise likely struggle to get funding from commercial banks.
“We expect to get a license from the capital markets regulator to start giving out loans very, very soon,” said Sagi Balasha, the CEO of Ogen.
Balasha is overseeing the organization’s transformation from a nonprofit that provides interest-free credit to new immigrants and marginalized segments of society into a nonprofit impact-investment bank that provides low-interest credit to to the same demographic, thus serving more people. The bank will be called Ogen – Israel Social Bank.
Ogen, formerly known as the Israel Free Loan Association (IFLA), was founded by Prof. Eliezer Jaffe, an immigrant from the US. He set up the organization in the early 1990s when Israel was flooded by immigrants, mainly from the former Soviet Union and Ethiopia, and it quickly became a resource to provide funds for low-income people.
Since its founding, Ogen, which means “anchor” in Hebrew, has provided more than $300 million in interest-free loans to over 60,000 low- and middle-income families and small businesses, with a default rate of less than 1%, according to the firm. The financing was raised from donations from individuals and foundations from the US, Israel, Canada and the UK, among others.
Commercial banks “more or less cater to middle- to high-income populations,” said Balasha, explaining the need for a bank with a broader reach. If you are not in those economic brackets, “you don’t really count.”
High-income people often can get a bank loan with no questions asked, even over the phone, he said. But banks sometimes can’t be bothered to process the paperwork for lower-income people who seek loans, and will flat-out deny their request. If they do approve a loan, it can come with a steep interest rate of 10 to 12 percent interest, Balasha said.
Banks are interested in creating shareholder value and not in benefiting the public at large, he said.
“Low-income people, uneducated people and new immigrants who don’t know the language, and Haredi (ultra-Orthodox) Jews and Arabs and all others, people that are marginalized, they have a really hard time” building up their financial life. Moreover, “their social mobility is blocked by a lack of access to credit.”
Ogen aims to fill the gap by with an infrastructure that reaches out to new borrowers, and under Balasha’s leadership, the existing nonprofit is seeking an expanded scope. “Why not take Ogen, which is already big and successful, and have some of its funds become the equity of a nonprofit bank?” he asked.
Instead of simply recycling a set amount of money as borrowers repay their loans, Ogen could have a far greater impact if it increased the amount of funds available for loans by charging a small amount of interest, he posited.
In other words, what is more important, the interest-free element or the access to more credit?
Ogen – Israel Social Bank thus intends to increase the supply of affordable credit by raising funds from impact investors. The bank will be a subsidiary of the original Ogen, which will continue to provide interest-free loans to needy populations.
Unlike the US, said David Angel, director of Strategic Partnerships at Ogen, Israel has no organized systematic solution for social banking and financial inclusion. And whereas the US has credit unions, the Community Development Financial Institutions Fund (CDFI Fund) and community banks, which form a sophisticated infrastructure to bring people into the mainstream economy and help build themselves up, “Israel has none of that,” he said.
“The idea of raising impact investments on top of what we can raise as donations has the potential to dramatically increase our resources, and therefore dramatically increase our ability to meet the demand” for credit, said Balasha.
Impact investing is a growing trend globally, fueled by investors who sink money into companies, organizations and funds for the sake of social and environmental impact alongside financial return. The concept flies in the face of the view that social and environmental issues need to be solved through philanthropic donations. Social impact investors believe they can advance good causes while simultaneously making money.
Investors would get a “modest return” on their investment in Ogen from the interest paid by the borrowers, said Angel. The interest-free loans, however, will continue to be funded by donations.
To start giving out loans, the organization initially will need a permit from the Finance Ministry’s Capital Markets regulator, which Balasha says is imminent. The permit will enable a newly set up Social Loan Fund to start operating in the interim period, until the Bank of Israel issues Ogen a banking license, which Ogen has already requested and hopes to obtain in 2020. When that happens, the Social Loan Fund would be transformed into a social bank.
“The Social Loan Fund is a steppingstone, a temporary interim structure,” said Angel.
“We have the full equity, we have whatever we need, we have a business plan” along with the employees and a lending system already in place, Balasha said.
According to Balasha, the timing for a new bank is perfect, now that Israel is seeking to lower banking fees for consumers by injecting new competition into the sector, which is currently dominated by five banks. In January, tech entrepreneur Marius Nacht formally submitted to the Bank of Israel a request for a banking license to set up a digital bank in Israel.
Once Ogen gets the Finance Ministry permit, it can start giving out loans. As a non-banking entity, it is allowed to accept funding from up to 29 investors or groups of investors, each of whom can invest as much as they want.
These investments will pay 1% and will be tax deductible for US foundations. As of July, the social loan fund had raised some $18 million in commitments from impact investors including Bob Gottesman and the Max and Marjorie Fisher Foundation. That means that together with its NIS 68 million ($19 million) core equity, Ogen has at its disposal $37 million it can start giving out in loans, Balasha said. A banking license requires a minimum of NIS 50 million ($14 million).
The social bank hopes to “significantly increase” the supply of affordable and accessible credit to hundreds of thousands of Israelis who are now sidelined. “The ultimate goal of the social bank is to provide a variety of banking services that will be accessible through a digital online platform,” Ogen says in an explanatory note to investors.
Credit ‘is a lifeline, it is oxygen’
This will not only make the banking services offered more accessible, but also lower operational costs because hardly any branches will be needed.
The bank and the fund will give out up to NIS 200,000 to small businesses and NIS 650,000 to nonprofit organizations and NIS 100,000 to first-time homebuyers. In both cases the average annual interest rate will be 5%.
Along with the loans, Ogen will also supply borrowers with financial guidance and expertise from in-house loan advisers and partner organizations to help them make the most effective use of the money they receive, Balasha said.
Balasha launched his career in the budget department of the Finance Ministry, where he oversaw 20 percent of the government budget and was involved in major structural changes and reforms. He has served as vice president of finance and development at Beit Hatfutsot — The Museum of the Jewish People, where he headed a financial recovery plan, and as CEO of the Israeli-American Council (IAC), a nonprofit focused on building a community of Israeli ex-pats in the US.
On one hand Israel is booming economically, in terms of GDP, GDP per capita, low unemployment and high labor participation in the workforce, he said. But there are people being left behind, in a trend that is spreading in Western civilization, where gaps are growing.
The tech sector — which makes Israel the so-called Startup Nation — accounts for “just 8% of our GDP. And then you have 92% that are so much not part of the Startup Nation. This is a major threat.”
“In Israel it is so fragile, and it can blow up in our face. Some people have no access, not just to credit, they have no ability to build themselves, they have no access to social mobility.”
“Ogen is not going to solve the entire problem of gaps in Israel,” he said. “But Ogen can focus on a very major element of the problem, and that is access to credit, which is a lifeline, it is oxygen. You cannot progress in life without it.”