Proposal To Expand Sources Of Funding For Non-Bank Lending Corporations
10 October 2020
PROPOSAL TO EXPAND SOURCES OF FUNDING FOR NON-BANK LENDING CORPORATIONS
Dear Clients and colleagues,
Israel’s Ministry of Finance has published a Memorandum proposing an Amendment to the Banking (Licensing) Law in order to expand the possible sources of funding for non-bank lending corporations. The Ministry has invited comments on the proposed Amendment by 25th October 2020.
In recent years we have witnessed numerous legislative and regulatory initiatives, as part of an effort to increase competition in the area of lending to households and small businesses in Israel. This is an area which has historically been dominated almost exclusively by the Israeli banks. The sources of funding available to different lenders has been identified as a major factor adversely affecting competition. Non-bank lending corporations are not permitted to use deposits from the public as a source of funding for extension of credit, and must therefore find alternative funding solutions. The rate of interest currently payable upon deposits from the public is significantly lower than the cost of alternative funding sources, and this difference creates immediate advantage for banks over non-bank lenders with regard to credit extended to households and small businesses.
The Economic Programme Law (Legislative Amendments for the Implementation of Fiscal Policy for the Budget Years 2015 and 2016), 5776-2015, amended Section 21 of the Banking (Licensing) Law, 5741-1981 (the “Banking Law”) so as to permit non-bank lenders to issue bonds to the public in order to fund their lending activity.
This amendment extended the funding alternatives available to non-bank lending corporations, thereby contributing to their development and to competition in lending markets. However, even after the amendment, the Banking Law imposes restrictions upon non-bank lending corporations with regard to funding by way of issuance of bonds. The latest proposal to amend the Banking Law has been announced with the declared purpose of further expanding the funding alternatives available to non-bank lending corporations, in order to increase competition in the area of lending to households and small and medium sized companies. The proposed Amendment to the Banking Law (expanding the sources of finance for non-bank lending corporations) has the following proposals:
- To amend the Banking Law so that large non-bank lending corporations, which are subject to capital and liquidity requirements, will be able to raise funds from the public. A non-bank lending corporation which has assets greater than NIS 5 billion (as appearing in its most recent consolidated financial statements) will be permitted, pursuant to the proposed Amendment, to issue up to NIS 15 billion in bonds. Such a corporation will also be permitted to issue commercial nonconvertible securities, as defined in the Securities Law, 5728-1968, provided that the maturity of such securities is between 270 days and one year of their issuance.
- To repeal sub-Sections (b) to (e) of paragraph (8) of the definition of “extension of credit” in Section 21(b) of the Banking Law (which stipulate conditions for the issuance of bonds by a non-bank lending corporation which restrict the business activities of a non-bank lending corporation which raises funds by issuing bonds) as follows:
a. Cancellation of the condition set out in sub-paragraph 8(b), pursuant to which a non-bank lending corporation may not lend to a company with annual income greater than NIS 400 million for the preceding year (or any other amount determined by the Minister of Finance). This restriction currently inhibits the ability of a non-bank lending corporation that raises funds by way of bond issuance to extend credit to large businesses. Although this requirement specifically relates to large businesses, the Ministry of Finance expects that the cancellation of this restriction will increase the funding options for non-bank lending corporations and will reduce the cost of lending to (and therefore the cost of borrowing for) households and small and medium sized businesses, thereby contributing to competition in the the household and small and medium sized business credit sector.
b. Cancellation of the requirement set out in sub-Section 8(c) of the Banking Law that bonds issued by non-bank lending corporations must be rated at least investment grade. Cancellation of this requirement is meant to afford greater flexibility for the issuance of bonds by non-bank lenders.
c. Cancellation of the conditions set out in sub-Sections 8(d) and 8(e), which set restrictions on credit secured by way of collateral over real estate. The revocation of these restrictions is meant to allow non-bank lending corporations greater flexibility in extending credit, and in practice may increase competition in the mortgage sector.
To summarize, the proposed Amendment to the Banking Law is intended to bring certain non-bank lenders closer to the Israeli banks in terms of raising funds from the public for the purpose of funding their credit operations. This is expected to decrease the cost of funding for non-bank lending corporations and thus to increase competition in the household and small business sector. On the other hand, since it is impossible to assess at this stage how the proposed amendments will affect stability in the credit markets in Israel, the proposed amendments will only apply to large non-bank lending corporations that satisfy the capital and liquidity requirements. We note that the Supervisor of Financial Services (the Supervisor of Capital Markets Insurance and Savings) is authorised to impose additional capital requirements on non-bank lending corporations, as well as liquidity requirements. However, no such requirements have been published to date.
We will be happy to advise and assist in this matter and in general the implications of amending the law.
Banking & Finance Department
Financial Services Regulation Department
Herzog Fox & Neeman
Irit Roth | Partner
Banking & Finance
Neta Dortman Raviv | Partner
Financial Services Regulation