Banks Retain Veto Power Over Competitors in Small Business Credit Despite New Reform
Just hours before the Knesset was dissolved, the Israeli government approved a major reform in the small business credit market by establishing a credit registry to enable financial entities to compete with banks on equal information grounds. The Finance Ministry estimates this will reduce interest rates for businesses by at least one percentage point, saving approximately 1.5 billion shekels annually. The Bank of Israel called it the most significant economic reform in the recent budget. However, industry experts warn that a key barrier to competition remains: banks still hold veto power over registering secondary liens on client assets, effectively controlling competitors’ market entry.
About 92% of small and medium business credit, estimated at 400 billion shekels, is secured by collateral, usually real estate, with banks holding the primary lien in most cases. When a business seeks additional credit from another financial institution, that institution must register a secondary lien, which currently requires the primary lienholder bank’s consent. This consent requirement allows banks to block or delay competitors, undermining competition and slowing financing processes. Although the Bank of Israel ruled about a decade ago that banks cannot unreasonably refuse such consent, in practice banks still leverage contractual agreements to demand borrower approval, which can take weeks or months.
Executives like Hagar Peretz Dayan, CEO of Altshuler Shaham Credit, and Ariel Ganot, CEO of Mikud Finance, argue this consent system distorts competition by enabling banks to offer better terms only when a competitor appears, rather than from the outset. They also warn that delays harm businesses that rely on timely funding. Ganot highlights that this issue extends beyond businesses to households seeking additional credit secured by their homes. The current mechanism also pressures businesses to seek more expensive or riskier financing alternatives.
A 2017 committee attempted to reduce banks’ power, but banks circumvented reforms through credit agreements. The Bank of Israel cautions that removing the consent requirement entirely could backfire, potentially leading banks to tighten credit policies or increase loan costs. However, non-bank credit providers reject this view, citing international models in the US, Germany, and France where secondary liens can be registered without primary lienholder approval, while still protecting the first lienholder’s rights upon asset realization.
Industry leaders call for adopting a similar model in Israel to enhance competition without compromising banks’ security interests. The Bank of Israel stated it has not yet received relevant complaints but will examine the issue if necessary.
