Say you come upon a golden business opportunity. A chance to buy raw materials for your small plastics manufacturing line at half the price. But there’s a catch. The supplier wants half the cash, some NIS 20,000 ($6,100), upfront.
Normally, you could just go to your local bank, explain the business opportunity on a loan application and borrow the sum with relatively little hassle. But as an Arab citizen of Israel, you are already familiar with the fact that the banks will classify your business as “risky” and deny the loan due to its small size and low turnover.
So you do what everybody else in the Arab community who needs a cash infusion does. You go to a loan shark, who usually operates out of what is advertised as a “change store.”
“It’s a small space, about 5 square meters (53 square feet). They are everywhere in Arab towns,” said Amal Urabi, an attorney who says his friend went through this exact process.
“He goes in, no one asks him about cash flow in the plastics business or why he needs the money. They arrange for him to return the money at relatively high interest rates, and that’s it. The criminal organizations hold huge amounts of cash and they serve as the alternative for banks for the Arab public,” Urabi said.
With organized crime and violence reaching epidemic levels in Arab areas of the country, experts, officials and local activists say criminal groups are flourishing as they become the de facto financiers for a community that has essentially been abandoned by traditional regulated banks.
Loans from such organizations often carry high interest rates and even higher consequences for unpaid loans. If a borrower misses a payment, they can expect a threatening phone call. If they fail to pay again, someone with a gun will stop by their house, making the threat more concrete. Miss again, and the loan shark will shoot a single bullet at the home as a final warning before they gun the delinquent borrower down, often in broad daylight in the middle of the street.
The mob loans are seen as a major part of skyrocketing murder rates in Arab towns. In 2020, at least 96 people in Arab Israeli communities were the victims of homicides, nearly double the number murdered in 2014. There have been 32 murders in the first four and a half months of 2021.
Prime Minister Benjamin Netanyahu, while campaigning for Arab votes ahead of March elections, promised to tackle the issue, and earlier this year presented a plan that would have set up a special committee, quickly dispatched officers to crack down on illegal weapons and put an extra NIS 100 million ($30 million) into adding police stations, welfare services and more. Longer-term parts of the plan would combat domestic violence, bolster economic empowerment and establish a new police division to deal with the crime issue.
“We have done this successfully against criminal organizations in Jewish society and we will do so successfully in Arab society as well,” he said during stump speeches.
But experts and community members say policymakers will need to look beyond policing and enforcement to tackle the problem. Only by dealing with the root issues underlying the crime wave will an effective solution be reached.
“Local councils, municipal welfare bureaus, community centers — all need to offer parents and young people home economics workshops,” said Hussein Khalaila, a mortgage consultant in the northern Arab town of Majd al-Krum. “[They need to] teach about the dangers of the gray market, explain to people how to calculate the monthly repayment on a loan.”
Mortgaging the future
The dearth of aboveboard bank loans for Arabs is a well-known problem among those in the community, but mainstream discourse on it is generally relegated to Knesset committee chambers and the Arabic-language press.
The Knesset Committee on Combating Violence and Organized Crime in Arab Society, an ad hoc panel headed by Ra’am chief Mansour Abbas that convened during the last Knesset, regularly hosted Knesset members who emphasized the critical nature of addressing underlying social and economic ills, singling out gray market loans as a major problem.
At one committee meeting, Abbas noted that at least 30 percent of homicides in Arab society are the result of organized crime. According to Aman-the Arab Center for a Safe Society, headed by Reda Jaber, most homicides are carried out with firearms and victims are overwhelmingly male, indicating that the increase in killings is not a product of domestic violence.
“The banks are the main cause of economic crime in Arab society,” former Joint List MK Sondos Salah noted at one meeting. “I know how difficult it is for Arab families to get loans.”
As gray market loans have become more widespread, organized crime syndicates have become more powerful, controlling not only the change shops but also businesses that do deferred deposit check-cashing, also known as payday loans. Criminal groups have also snatched up agricultural lands, which can be a cash cow if later zoned for development, and have become emboldened enough to level threats at local politicians or put them in the mob’s pocket.
“We live in the Wild West,” said Khalaila, describing an incident recently in which one of his four children called him in hysterics. “There was a shooting in the neighborhood near the house, he told me. An hour later they found two bodies. People were killed on the street, at 2 p.m., in daylight. I had to take the kids for psychological treatment. They were traumatized.”
On paper, Arabs should be able to turn to banks or get credit through regulated non-banking institutions. But both have failed to actually provide for swaths of the community, sending many looking for quick liquidity into the hands of dangerous loan sharks.
One major problem is the fact that Arab Israelis often do not have what the banks consider sufficient collateral, since homes often lack official permits due to what community members say are discriminatory zoning laws that make legal building nearly impossible.
“A home is usually the only asset community members have,” said Faisal Mahagna, an economist, social activist and former deputy director of a Bank Hapoalim branch in Umm al-Fahm. “However it is almost impossible to take a mortgage or a loan while using a home as collateral. The banks usually claim that Arab homes are non-transferable since many of the houses are not officially registered by the Israel Lands Authority.”
Mahagna said one solution suggested was to use the land the home is on as collateral instead, but there were more hurdles, namely the fact that banks are reluctant to lend to businesses located inside homes, due to complicating factors stemming from issues that could arise if the shop defaults on the loan.
Such mixed-use properties, in which a woodshop or pharmacy might be located on the bottom floor of a home, are common in Arab cities.
“There are not enough industrial zones in Arab communities, so people have businesses attached to their homes,” Mahagna said during a recent tour of Umm al-Fahm organized by the Center for a Shared Society at Givat Haviva.
According to Urabi, the fact that many businesses are located in homes and don’t have access to financing except through loan sharks means that they have few opportunities to grow or transition from the service sector to the more stable and robust manufacturing or tech sectors.
The attorney, who works for Sikkuy, a nonprofit organization that seeks to advance equality and cooperation between Arabs and Jews in Israel, said that 90% of Arab-owned businesses are small to medium-sized or family-owned. Few large factories or plants are owned by Arabs, and tech or research and development offices are exceedingly rare.
Mortgages to build homes are also hard to come by. A Bank of Israel study in 2017 found that predominantly Arab locales made up only 2% of mortgages nationally, with another 4% coming from mixed Jewish-Arab cities.
One reason is Arab dwelling patterns, in which it is not uncommon for several generations of the same family to live under the same roof or in the same compound.
A father might want to add a floor to his home for a married son, but when they try to get a loan for the building costs, banks will view the multi-generational structure as a risk, since they would only be able to foreclose on a single part of the family home in the case of default.
“There are no mortgages, no construction starts, and all of this is holding back changes taking place in Arab society,” Urabi said. “On the one hand, purchasing power among Arabs has risen in recent years, but it’s a service-based economy, not a manufacturing-based one.”
Urabi argued that Israeli banks and regulators could deal with the issue by doing what other countries have done, like putting in place government-backed guarantees for home mortgages to ensure that banks don’t lose their shirts by offering loans they consider risky.
“It could be a municipal entity, or a governmental body or even an insurance company. There are models for that in the world,” he said.
Sources in the banking sector who spoke with The Times of Israel admitted that Arabs face a number of impediments in trying to get home loans. Many of them wind up taking out short-term general purpose loans from the bank, which carry higher interest and don’t come with various benefits offered by the state to encourage home ownership among young families.
Credit where credit is due
In recent years, attempts to address inequality in the banking sector have focused on increasing access for a previously underserved population.
In 1959, the Arab-Israeli Bank was founded in Haifa with the mission of serving the country’s Arab population. The bank expanded over the next dozen years, opening branches in Arab cities across northern Israel and even the West Bank after 1967.
In 1971, it was acquired by Bank Leumi, which operated it as a subsidiary and in 2015, it was fully merged into the parent bank, following a money-laundering scandal. By then, the bank had long since lost any semblance of being an independent entity.
According to Bank of Israel monitoring data, the number of bank branches in Arab localities grew between 2005 and 2018 from 100 to 169. In Jewish towns and mixed cities, the number of branches remained roughly the same during that time, likely due to a move toward more digital banking.
Non-banking institutions should also be an option for members of the Arab community seeking credit via deferred deposit checks. But the only such regulated firm focused on serving the Arab community, M.L.R.N. (which recently became the first-ever Arab-owned business to launch an IPO on the Tel Aviv Stock Exchange) doesn’t work with private borrowers or small businesses.
Unregulated check-cashing outfits, meanwhile, have also come under control of the mob.
While access to credit for consumers is available via credit cards, members of the community have traditionally shied away from using such instruments, said Urabi, who estimated that over two-thirds of Arabs in Israel do not have cards.
“The state has an interest in reducing the use of cash, but in Arab society it works the other way around. Cash is still used, salaries are paid in cash, and there is invoice fraud. This is a very common phenomenon,” he said.
According to banking experts, the lack of credit cards means that people are less likely to have credit histories, which can cause issues when trying to open an account or transfer money between accounts.
The end result is that the easiest, quickest and sometimes only way to get a loan is through gray-market lending.
“There are a lot of credit services on the market today outside the banking system,” said Khalaila. “You can buy a car with financing, or can get a NIS 4,000 line of credit at a pharmacy, without any checks on whether they can repay the loan. Someone can cash deferred checks at a change store, but then they are doing business with organized crime.”
Khalaila, who coaches families on financial responsibility on top of his mortgage consulting, said he advises everyone to stay away from gray market loans.
“If a family asks for my counseling, I tell them, ‘I do not counsel those who have received a loan in the gray market,” he said.
He noted that many in the community suffer from a lack of financial education, spending beyond their means and relying on easy access to unregulated loans without necessarily considering the consequences.
“You see 20-year-old kids in the Arab community, who worked a little and maybe make NIS 7,000 ($2,150) a month, and decide to buy a luxury car worth NIS 220,000 ($67,600),” he said. “They think, ‘I can pay back NIS 4,000 ($1,200) a month, but don’t take into account NIS 12,000 ($3,700) a year for insurance, gas and other expenses. So from their monthly paycheck, nothing is left. And even worse, the dad pushes his son into it, because his car is also financed, and so the whole family’s financial situation collapses.”
To Urabi and others, the lack of access to regulated banking is rolled together with other root problems ailing Arab society, but they are not being addressed in any significant way.
“There is currently no serious and in-depth discussion of the barriers to finance in the Arab community, both for young people and in general,” he said. “The real-estate market is bogged down, there is no development happening locally and so long as the real estate market remains unsophisticated, there is no incentive for credit or loans for building or to businesses driving construction.”
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