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ello, this is Natalie. You left me your contact details concerning a loan. Is it still relevant?

Yes. What can you tell me about your loans?
‍Do you have a credit card or a checkbook?

Yes. I have a credit card.
‍A credit card means a loan of up to NIS 20,000. It doesn’t count toward your credit limit. Payment is NIS 935 per month for 36 months.

How much does it amount to in total?
After three years, you end up paying back NIS 33,600 in total.

And I get NIS 20,000. What is the interest rate on that?
NIS 13,600.

Do you know how much that is in percentages?
The representative will explain it to you.

Where do you get the funding for the loan?
We bring the money. The representative will explain it all to you. He’ll call you within in two days.

This call was made to the offices of a loan company called Yesh Shefa (Hebrew for "there is plenty"), which, since the start of the coronavirus crisis, has, like similar companies in the sector, been aggressively advertising its services via text messages and social networks. Based on the information provided by the representative, we got a particularly bad offer with an annual interest of 37.7% – almost double the maximum interest permitted by law. But that is only a small part of Yesh Shefa’s story. The rest comes to light two days later, when a company representative by the name of Pinchas gets back to us. He refers to our expressed interest in an unsecured loan and then tell us that Yesh Shefa is, in fact, a company that deals in the distribution and sale of mobile phones.

"We offer you the option of buying several mobile phones at the cost of NIS 900 per month [for a duration of three years, in total NIS 33,000 – N.A.] and we commit to then buying them off you for NIS 20,000. Your commitment is only to the mobile company." Pinchas then breaks down the details of the deal: the iPhone models he is interested in, the mobile supplier we should make the deal with, and more. Once the devices are supplied, he says, "we will come on the very same day and buy them off you brand new. You get the money from us in cash and keep on paying for the devices in a standing order to the supplier you bought them from.... Instead of paying us back for the loan, you pay for the devices themselves."

Attorney Yehuda Shaffer: "The grey market players do everything by the book: they have people sign contracts and perform various tricks with the authorized interest rates, and you don’t understand that you are tying your destiny to a crime organization and to extremely violent people."

Are many people approaching you right now with the coronavirus?

"Yes. A huge number of people. A huge number."

It is hard to determine whether Yesh Shefa is the result of particularly "creative" thinking by a mobile distributor or the brainchild of grey market players who discovered a way of passing their credit risks on to someone else. The Yesh Shefa company refused to shed light on the matter, and when approached for comment, they slammed the phone down. Either way, Yesh Shefa reflects the desperate need for quick credit of those newly unemployed due to the coronavirus crisis or the self־employed whose businesses have taken a hit. A large part of this demand rolled quickly into the grey market; that does not mean the nonbank but regulated credit companies but rather lenders and changers who mostly have no regard for legal considerations.

"There is bank credit, nonbank credit, and the grey market. Grey market means any company that provides credit without a state license," explains attorney Yehuda Shaffer, former deputy state attorney for financial crime at the Israeli Ministry of Justice and founder of the Israeli Financial Intelligence Unit (FIU). He says that it can be difficult to know whether the lender entity is licensed and regulated, as "the grey market players do everything by the book, have people sign contracts, and perform various tricks with the authorized interest rates, and you don’t understand that you are tying your destiny to a crime organization and to extremely violent people."

According to all people interviewed for this article, the number of people turning to the grey market has grown dramatically over the past few weeks and will continue to grow at least until the crisis is over.

A huge demand for loans

As of April 1st, Israel’s unemployment rate had surpassed 22%, over a million people, almost 850,000 of whom have registered with the Israel Employment Service since the coronavirus crisis broke out at the beginning of March. To that number should be added at least a few tens of thousands, if not more, of self־employed people who are not working but are not eligible for unemployment benefits. Most of those currently unemployed will return to their jobs once the crisis is over, but until then their income has been slashed dramatically. For example, unemployment benefit is capped at 70% of a person’s monthly salary with a ceiling of NIS 9,500; the self־employed will receive a one־off grant of between NIS 6,000 and NIS 14,000 gross.

The urgent need of many of these people for credit first of all reached the banks. At the beginning of the month, the Bank of Israel released a statement detailing the leniencies it had instructed the banks to extend to lenders: "Since the beginning of March, the banking system has extended credit to the public on a scale usually provided over several quarters." In the same press release, the bank provided a numerical glimpse into the financial distress that has recently emerged in Israel: 55,000 households had so far received permission to postpone their mortgage payments and the bank estimated that by Passover eve, the number would reach 140,000 households. The bank also issued a warning about significant credit losses and an unequivocal directive: "We emphasize that clients who were in a dire financial situation even before the crisis or who had already fallen behind on their bank payments are high־risk clients to whom the banks cannot extend further credit."

Danny Gigi: “Next month, when no salaries are paid at all, we will see a collapse of the lower socioeconomic groups. Families who are partly employed off the books, people who work temporary jobs, or self-employed. They won’t receive unemployment benefits, and don’t benefit from the financial assistance given to the self-employed.”

The next stop for those who are unable to obtain bank credit is the nonbank credit companies, but many of them have decided to stop providing credit until the situation becomes clearer. "Many nonbank entities have stopped extending new credit to households and small businesses," the Bank of Israel stated somewhat laconically. A sample conducted when writing this article revealed that even those companies that are still operating in the sector are somewhat unenthusiastic about providing loans to people who have been furloughed or are in economic distress.

In such a situation, high־risk clients quickly fall into the hands of one of those "loans of up to NIS 100,000 with immediate approval!" companies that advertise nonstop on social networks and in text messages. Their stories are almost identical. "I’m down to my last shekels, and I don’t know how I’ll pay my rent," says Miriam (full name withheld, as with other interviewees who have turned to the grey market), a single mother of two from Tel Aviv who earned a little above minimum wage but was recently furloughed.

"I approached the bank, and they said they could only give me a final answer after Passover," says Karem, who usually operates two delivery trucks. "I know it is better to take loans from the bank, but I already have loans from them, and they don’t want to give me anymore. I moved in with my parents, but I still have debt, and credit expenses for my equipment, and I have no other way of paying them."

"In two weeks’ time, I won’t have a shekel left," says Dror, a taxi driver from central Israel. "As of March 15, my workdays were ending with NIS 200 before expenses, which is next to nothing. Now there are no rides at all, so I don’t even have that. I’m not approaching the banks, because I know from past experience that they don’t like providing loans to taxi drivers."

David Kochmeister, the CEO of Paamonim, an NGO that helps households conduct their household finances and is currently working with 2,000 households in economic distress, says he knows these situations well from families who were in distress even prior to the coronavirus crisis. "They reached the corona crisis with their income already lower than their expenses. After the crisis broke out, their income took a hit, as did their ability to obtain credit. That directly impacts their ability to keep up with everyday payments."

"We tell them to be careful; the road to the grey market is very short, but once you are in, you can’t get out. Second, we suggest that they review their financial liability to the banks and try to reduce their payments, as the state demanded the banks to approve. Most banks are willing to postpone payments."

"A large number of people were still working until mid־March, so they still have some income. May 1, however, is going to be a frightening day. It will be a financial terror attack," says Alon־Lee Green, joint national director of the grassroots movement Standing Together and the person behind the Facebook page "We are the Coronavirus Unemployed," which demands that the government enact a series of emergency economic measures to help those in distress.

"I have received hundreds of inquiries – a never־ending flow. Next month, when no salaries are paid at all, we will see a collapse of the lower socioeconomic groups," says Danny Gigi of Shatil’s Public Housing Forum, which attempts to support 200,000 families that are receiving rent assistance from the Ministry of Construction and Housing. "I’m talking about families who are partly employed off the books, people who make their living off temporary jobs, or self־employed people like taxi drivers. They won’t receive unemployment benefits, and they don’t benefit from the financial assistance being given to the self־employed. Of course the situation pushes people into such loans. Currently, I am fighting for the housing ministry to provide emergency grants so that these families are not driven into the arms of the grey market."

The lenders and the brokers are taking a cut and tightening their terms

The grey market quickly took stock of the distress and realized how it could be translated into money. "Business has never been so good. My scooter roam the entire city, collecting signatures and distributing cash," says Y, who owns a lending company. The increase in demand pushed Y, like others in the sector, to change his method of operation, and now he lends only to those who can put up significant collateral: a car, an apartment, or some sort of financial asset.

According to analysis by an attorney who represents several grey market companies, the collateral now being demanded is a good reflection of the demand and the way in which lenders are exploiting the opportunities. When asked whether he is referring to better return percentages on loans, he scoffs: "These companies pray that people won’t be able to keep up with their repayments. They don’t want returns. They want bodies, because there is interest on falling behind on payments, there are fines on falling behind on payments, and there is a guarantee to realize that is always worth more than the sum of the loan."

In addition to nonbank credit companies and grey market lenders, there is another type of company that brokers between lenders and borrowers. The model is simple: the brokerage company collects the details from the client and approaches several legitimate nonbank credit companies on their behalf. A significant number of the texts currently flooding the mobile phones of Israel’s citizens comes from such companies.

In a conversation with the call center of a company called Castle, a representative named Erez explains that the company only provides credit to property owners. "People today are unfortunate. People are calling us for NIS 5,000 or NIS 10,000. A person who wants such a sum is a person who has no money for their family," he says, "we don’t deal with such sums." Castle, he says, obtains funding of between 65% and 80% of an existing property, after subtracting the mortgage. When asked whether Castle fronts the credit itself, the following dialogue took place:

We are not the lenders.

"Business has never been so good. My scooter] roamthe entire city, collecting signatures, and distributing cash," says Y who owns a loan company. The increase in demand pushed Y, like others in his sector, to change his method of operation, and now he lends only to those who can put up significant collateral.

Who do you borrow from? From licensed organizations?

Yes, of course.

Like who?

We can’t name the organization we get [the credit] from, because then people...can approach them directly.

Are we talking about licensed organizations?

Yes. Everything here is done with signatures and lawyers and the entity itself. These are organizations that are traded on the stock market, not grey market entities.

If the picture painted by Castle’s representative is accurate, there is no legal issue with credit brokers, but this service is not cheap. For its brokering, Castle takes a one־time payment worth 8% of the loan. Another brokerage company we approached, Derech Management and Consulting Ltd., takes a commission worth 10% of the loan. These commissions come, of course, in addition to the significant interest rates attached to the loans.

Back to the grey market, Kochmeister says: "On the grey market, they charge double־digit interest rates that reach and even surpass 20%. People cannot manage the repayments because the interest rate is astronomical, and they reach the point of arrears of interest, pay back two or three times the loan, and still owe huge sums. It can lead to collapse and this is why you mustn’t even start with it."

Among his many public roles, Attorney Yehuda Shaffer was one of the legislators of Israel’s fair credit law which regulated the nonbank credit domain. According to the law, the maximum annual interest rate for nonbank loans is 20%, while arrears of interest are capped at 35%. Astronomical already, but grey market lenders exceed even that.

"They managed to pass that interest rate because of lobbyists who attended the committees in th name of liberalism, the free market, and ‘why should the Knesset decide’" Shaffer recalls. "What free market? There is a huge market failure taking place now. People are hungry, and they are collapsing under the burden of debt. Now, with this crisis, the need for regulation and intervention is more obvious than ever. It demands considering the need to update the law and reduce interest rates substantially. The law was passed during an era of a free market and economic prosperity. In the distress we are experiencing, there are concerns about exploitation. To take 20% interest from people right now is extortion, it’s exploitation of distress. I’m not just talking about grey market companies, but about everyone. Take the banks, for example, that are taking 8%–9% from anyone asking for a three־month bridge loan for their mortgage. That is also a type of exploitation. This is the time to expedite the approval of licenses to credit service providers and to start supervising them. The Ministry of Finance has been dragging its heels on this issue for years."

"Even discounting interest, you cannot allow grey market loans, because the people who take them cannot return them and find themselves on a slippery slope toward an impossible life," says Kochmeister, who has spent the past 20 years helping people recover from grey market entanglements. The stories he tells about the pressures exerted on borrowers are hair־raising and include hired thugs, people falling into prostitution, serious threats, and more. "People run around from morning till night just to pay and pay and don’t manage to bring even one shekel home. They lose their sanity, and I’m not talking about gamblers or drug addicts, but normative people who were tempted to take out a loan on the grey market."

Asked what people who find themselves in financial distress should do, Kochmeister says, "Do today what you would have to do on the day you need to repay the money. Steal today. Don’t pay your rent today. Cut down on expenses. Sell things. Don’t take out a loan, because you will find yourself in a deep, dark hole."

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