Will coronavirus sink Israel’s 10-billion-shekel loan pyramid?

Unsupervised free-loan funds have been operating for decades among Israel’s ultra-Orthodox community - often being used for large-scale money laundering. With long-awaited legislation only set to be implemented in 2022, and under threat from the coronavirus pandemic, the entire pyramid could come crashing down on the heads of Israel’s poorest population - with dire consequences for the Israeli economy as a whole. A special Shomrim and Calcalist report.

Unsupervised free-loan funds have been operating for decades among Israel’s ultra-Orthodox community - often being used for large-scale money laundering. With long-awaited legislation only set to be implemented in 2022, and under threat from the coronavirus pandemic, the entire pyramid could come crashing down on the heads of Israel’s poorest population - with dire consequences for the Israeli economy as a whole. A special Shomrim and Calcalist report.

Unsupervised free-loan funds have been operating for decades among Israel’s ultra-Orthodox community - often being used for large-scale money laundering. With long-awaited legislation only set to be implemented in 2022, and under threat from the coronavirus pandemic, the entire pyramid could come crashing down on the heads of Israel’s poorest population - with dire consequences for the Israeli economy as a whole. A special Shomrim and Calcalist report.

Amir Kurz

Illustration from Mea She'arim neighborhood in Jerusalem | Photo: Bea Bar Kallos

October 25, 2020

Summary

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hen Joel Baris, one of Israel’s leading legal experts, first heard about Gemachs - the free loans that serve Israel’s ultra-Orthodox community - he was appalled. "Good God," the former chief legal advisor to Israel’s Finance Ministry said at a recent conference, "what we have on our hands here is an unsupervised banking system. If one Gemach falls and "infects" others, and the pyramid collapses, it will have a devastating effect on Israel’s poorest society."

Baris first became aware of Gemachs - which adhere to two important Torah commandments: giving charity and not charging interest to fellow Jews - when he was named head of an inter-ministerial team charged with regulating these funds and bringing them in line with Israeli law.

Illustration from Mea She'arim neighborhood in Jerusalem | Photo: Bea Bar Kallos

In January 2019, after years of debate and political pressure, the Knesset passed the Gemachs Law, which sought to regulate the interest-free credit industry in the ultra-Orthodox economy. After operating under the financial radar for years, the Gemachs - which take their name from an acronym in Hebrew meaning "acts of kindness" - would be required to comply with a regime of licenses and regulate their activities. The Gemachs, however, were given a three-and-a-half-year reprieve before the law goes into effect; they’ll be able to apply for licenses through to July 2022, but will come under anti-money laundering regulations only in 2024. At the same time, the Capital Market, Insurance and Savings Authority, which has been charged with overseeing this hot potato, needs to implement suitable regulations for enforcing the law and probably won’t be ready in time. In all likelihood, say many in the know, the law will be deferred again and again. Indeed, it already contains a clause that lays the ground for this eventuality. In the meantime, the world of the Gemachs will continue to turn over loans to the tune of an estimated 10 billion shekels and more, without any state supervision.

The fact that one of the large Gemachs has yet to fall doesn’t mean it can’t happen, Baris warns. "We’ve identified a classic pyramid-like structure, sparking concern that in an instant, when the curtain goes up, the entire system could come crashing down," he says. Pointedly, he also suggests that authorities prepare for the horror scene that could ensue as the result of what he terms "the perfect storm" - namely, cutbacks in allocations to yeshiva students, a dramatic fall-off in employment among ultra-Orthodox women, a plunge in terms of donations from Diaspora Jewry, and more. Some of these scenarios, needless to say, have already materialized due to the coronavirus crisis.

Avraham Dov Greenbaum, editor of HaDerech, a weekly magazine affiliated to the Shas party | Photo: David Vinocur

"If this happens," Baris says, "people won’t be able to repay the money they’ve borrowed from the Gemachs, which, in turn, won’t be able to loan money to people who’ve deposited funds with them for years. When people learn of this, they’ll stop depositing money in the Gemachs, which will then fall apart and drag down others with them. The first to lose will be those at the bottom of the ladder, and the state may have to dip into its own pockets to save them - with money designated for the public as a whole. This scenario, therefore, requires us, as a state, to have our finger on the pulse."

Over the past few weeks, we’ve delved into this formidable financial system that has flourished under the nose of the state. This isn’t a simple tale of good guys and bad guys, but, rather, a portrayal of a complex system that rests, on the one hand, on the value of mutual assistance and meets a vital need of one of the country’s weakest population sectors, but on the other hand, appears fundamentally unstable and likely to come crashing down in the event of a gust of economic ill-wind.

Despite the clear and present danger, a combination of political pressure, foot-dragging and a genuine desire to strike a compromise has led to the ongoing postponement of the required regulation. And thus, we find ourselves in the midst of a pandemic in which the Israeli economy is hurtling towards a major crisis and the world of the Gemachs continues to function as usual. Are the Gemachs stable in this current reality? Is the money they’re holding as savings genuinely safe? And just how close are we to the scenario that many fear?

For the greater good

The Gemachs, also known as Jewish Free-Loan Societies, are one of the oldest models of the "cooperative economy" that is very commonplace in ultra-Orthodox society. There are Gemachs for almost everything - from baby strollers through to foodstuffs, furniture and medicines, but the most significant are those that provide interest-free loans, in keeping with the Halacha, or Jewish religious law. Thousands of Gemachs are believed to be operating in Israel’s ultra-Orthodox society.

In November 2016, Seker Kehalacha, an ultra-Orthodox polling institute, conducted a survey for Hamodia, a Jerusalem-based newspaper, and found that 28 percent of the ultra-Orthodox deposit their savings in a Gemach, while 59 percent said they would rather request a loan from a Gemach, family member or friend - more than double those who would choose to take a loan from a bank.

Illustration from Bnei Brak | Photo: Bea Bar Kallos

"On the one hand," explains Avraham Dov Greenbaum, editor of HaDerech, a weekly magazine affiliated to the Shas party, "borrowing money from friends or family is easier because they don’t come chasing after the repayment installment every month. On the other hand, there aren’t many people who can afford to loan the kind of sums a Gemach can - tens of thousands of shekels at once - and you’d have to drum up the money from several people. It’s customary in ultra-Orthodox society that if you have liquid cash, you deposit it in a Gemach to be used for the greater good, and also so that when you want to take a loan from the Gemach in the future, you’ll get one with favorable terms. It’s a little like upping your credit rating with a bank."

Some Gemachs are small, serving just an apartment building, a yeshiva, or a synagogue congregation; in most instances, these are the private ventures of an individual who’s viewed as dependable and is entrusted with safeguarding deposits that are then given out as loans to the needy. "There are thousands of Gemachs like these throughout the country that give short-term loans to people in need of a few thousand shekels. They can borrow the money and pay it back a few months later," says Yisrael Guttman, who manages the Gemach Housing Fund, a large neighborhood Gemach in Beit Shemesh. "We’re talking about Gemachs that can offer loans of up to a million shekels, so they’ve been exempted from supervision and the need to obtain a license in the Gemachs Law, for fear that the regulation will kill them," explains Guttman, who also serves as chairman of the Gemachs Association.

There are also medium-sized Gemachs, which offer loans to the tune of several millions of shekels, and large-scale Gemachs - on a neighborhood level, for an entire sect of the ultra-Orthodox population, and even on a national level - that turn over tens and even hundreds of millions of shekels.

The Gemachs Law, meanwhile, has created a hierarchy and stipulates that Gemachs that handle up to 8 million shekels will have to obtain a "basic" license and meet a minimum equity requirement; Gemachs that handle more than that, on the other hand, will require an "expanded" license, with more obligations, tighter supervision and sanctions; and Gemachs with more than three billion shekels in play will be subject to supervision and regulation in accordance with Israel’s banking laws.

The Gemachs, according to Dr. Shuki Friedman, director of the Center for Religion, Nation and State at the Israel Democracy Institute, are "a key component of the ecosystem that supports the ultra-Orthodox world, with the characteristics of a voluntary pyramid held up by the ultra-Orthodox public and a questionable degree of solvency at a time of reckoning. It’s a world that conducts itself in keeping with grocery store methods, and a black hole in terms of supervision and the ability to foresee a collapse."

Photo: The Israel Democracy Institute

"Today, the medium-sized and large Gemachs operate in an orderly fashion, and the money goes through the bank. They no longer work with cash and dollars like they used to," Guttman says, noting that while just over 200 medium-sized and large Gemachs are registered with the association he chairs, he puts their number at above 300. And according to Prof. Yoram Margalioth from Tel Aviv University’s Faculty of Law, who also serves as a senior fellow at the Haredi Institute for Public Affairs, "Israel has about 100 large Gemachs, many of them with a volume of activity of 10 to 20 million shekels. But there are Gemachs with loans amounting in total to hundreds of millions of shekels."

Some of the Gemachs survive on donations, but most get their money from standing-order deposits and sometimes in cash. When depositors want to withdraw their money, they approach the Gemach, which then makes the necessary arrangements to return the money immediately or within a few months, depending on the sum. Arrangements are required because the money isn’t kept in accounts in the name of the depositors but serves instead for granting interest-free loans - to individuals, young couples who are getting married and purchasing an apartment, small businesses, and ultra-Orthodox public institutions.

Instead of having to put up collateral for the loans, borrowers are required only to bring along guarantors - for the most part, individuals from the community who the Gemach managers know - to sign a promissory note. The most efficient enforcement tool is the community itself and its fear of the shaming of the borrower if the debt isn’t repaid. "The guarantors are chosen according to the degree of discomfort the borrower will feel towards them if he doesn’t repay his debt," Margalioth explains. The next stage in the deterrence comes in the form of a summons for the borrower to appear before a religious tribunal, with the initiation of repossession proceedings a final resort only.

Some of the Gemachs are just "regular" free-loan funds that receive deposits and donations and offer loans to all and sundry, in keeping with their capabilities; and you can also find Gemachs that operate on a "membership" basis among specific communities, with the members of the community depositing money on a regular basis, just like a savings account with a bank. These deposits, donations or membership fees, whatever you choose to call them, then afford the depositors priority when it comes to a loan from the specific Gemach when needed - to pay, for example, for a wedding or an apartment for a young couple. According to Margalioth, not unlike the National Insurance Institute’s mutual-guarantee model, "the members who join later finance the loans of those who joined earlier."

In dirty, out clean

While the noble idea behind the Gemachs turned into a widespread network handling ever-increasing sums of money, the state chose to bury its head in the sand. "There are no evaluation tools, there aren’t any financial reports, there’s no reporting obligation, and no one knows how much money goes through them. We’re dealing here with huge credit risks that remain undisclosed - of the Gemach itself, and in terms of the customers’ ability to repay their loans," says Dr. Shuki Friedman, director of the Center for Religion, Nation and State at the Israel Democracy Institute. The Gemachs, according to Friedman, are "a key component of the ecosystem that supports the ultra-Orthodox world, with the characteristics of a voluntary pyramid held up by the ultra-Orthodox public and a questionable degree of solvency at a time of reckoning. It’s a world that conducts itself in keeping with grocery store methods, and a black hole in terms of supervision and the ability to foresee a collapse."

Illustration from Bnei Brak | Photo: Bea Bar Kallos

A senior official at one of the law enforcement agencies confesses: "We have no idea how much money’s in circulation among the Gemachs" he says. And according to an ultra-Orthodox publicist who’s borrowed money from Gemachs, "There are cases in which Gemachs are used for other things that can’t be done through the banks. Rumors in the sector say that a significant proportion of the money deposited in the Gemachs is black money, and that money laundering takes place too."

How is it done?

"Someone could deposit undeclared money in a Gemach, for example, and then he or a family member can take a loan from the Gemach that doesn’t require payment and is essentially fictitious. That individual then incurs a debt to the Gemach and has an explanation for the tax authorities concerning the source of the money - and that’s how it’s laundered."

A senior official at one of the law enforcement agencies confesses: "We have no idea how much money’s in circulation among the Gemachs".

In contrast, Prof. Margalioth argues that laundering money through Gemachs requires the cooperation of the fund managers, "and they don’t want to be criminals," he adamantly states. "It’s a job that’s usually done voluntarily and they aren’t looking for trouble. That’s why, during the discussions on the law, we told the Israel Money Laundering Prohibition Authority (IMPA) that they’re merely speculating and talking about a hypothetical situation."

The IMPA is indeed blind to the comings and goings among the Gemachs, but indications from banks and currency exchanges point to irregular activity. According to the IMPA’s annual report for 2019, 4.2 percent of money laundering cases in Israel involves the use of Gemachs, non-profits or charity organizations.

Yisrael Guttman, who manages the Gemach Housing Fund, a large neighborhood Gemach in Beit Shemesh | Photo: David Vinocur

"As pure as the intentions of the Gemach managers may be, they don’t always look into the source of the money with a fine-tooth comb," said Yaakov Konortov, former long-serving chief compliance officer at First International Bank of Israel, at a recent conference. "We encountered cases in which people who wanted to conceal money earned from work or rent transferred the funds to a Gemach, after which they were passed on to a third party," he added, admitting nevertheless, that "a significant portion of the Gemachs activities don’t go through the banks at all, so monitoring them is a near-impossible task."

Furthermore, in the current reality, anyone can set up or manage a Gemach, and there are no regulations governing the qualifications of the fund’s officers - something the law is trying to implement for the first time. Take, for example, Moshe Montag, the veteran CEO of the Central Gemach, the largest housing loan fund in operation in ultra-Orthodox society, with a turnover of hundreds of millions of shekels, who is currently facing criminal proceedings in parallel with his position - a situation hard to imagine for a bank manager. In August, Montag was summoned to a hearing ahead of a possible indictment on charges of bribery, fraud and breach of trust in relation to a real-estate affair during his time as chairman of the Beit Shemesh Local Planning and Building Committee.

Ethical borrowing

Former Finance Ministry legal advisor Joel Baris says that the fact that bad debts are a rare occurrence is nothing short of astounding. "It shows," he says, "that the members of the ultra-Orthodox community feel obliged to repay debts because of the harsh social sanctions they could face if they fail to do so. For example, someone who has defaulted on his loan could find that his father is no longer allowed to open the curtain of the Torah ark on Yom Kippur."

That said, the figures relating to bad debts may not be all that accurate. During discussions on the Gemachs Law, the CEO of one of the funds stood up and admitted candidly that when it comes to problematic cases, they divide the money still owed into negligible installments, of 18 shekels a month for life, and hence there’s no record of a bad debt. He also admitted that the CEO of one Gemach will sometimes call the CEO of another and say: "Roll over this loan for me because the borrower can’t make the repayments, and I’ll return the favor when the occasion arises."

According to an ultra-Orthodox publicist "Rumors in the sector say that a significant proportion of the money deposited in the Gemachs is black money, and that money laundering takes place too. Someone could deposit undeclared money in a Gemach, for example, and then he or a family member can take a loan from the Gemach that doesn’t require payment and is essentially fictitious. That individual then incurs a debt to the Gemach and has an explanation for the tax authorities concerning the source of the money - and that’s how it’s laundered."

A well-known joke in the ultra-Orthodox sector tells of a Jew who borrowed thousands of dollars from a Gemach. Whenever it came time to repay the loan, he would borrow the money from a different Gemach to cover his debt, and so on and so forth. At some point, the man fell ill, and lying on his deathbed, he summoned all the managers of the Gemachs and said to them: "For years, I’ve rolled over the loan among all of you; from today, you’ll have to continue rolling it over without me."

Haim Har Kesef, general secretary of Bnei Brak non-profit that works with people caught up in financial turmoil | Photo: David Vinocur

The joke, Montag, is a reflection of the reality itself. "A person can borrow money from a different Gemach every six months and repay his debt to the previous one," he says. "The debt is passed on from the one to the other, and on the day he stops paying, there’s going to be a problem. But the system in ultra-Orthodox society is built in a way that won’t allow the wheel to stop turning. There are mechanisms in place that ensure this, so the Gemach system functions just great. The borrower knows that if he doesn’t pay, they’ll turn to his guarantors. The payment ethic is high due to the fear of shaming and social ostracism. A person who’s seen as problematic and has trouble making repayments will have an indelible mark next to his name. People don’t want to find themselves in such a situation. All of this can explain why defaulting is almost non-existent. People feel that making a payment to the Gemach is the same as buying bread, an integral part of their living expenses, so they make every effort to pay."

This effort, coupled with the fact that the loans are interest-free and come therefore with no costs, encourages people to take out new loans to repay old ones. "It's common practice. People take out another loan, repay the debt to the first Gemach, and the ball keeps rolling," says the publicist. "When I requested a loan of tens of thousands of shekels from a Gemach in Modi'in Ilit to cover an overdraft at the bank, the manager of the Gemach wanted to make sure I wasn’t rolling over a previous loan, he asked me about the purpose of the loan and how I was going to pay it back. But it was all based on my word. I didn’t have to show him a payslip. On the other hand, they asked me to bring guarantors from the community who the people at the Gemach knew. That’s what they count on."

According to Guttman, during the 16 years in which he’s served as CEO of the Gemach Housing Fund in Beit Shemesh, there’ve been just a dozen cases when they’ve had to collect the debt from the guarantors. "Bad debts are rare," he says.

"The Gemachs learned the hard way, after tripping up several times, that they don’t give loans without signatures from good guarantors," Greenbaum says. "My brother, for example, signed a promissory note for a friend who took out a big loan to set up a business that went bankrupt, and my brother is making the monthly payments in his place."

Haim Har Kesef, general secretary of Bnei Brak non-profit that works with people caught up in financial turmoil, says his organization has "handled numerous payment deferrals and other arrangements for borrowers from the Gemachs over the years. The problem there is often with the guarantors, because when someone is left financially depleted or runs away, the guarantors go down with him. These are people who may have signed surety for the borrower with several Gemachs, if he’s a brother or cousin, and then they, too, get tangled up in massive debts."

Illustration from Mea She'arim neighborhood in Jerusalem | Photo: Bea Bar Kallos

And aside from the borrowers and guarantors, have you come across Gemachs that have run into financial trouble and have collapsed?

"Yes - and the owners of those Gemachs are now defined as debtors to the depositors who are hounding them. There haven’t been many such cases, and it’s usually the small Gemachs. It’s important to note that Gemachs are still a good place for depositing funds, from both a moral and economic perspective. But it has happened, for example, in Rechasim, Bnei Brak, and Jerusalem."

Har Kesef says he’s currently working on a debt repayment schedule involving millions of shekels that the owner of a Gemach owes to dozens of his depositors. "The trouble started when a man who donates a significant sum of money every year to a Passover charity fund went to the Gemach and said he had run into a cashflow problem between deals and asked for a large loan of $100,000," he says. "Knowing the man to be wealthy and generous, the manager of the Gemach allowed him to take the loan with just one guarantor, and not a very good one, unaware, too, that the borrower was on the verge of bankruptcy. The ensuing snowball effect led to the collapse of the Gemach itself."

When donations dry up

The devastating effect of the coronavirus crisis on the Israeli economy and the ultra-Orthodox sector, with its high morbidity rate in particular, is bad news for the Gemachs. According to figures from the Israeli Employment Service for August, cities with an ultra-Orthodox majority boasted the highest percentage of jobseekers in the country: 34.5 percent of the residents of Betar Ilit, 30.4 percent in Modi'in Ilit, 27.3 percent in Bnei Brak, and 23.1 percent in Beit Shemesh.

And with unemployment rising, signs of economic hardship are already clearly evident on the ground. The "perfect storm" scenario described by Baris appears to be edging ever closer to bitter reality. Some of the Gemachs have received an unusually large number of withdrawal orders and requests to freeze monthly loan repayments, and some have also been struggling to attract the new deposits required to keep the loan wheel turning.

Joel Baris suggests that authorities prepare for the horror scene that could ensue as the result of what he terms "the perfect storm" - namely, cutbacks in allocations to yeshiva students, a dramatic fall-off in employment among ultra-Orthodox women, a plunge in terms of donations from Diaspora Jewry, and more. Some of these scenarios have already materialized due to the coronavirus crisis.

Joel Baris, one of Israel’s leading legal experts

"People today have less disposable income, and those who do are putting it aside for now," Greenbaum says. "The economic situation and resulting sense of insecurity have also caused some people to withdraw their money from the Gemachs."

Pini Rubin, who manages a small neighborhood Gemach in Betar Ilit, says the COVID-19 crisis has led to a 20-30 percent fall-off in the number of people taking loans from his fund. Every month, Rubin’s Gemach provides dozens of small loans - of up to 5,000 shekels - that are usually repaid in 10 installments. "On the one hand," he says, describing the sense of insecurity among the community, "families are cutting back on expenses; and on the other hand, they’re acting responsibly and with caution. Many people are worried that they won’t be able to repay the debt and are choosing therefore not to take a loan."

The world of the Gemachs has also been affected during the coronavirus period by the decline in donations coming from Diaspora Jewry, and from the United States in particular, with researchers at the Israel Democracy Institute talking of a fall of tens of percent. "The ultra-Orthodox community in New York leads the way in terms of morbidity figures and infection and mortality rates, and has been hardest hit by the coronavirus," Friedman says. "This affects donations to the third sector in Israel, and the ultra-Orthodox, according to my assessments, have suffered even more."

Greenbaum: "In Beit Shemesh, for example, most of the city’s residents receive financial support at least twice a year - in the run-up to the Passover and Sukkot holidays - from local charity fund organizations, all of which receive donations from the major funds in the United States and Europe. But the moment the latter suspend their large donations, it has a roll-on effect and hurts the little man, who stops making deposits or donations to the Gemachs. This, of course, also affects the Gemachs in terms of their ability to extend credit and grant loans, and it’s certainly led to a tightening of the belts among them. Someone who requests a loan from a Gemach today will probably have to get over a few more hurdles before getting approval."

Illustration from Bnei Brak | Photo: Bea Bar Kallos

According to Rubin in Betar Ilit, the number of people with repayment problems has increased significantly, and he’s received numerous requests for deferrals. "People are saying: ‘Wait until after the holidays, until the grant comes through, until my unpaid leave is over.’ A Gemach has hundreds of debtors at any given moment, and I estimate that about one-third have asked for a freeze or deferral, with the numbers peaking in the summer and ahead of the holidays. I try to cater to these requests. From my perspective, someone who asks for a deferral is being responsible; he doesn’t wait for the check to bounce and for me to come running after him. So I try to be accommodating to people, to defer for a week, two weeks, a month, as long as possible, since my ultimate goal is gemilut chasadim."

To what extent has the COVID-19 crisis affected withdrawals from the Gemachs?

"Some depositors wanted their money back because they’re on unpaid leave and their financial situation has been affected. I estimate that about 10-20 percent of the depositors have asked to withdraw money they put aside for future purposes, like savings for weddings, bar mitzvahs, apartments for the children, but need now because of the situation. I try in such cases to do all I can to give them the money immediately. After all, they’re helping me help others."

Rubin says that other Gemach managers he’s spoken to of late have also been affected by the crisis. "One of them," he recounts, "jokingly said to me: ‘Pass on whatever you have because I have a long line of people waiting for loans.’ He has 50 families waiting in line for loans and has run out of money."

Despite the situation, Rubin claims that the world of the Gemachs is not at risk. "The payment ethic among the ultra-Orthodox public is very high, and no bank has achieved what the Gemachs do in this regard, partly because of Jewish laws that forbid gouging and require the timely repayment of a loan. The problem, primarily, is the difficulty in providing new loans."

The problem of "the dearth of loans" was also noted recently in a television interview with the manager of a small Jerusalem-based Gemach who said the coronavirus crisis had prompted more requests for withdrawals along with more demand for new loans. "So I’m stopping the loans because I’m obliged first of all to return the money to those who have made deposits with me. I tell the loan seekers to call me back next month."

Rubin from Betar Ilit wears another hat: As a representative of the Central Gemach, the largest housing loan fund in the ultra-Orthodox society, he tries to recruit new depositors for the fund’s savings plans, and is paid according to how successful he is. Over the past six months, he says, the marketing work has been a lot harder. "People aren’t opening new accounts," he says. "In the six months since the start of the coronavirus crisis, I’ve recruited 30-40 percent fewer people than I did during corresponding periods in the past. The difficulties started around the first lockdown over the Passover holiday; things picked up a little after that, but it’s become tough again now around the second lockdown and the holidays. At some point, and in an effort to encourage people, the managers of the Central Gemach decided to offer a ‘coronavirus special,’ which gives new depositors the option of delaying their initial deposit for three months, but it doesn’t always help. A lot of people say: ‘Get back to me after the pandemic.’ A Gemach is a savings account for the future, for the children, and it’s hard for people to think about the future now. ‘Just let me live now,’ they say. At the start of the crisis, a lot of people asked to freeze their monthly repayments."

Moshe Montag, CEO of the Central Gemach | Photo: David Vinocur

According to Moshe Montag, CEO of the Central Gemach, like the banks, which froze around 25 percent of their mortgage loans at the height of the crisis, his fund also allowed borrowers to suspend their loan payments. "We gave people this option in April-May and received requests to freeze payments from around 15 percent of our borrowers, and after that, people went back to their regular payment schedules," he says, noting that the Central Gemach also initiated a "Corona Fund," which allows its members to borrow 5,000 shekels to be repaid in 10 installments.

Montag claims that their fears weren’t realized - neither those concerning loan repayments or those regarding new Gemach members. "It’s not that the crisis doesn’t exist," he says, "but we haven’t seen the kind of effects we were afraid of. I, of course, put it down to the grace of God, but the central factor is the very high payment ethic in the ultra-Orthodox sector."

And according to Guttman, chairman of the Gemachs Association, it’s pretty much business as usual. "At first," he says, "everyone was scared that the economy would crash, and I was sure that the Gemachs would take a big hit too. In practice, there were withdrawals from our Gemach before the Passover holiday and during the first lockdown because people didn’t know what to expect next and were afraid they wouldn’t have money for the holiday; but the withdrawals weren’t particularly high. There were also a few instances of people asking to defer loan repayments, but most continued paying as usual. During the month of Nissan [April], we even had deposits totaling millions - perhaps because business deals came to a halt as a result of the pandemic, and people were left with cash in hand and chose to deposit it in the Gemach. The bottom line is that more money came in than went out. I don’t think the Gemach world is in danger."

The battle over legislation

It’s still too early to assess the impact of the COVID-19 crisis on the Gemachs, but it’s plain to see that the absence of supervision does nothing in terms of the risk management element. Some of the parties involved in the legislative process, including Prof. Margalioth, say the Gemachs need time to get organized, noting that even a formal arrangement designed to protect depositors’ funds must consider the needs of the ultra-Orthodox population and the unique characteristics of the loan funds themselves, in order to prevent their collapse.

According to Margalioth, regulation that places too heavy a burden on the Gemachs will lead to an increase in their operating expenses. Transparent reporting, he adds, may deter donors and depositors, and a minimum equity requirement could undermine the model according to which almost all of the depositors’ money goes towards the lending enterprise.

The figures relating to bad debts may not be all that accurate. During discussions on the Gemachs Law, a CEO of one of the funds admitted candidly that when it comes to problematic cases, they divide the money still owed into negligible installments, of 18 shekels a month for life, and hence there’s no record of a bad debt. He also admitted that the CEO of one Gemach will sometimes call the CEO of another and say: "Roll over this loan for me because the borrower can’t make the repayments, and I’ll return the favor when the occasion arises."

Nevertheless, regulation of the industry is also important for Gemachs themselves, especially the larger ones, the legal status of which has come under question over the past decade. A chance discovery by the Registrar of Associations revealed that most Gemachs are in violation, unknowingly, of a clause in the Banking Law that prohibits entities that take in deposits from more than 30 different people from affording credit. This has prevented these Gemachs, incorporated as non-profits, from receiving the authorization they require for fundraising. In addition, the tightening of reporting requirements vis-à-vis the bank accounts of U.S. citizens abroad has led banks in Israel to urge the Gemachs to sort out the accounts they have with them to meet the requirements of the American authorities.

"In the beginning, the Gemachs tried to fight legislation and regulation, but when they saw it was going to happen, they realized that their goal must be a law that would do as little harm as possible to their activities," says Yuval Shalhevet, an attorney who represented several Gemachs in the legislative process.

Prof. Yoram Margalioth from Tel Aviv University’s Faculty of Law | Photo: Nir Sellkman

During the Knesset Finance Committee’s deliberations on the bill, representatives of the Gemachs insisted on raising the threshold above which they’d be required to obtain a license. They also sought to ease the minimum requirements for obtaining a license to manage a Gemach, to reduce the sanctions imposed for violating such a license, and to lower the equity required for obtaining the license. Their principal demand, however, concerned a significant delay in the implementation of the law. "There was pressure from the Gemachs, especially the medium-sized ones, to give them as much time as possible to prepare," Shalhevet says. "In the end, we found a solution that balances the needs of the Gemachs with the needs for state supervision."

In an upcoming academic paper, Margalioth writes that "the Gemach managers were concerned about the reaction of the ultra-Orthodox public and being accused of failing to protect its interests and allowing state supervision, while the state, for its part, was worried about being seen as caving in to ultra-Orthodox extortion." In the end, however, Margalioth says, "the final piece of legislation was one that both sides felt they could live with, and therefore agreed to, albeit without much enthusiasm. A number of critical issues haven’t been resolved, but the important objective was attained - regulation without causing the ruin of the Gemachs."

The person responsible was the chairman of the Finance Committee, MK Moshe Gafni from the ultra-Orthodox United Torah Judaism party, who fought to uphold many of the Gemachs’ demands. As part of this pressure, Gafni made it clear that the Finance Committee wasn’t going to approve an important international treaty that would keep Israel off a blacklist of countries that evade taxes until agreements were reached on the Gemachs Law. "Thank God," Guttman remarks, "thanks to Gafni’s actions, we avoided further harm and minimized the damages."

"Dramatic compromises were made along the way," says Baris. "Nevertheless, the outcome, in my opinion, is satisfactory because the state has a foot in the door and has passed the law. My only plea goes out to the Capital Market Authority, which needs to prepare in the interim for the licensing of the institutions, gather information, and meet with the rabbis and ultra-Orthodox leaders. Unfortunately, this has yet to be done and could serve as further grounds for delaying the implementation of the law."

IT and equity: Inside Israel’s largest Gemachs

Ahavat Chesed, better known as the Kuperman Gemach, in Jerusalem’s Beit Yisrael neighborhood, is believed to be Israel’s largest free-loan fund. Funded primarily by deposits and partly by donations, the Gemach turns over loans to the tune of hundreds of millions of shekels, with some putting the figure closer to a billion. Years ago, the Gemach’s records were simple handwritten notes, but its IT capabilities these days, says Margalioth, don’t fall short of those of a bank. At the press of a button, Kuperman Gemach employees can access all the information they need on the fund’s donors, depositors, borrowers and guarantors. The application process before a loan is granted includes an interview with the borrower, the submission of references, inquiries about the borrower among people in the community, and the signing of a promissory note by the guarantors.

"Loans above $30,000 require a joint decision from the entire management team," Margalioth says, noting that most of the loans granted by the Gemach amount to tens of thousands of shekels and are usually repaid with a fixed order over a period of 40 months. Loans from the Kuperman Gemach, he adds, also go towards the construction of ritual baths or synagogues, religious study institutions, and even the establishment of smaller Gemachs.

According to Shalhevet, "It can take several months for a depositor who has asked to make a withdrawal from a Gemach to get the money. This leaves depositors at financial risk, because what would happened if a lot of people show up all at once and ask for their money back, leaving the Gemach struggling to pay up? I’ve seen agreements in which the Gemachs have a six-month period in which to return the money, with a caveat saying that there may be further delays as they have to first collect it. People who deposit their money in a Gemach should know, therefore, that it’s not a bank from which you’ll get your money from one day to the next."

Yuval Shalhevet, an attorney who represented several Gemachs in the legislative process | Photo: Yoram Reshef

The Central Gemach, which we’ve already mentioned, is considered the country’s second-largest free-loan fund and focuses on housing loans. It operates in keeping with a unique model that includes a savings plan for members. This allows parents in the ultra-Orthodox sector to save money that, when the day comes, will help their children take out a loan to purchase an apartment after they marry. By disconnecting the parents’ "contributions" to the Gemach and the loan granted to the child, the Gemach circumvent the Halachic prohibition on collecting interest. "Essentially, the child slots into line for a loan based on the contributions made by the parents or grandparents," Shalhevet explains.

The savings plan built into the Central Gemach is based on "donation units" - fixed monthly deposits of 40 shekels over 10 years, or 4,800 shekels in total. A unit like this entitles a child to a loan of 40,000 shekels that can be repaid, without interest of course, in 100 installments of 400 shekels per month, as well as a grant totaling half the sum of the donation. Parents can, of course, save several such units for each of their children. "We’ve created a ‘Classic Savings Plan’ of four units - in other words, 160 shekels a month that gets you a loan of 160,000 shekels, or an expanded plan of six units, which get you a loan of 240,000 shekels," Montag explains.

According to Montag, apartments in cities like Elad, Modi'in Ilit and Beit Shemesh were selling 17 years ago when the Gemach was established for around $100,000, so the loan from the Gemach was a complete substitute for a mortgage, assuming each side came up with its share. Rising housing costs over the years have led the Gemach to slightly up its loan amounts, but there’s still a long way to go before getting an apartment. "Couples have to take out a mortgage, and the Gemach essentially gives them the equity required to do so," Montag says.

Thus, it’s common for apartments in the ultra-Orthodox community to be purchased with 100 percent leverage, which is divided between a loan from a Gemach and a mortgage from a bank. According to a source in the banking system, the banks are aware of this situation and carefully examine each customer’s repayment capabilities.

"A loan from a Gemach is calculated as part of the customer’s loan repayments, just like any other non-bank loan, and we check to make sure that the customer’s disposable income complies with Bank of Israel regulations," the source says. "In truth, we’re even a little more stringent when it comes to the ultra-Orthodox community. Because it’s very common in that community to work with fixed payment orders, we carefully examine every standing order we see on the account statements to make sure there aren’t any hidden loans that are being repaid to Gemachs."

Montag admits that the banks do sometimes cause problems. "Ahead of coalition negotiations this past year," he says, "I submitted a proposal to Knesset members from United Torah Judaism and Shas that banks recognize the money from Gemachs as equity, for all intents and purposes, and not as a loan. Young couples are indeed registered as borrowers due to the issue of the prohibition on charging interest, but in practice, the parents are the ones helping to repay the loan to the Gemach. Regrettably, there’s been no progress on the matter."