The Alternative lending market in the US is massive. By the end of 2022, the projection for the value of the alternative lending market in the nation is to be almost $9 billion. When we talk about alternative lending, we’re referring to such things as personal loans, peer-to-peer lending and even crowdfunding.
The alternative lending market in Israel is growing at a rapid pace, but is nowhere near the heights set by the US, despite its thriving economy. 5 years ago, the value of the market was a mere $100 million. The market has grown over 60% in these last 5 years, however, it remains only a fraction of the size of the market of its great ally, the United States.
So, this makes one question, why is the alternative lending market so small in such a thriving economy like Israel?
Well, for starters, the VC industry does a lot of the financing of technology and startups, as opposed to alternative methods used in the US such as crowdfunding, peer-to-peer lending and personal loans.
According to stats from IVC, in 2021, venture capital investment in Israel stood at $25.6 billion – a leap of almost 150% from 2020, and this figure is only expected to grow in 2022. The size of the VC market could certainly be seen as one reason for the small stature of the Israeli alternative lending market.
Additionally, lending practices in Israel are subject to rather strict regulation. There is a licensing obligation on operators of peer-to-peer lending platforms and subjects the platforms to supervision by the Supervisor of Regulated Financial Services.
When this regulation was introduced, the peer-to-peer lending segment was to be divided into two licensing categories: a basic license for a limited volume of activity, and an expanded license for a material volume of activity. In short, the licensing process is extensive which makes it tricky to obtain private loans in the country.
Additionally, payday loans are typically forbidden in the State of Israel, and have been for over 60 years. Usury laws have been in place since the passing of the Interest Law of 1957 which restricts the interest rates that creditors can collect on loans.
As a result, lenders are restricted to charging the interest rate determined by the Ministry of Finance and can be prosecuted or have their license withdrawn if they are seen to be charging higher rates.
Interestingly, Israel’s Usury laws can be traced back to biblical times. On account of the fact that Israel is a Jewish state, it is unsurprising that creditors are limited to charging a small amount of interest on a loan product. The Torah encourages interest-free loans to provide fellow Jews to alleviate some of their financial struggles, however, Jews are discouraged from charging interest on loans to other Jews, hence why payday loans aren’t really a common practice in Israel. Charitable organizations such as the Israel Free Loan Association (IFLA) provide interest-free loans to those in need.