Israel’s finance committee is advancing a credit framework reduction

15/03/2021

Credit is a key component of our consumer behavior—but behind the scenes, in the past few months, a plan was developed that will force us to minimize our consumption by reducing our credit framework. We’ve put together everything that you need to know about the credit framework reduction law that was recently approved by Israel’s finance committee, which is expected to have a significant impact on both private and corporate consumers.

Found a cute top on sale? Get your credit card out. Hungry? The meal you’re craving is only a swipe away. Another never-ending trip to the supermarket? Just another line item on your credit card bill. Our credit cards have become an inseparable part of our consumer behavior, both in our personal lives and in our businesses.

But change has been brewing in the past few months, in the form of a plan that will force us to minimize our consumption and our credit framework. Why? How is it going to work? Who is going to benefit from the change and how is it going to impact the way we function, both in our businesses and in our personal lives? Here’s everything that you need to know about the credit framework reduction law that was recently approved by the finance committee.

It’s all about competition

Introducing the Shtrom reform, designed to increase competition in banking. As part of the reform led by the Minister of Finance at the time, Moshe Kachlon, the two main Israeli credit card companies—Leumi Card and Isracard—were disconnected from the two largest banks, Bank Hapoalim and Bank Leumi, to encourage competition. However, although the separation occurred and the bank reform was launched, it didn’t achieve the desired results.

What more could the government do to encourage competition? Their solution—restriction. An outline was created for a plan to cut credit frameworks. The rationale behind the action was that if the credit framework were minimized, and became insufficient to cover ongoing expenses, people would be forced to take out additional credit cards in order to have sufficient credit. This, they hoped, would increase the competition in banking.

45% reduction

A compromise was reached within the framework of the law, and banks were asked to reduce their credit frameworks by 45%. According to the agreements, the law would take effect at the end of January 2021 and would remain in effect until January 2024. At the end of that period, the banks could return to an unrestricted credit framework, but until that time, the law would be implemented to the letter, despite the expected ramifications of the pandemic.

Don’t harm the underprivileged groups

A 45% cut is not negligible, and it has a more significant impact on underprivileged groups than on other consumers. People who already have a low credit limit are likely to suffer twice. First, because their credit has been reduced, and second because non-banking credit companies are unlikely to approve an additional card for them because they are considered to be high-risk customers. The finance ministry understands this, so they are allowing credit frameworks of 5,000 ILS to remain unchanged.

A significant blow to businesses

In addition to the blow to consumers that will be felt when the law is implemented, businesses are likely to suffer significant harm from the credit reduction. Many business owners, organizations, and corporations rely on their line of credit for the ongoing expenses of their businesses and for significant transactions. Now, they will have to change their plans and find other alternatives.

The solution that doesn’t limit credit frameworks

When the law is implemented, our wallets will start to fill up with more and more credit cards, alongside other alternatives designed to bridge the credit gap that has been created by the new law. One of those alternatives is V-Check, an Israeli startup that has raised over one million dollars and provides financial solutions for digital wallets. The company’s smart platform lets business owners and private citizens manage their payments easily and quickly in an app, without impacting their credit framework. It provides a solution for restricted accounts and eliminates the challenges that are likely to arise following the implementation of the new law.