A household lending revolution in Israel began this weekend with the launch of the country’s first credit database. Supporters are hailing the database as a way of lowering the cost of borrowing for consumers, while critics warn it may tempt many households to take out loans they can’t afford.
Formally launched on Friday, the database – or “system” as the Bank of Israel calls it, apparently out of the negative connotations with respect to privacy that official databases have – collects information about the financial activity of almost every household in Israel.
The data are collected from bank and credit card accounts and other sources, including the government’s Enforcement and Collection Authority, from all Israelis above 18 – including those who have never taken out a loan.
What the database shows is a consumer’s credit history, such as what kinds of loans they may have taken and the history of monthly repayments.
What the database doesn’t collect is information about personal income or assets, unless the latter were used as collateral for a loan.
Until now, the only generally available credit history revealed only a borrower’s past credit problems, such as arrears and defaults. Such histories generally protected lenders from taking on bad credit risks but did little to help borrowers with a good credit history from getting better terms.
In addition, only the borrower’s own bank had access to their full credit history, a situation that has enabled the nation’s two biggest banks – Leumi and Hapoalim – to dominate the market.
Other lenders had to operate mostly in the dark and that made them likely to demand stiffer terms. The rule of thumb has been that anyone who applies for a loan from anywhere but their own bank must be making that choice because they have been turned down by their own bank.
The Bank of Israel and the new system’s other supporters are hoping to see a cut in borrowing costs for people with a strong credit history – albeit at the cost of higher interest rates for those who do not have good credit histories. It will also enable them to shop around between bank and non-bank lenders to get the best loan because all lenders will have access to the same credit information and can properly price a loan.
More household borrowing should grease the wheels of the economy and make consumer spending more efficient—for example by enabling young families with high expenses and relatively low incomes defray some of the costs by borrowing. As they and their children grow older, their costs tend to fall and income often rises.
Critics are focused on the risk that lower income borrowers will be lured into taking loans they can’t afford.
“We’re expecting to see a huge and worrying increase in the number of Israelis, singles and families, that can’t meet their monthly repayments on their loans,” said Ran Melamed, deputy director of the community empowerment non-profit, Yedid.
In response, supporters of the database point to the fact that Israeli households have little debt relative to other countries, according to Bank of Israel figures. Bank of Israel.
Consumer credit has grown by an average of 5% to 6% annually in recent years to 557 billion shekels ($156.26 billion) at the end of 2018, mostly it due to a surge in mortgage borrowing as home prices soared.
The increase was far faster rate than the overall growth of the economy, but Israeli household debt, including mortgages and other consumer loans, amount to just 42% of gross domestic product. In the United States, household loans equal 80% of GDP and in countries like The Netherlands and Denmark it is more than 100%.
Critics, however, say the overall figures mask the problem facing Israel’s lowest income groups. A study by Labib Shami, a senior researcher at the Taub Center for Social Policy Studies, found that in 2016 the bottom 10% of households had debt on average equal to eight years of annual income.
The Bank of Israel hopes to assuage concerns about privacy by operating the database itself and limiting access. Violations of client privacy will be subject to severe sanctions, it warns.
Banks and other lenders won’t have direct access to the data. Rather, a select group of credit bureaus (right now two – BDI and Dun & Bradstreet Israel – but others are on the way) will get the raw information and process it into credit reports that they pass on to lenders.
The bureau can issue either a “credit indication,” a simple report that says the potential borrower has had no past problems with repaying debt or a full report on the borrower’s credit history. In either case, the borrower must agree to having the report issued, although in the case of a credit indication consent doesn’t have to be explicit.
The credit bureaus must erase the data from their files after it has been processed, although the information remains in the central bank’s own database for future use.
As to the problem of incorrect data– one the banking industry said they expect to see at least in their first few months of operation – the Bank of Israel allows a consumer to see their own file – once a year for free and more often at a cost of 31 shekels.
They can access it from a credit bureau or directly from the Bank of Israel at www.creditdata.org.il and request corrections.