Kosher Bank

: Erel Segal Halevi

Jewish law forbids usury. However, this law is virtually ignored in modern-day Israeli banking. Recently, several religious Israelis have formed a group devoted to founding a new "Kosher bank", which will be totally usury-free. There are several services which such bank can supply:

A. Current account

Current account in a kosher bank will be different than in a usual bank in several respects:

Of course this current account will not have any credit cards (that usually involve usury), but only debit cards.

B. Standard banking services

A kosher bank will supply other standard banking services in a kosher way:

C. Mediation services

A very common institute in every religious Jewish society is the Gmach - a non-profit organization that gives interest-free loans. Usual banks view the Gmachs as competitors, as they reduce the number of customers who take loans from the banks. However, a kosher bank does not make make money from loans, so it can help the existing Gmachs and also help people found new Gmachs.

Currently, managing a Gmach is difficult and requires a lot of technical work - getting credit information about borrowers, writing loan agreements, looking over the loan returns, etc. The bank already has all the necessary infrastructure for granting loans, and can use this infrastructure to mediate between Gmachs and borrowers. Specifically, the bank can supply the Gmach with credit information about customers who ask for loans (with their consent, of course); the bank can help the Gmach manager track the loans and returns; etc.

This will make it much easier for people to found new Gmachs. Of course the responsibility for giving and collecting the loans will still rest upon the shoulders of the Gmach manager, but there will be less technical burden. The bank will profit from this, either by taking a commission from the borrower (which will be much less than the usury taken by usual banks, since the bank does not have to give the money for the loan), or by the very fact that the possibility to get free loans will attract new customers to open a current account.

The bank can also mediate between Gmachs and depositors. Currently, many religious Jews deposit their money in Gmachs, in order to take partnership in the Mitzvah of free loan. However, this is also quite complicated technically, especially when one wants to split his deposits among several Gmachs. A kosher bank can make this process much easier, by letting the customer manage all his Gmach deposits in a single spot, the same spot where his current account is managed. It will also be easier to deposit and withdraw from the Gmachs.

D. Business partnerships

In addition to banking and mediation services, where the bank's profit is based on commissions, the bank can also give services to businessmen who want to invest their money for profit. The main limitation posed by the Tora is that the business be fair - that is, each partner should take partnership both in case of profits and in case of losses. This is in contrary to usury loans, where the lender always profits, even when the borrower loses.

Several types of partnerships has been offered recently:

In all partnerships, the funding will come from bank customers, who explicitly agreed to deposit their money for these purposes. It will not come from current accounts, who will keep full reserve, as mentioned above. The customers will get a share of the bank's profits from these partnerships, but they may also suffer loses.

These partnerships can be implemented in two flavors, according to the amount of risk the bank wants to take:

  1. The bank can receive a certain percent of the actual profits (whether they are real estate profits, business profits, professional salary of a university graduates, etc.). This requires a tight supervision over the customer, in order to make sure he/she actually uses the funding for the right purpose. For example, the bank should see that the student actually uses the money to fund his/her studies, and that he actually puts all his effort to his studies. This can be done by requiring a monthly report, where the student reports his academic progress, exam results, etc. Similar supervision can be applied to businesses. Even with supervision, there is still risk for the bank, for example, if the student cannot find a worthy job in the profession he studied for, his salary may be low, and the bank might lose. However, with careful planning, this risk can be minimized.
  2. In order to save the costs of supervision, the bank and the customer can agree in advance about the expected profits, and the bank will receive a certain percent of the estimated profits . In case the customer claims that his/her profits were lower, or even negative, he has the option to prove his claim in court. For example, if a student can prove that he became ill and could not finish his studies, this will show that he had no profits in the "academic studies" business, and so the payment to the bank will be smaller. This method is easier to the bank, because it puts the entire burden of proof on the customer. This may also be easier for the customer, because it saves him the burden of regular supervision. Additionally, if the profits of the customer are higher than the estimated profits, he will not have to give a share of the additional profits to the bank. There is still some risk to the bank, in case the customer proves that he had no profits, but the risk is smaller.
These ideas of partnerships are still preliminary, and need more discussion and review by economists and bankers.

I suggest that the bank starts with the standard services, continue to the mediation services, and then gradually start to offer the more advanced business partnerships.