Interest rate ceiling may be slashed under new law

Moshe Kahlon, Karnit Flug  photo: Uriah Tadmor
Moshe Kahlon, Karnit Flug photo: Uriah Tadmor

If ongoing talks end in agreement, the Fair Credit Law will institute a ceiling rate for both bank and non-bank lenders.

A draft amendment to the "Regulation of Non-Bank Loans Law" suggests the parties are nearing an agreement to lower the interest rate for households and individuals down to the single digits and to impose a ceiling on the rates charged by banks and non-bank lenders.

The draft provides the new financial comptroller (instituted after the implementation of the "Regulation on Financial Services Law) with the authority to adjust the maximum rate following developments in the credit market - say, when the Bank of Israel eventually raises its interest rate.

The Bank of Israel recommended two years ago, in the Zaken Committee report, to set a rate ceiling for banks -- on the condition the same maximum rate applies to non-bank lenders.

However, it is possible some of the agreements reached between the Knesset's Constitution, Law and Justice Committee and the Ministry of Finance will be opposed by the Bank of Israel.

After Passover, the meetings between the committee members, the Ministry of Finance, and the Bank of Israel will be moved up. More specifically, the meeting between Minister of Finance Moshe Kahlon, Bank of Israel Governor Karnit Flug, and Regulator Hedva Bar.

Deliberations over the interest rate section in the legislation, which was renamed the "Fair Credit Law" have been continuing for several months while under stringent criticism from the Knesset committee members and Ministry of Finance officials over the rate ceiling for non-bank lenders.

The original draft of the legislation -- reflecting the position of the Bank of Israel and the Ministry of Justice -- set the maximum interest rate for individuals borrowers of both bank and non-bank loans at 20% plus the prime rate.

Many of the Knesset committee members opposed the figure, with chairman and Bayit Yehudi MK Nissan Slomiansky saying at the time: "We do indeed need a ceiling for interest rate -- but not 20%!"

The official reasoning provided by the authors of the original legislation, in line with the position of the Bank of Israel, claimed a ceiling above 20% may appear high but will provide incentive for the establishment of many new lenders, both banks and non-banks, and help foster competition for credit which will eventually lower the cost of loans.

As it stands, since 1993 when the regulation for non-bank loans was passed, banks have been outside its jurisdiction, releasing them from any rate ceiling for loans. Meanwhile, the interest rate designated by the non-bank legislation sets a rate 2.25 times the average rate offered by banks, as reported by the Bank of Israel.

"The absence of a ceiling for banks led to a situation in which regular consumers are paying double-digit interest while the interest rate in the market is negligible," says Kulanu MK Eli Cohen. He supports the legislation but is avidly opposed to the high ceiling.

"Who gets credit cards? Only a client deemed 'normative' by the bank, with a credit line and a history of debt repayment. Most people have a monthly line of credit of NIS 15,000-50,000. Most people cannot charge their credit cards more than that. Despite that, the average interest charged by credit card companies is 9.5% annually. It means most clients are paying much higher interest -- double-digit interest. It's unreasonable.

The deal being reached these very days will set a rate ceiling for individual borrowers -- across the market, for both banks and non-bank lenders -- at a rate of no more than 3 times than average interest charged by banks (currently 3%).

When a financial regulator is appointed, they will be authorized to adjust the ceiling with the permission of the Minister of Finance. "The current situation, in which non-bank lenders have a ceiling and the banks do not, is an injustice that must be fixed. All the players on the credit market must operate based on uniform rules," says MK Cohen.

Published by Globes [online], Israel business news - www.globes-online.com - on April 25, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

Moshe Kahlon, Karnit Flug  photo: Uriah Tadmor
Moshe Kahlon, Karnit Flug photo: Uriah Tadmor
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