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Supervisor of Banks David Zaken today published a draft for comments by the public regarding the benchmark conditions for establishing credit unions in Israel, and the stages required for their establishment. This is another stage in the adoption of the recommendations of the Team to Examine Increasing Competitiveness in the Banking System, and comes in addition to other measures taken by the Banking Supervision Department to increase competition in the banking system, particularly increasing the number of parties active within and outside the banking system.


A “credit union” is a cooperative financial association[1] owned and controlled by its members, which does not operate for profit. A credit union is intended to provide its members with bank account management services, savings, obtaining loans, and obtaining other basic banking services. These narrowed services may provide a framework for the management of current account activities, and may constitute a worthwhile alternative to managing an account at a commercial bank for a significant portion of the population.

The draft details the activities and measures required on the part of anyone wishing to establish a credit union, and the manner in which the Banking Supervision Department will guide the process of establishing the union, up to the point of obtaining a license of a banking business. According to the estimated timetable that is detailed in the draft, the duration from the first application to the Banking Supervision Department until obtaining a license should be about two years.

The draft sets forth that the shareholders who are members of a credit union, as it is a cooperative financial institution, are the account holders themselves, and they are the ones who choose the Board of Directors of the credit union. Rules will be set for each credit union, that will define the rights and conditions of membership in them, subject to the requirements of the law, and based on a common bond among the members, and only a member of the union will be permitted to manage an account in it.

Credit unions will operate based on a social orientation, and will set themselves the objective of improving the well-being of their members. Profits will be invested in improving services to the members, in order to ensure their well-being, and in the growth of the credit unions themselves. The establishment of credit unions may contribute to increased competition in the banking system, since their reduced cost structure and social character will lead to services to their members being provided under relatively good conditions. These unions may attract an attractive community of customers, thereby leading indirectly to an improvement in terms within the banking system for that response group.

With the aim of ensuring the stability of credit unions, and in order to prevent the possible damage of the collapse of “new players” that will increase competition for a short period but not survive over time, prudential requirements have been set that will be applied to credit unions as listed in the draft, including:
 
  • Initial capital totaling no less than NIS 75 million;
  •  Formulation of a business plan that details how the union plans to serve the needs of its intended members, in accordance with their characteristics. The business plan, including the minimum number of union members, will be submitted for approval of the Banking Supervision Department;
  •  Requirements regarding the computer and operational systems.
 
Supervisor of Banks David Zaken said, ”In parallel with the many measures we have taken in recent years to remove obstacles that hampered the development of competition in the banking system, it is very important to also create the conditions that will make it possible for new players to enter the market. The document that we are publishing today will make it easier for potential credit unions to undergo the process and to start operating as a cooperative banking entity. At the same time, we will insist that all of the unions have the stability required of an entity that manages the public’s money.”

[1]    A credit union will apparently be incorporated as a “Cooperative Association”, but if legal difficulties arise, it may also be possible to incorporate in another fashion, such as a “Charitable Company” (company for the public good).