Israeli Banks Face Class Action Over Unpaid Interest on Savings Accounts

A class-action lawsuit has been approved against four major Israeli banks, alleging they failed to pay customers interest on their checking account balances during periods of significant interest rate hikes. The lawsuit highlights that approximately 400 billion shekels are held in checking accounts, with 236 billion shekels belonging to households and small businesses, earning an average interest rate of only about 0.1%. Data presented in the case suggests that in 2025, for every 10,000 shekels in a checking account, banks earned approximately 430 shekels, while customers received only about 10 shekels in interest.

This situation has brought renewed attention to money market funds as a relevant investment option. Historically considered unexciting with near-zero returns, rising interest rates have made them more appealing. Money market funds are a type of mutual fund that invests in a limited range of short-term, low-risk assets like shekel bank deposits and high-rated corporate bonds, with an average asset maturity of under 90 days. Their short-term nature makes them less sensitive to interest rate changes and generally less volatile.

The advantage of money market funds lies in their "purchasing power." When a fund pools large sums from investors, it can negotiate better interest rates from banks than an individual customer can. This allows smaller investors to benefit from the terms typically offered to larger institutional investors. While money market funds have been legally established in Israel since 2008, they only gained significant traction in 2022 when interest rates began to climb, offering substantial returns for the first time.

Key benefits of money market funds include a real capital gains tax, meaning taxes are paid only on the profit after accounting for inflation, unlike the nominal profit taxed on bank deposits. Additionally, money market funds purchased through banks are exempt from purchase, sale, and custody fees, as mandated by the Bank of Israel. When comparing funds, management fees are a crucial factor, with significant variations existing between providers. However, investors should consider that selling an existing fund to switch to a new one can trigger a taxable event on accumulated profits.