Micro-Financing Israel-Style

by Ardie Geldman

It is a fact of modern life that people with little cash income and few, if any, substantial assets do not qualify for a conventional bank loan. Its not that banks are mean; banks exist to make money and managing each account, regardless of how small the amount, incurs costs. If a friend or relative will not lend you the money the only other alternative to securing a loan is the “loan shark.” However, it well known that late repayment of these unsecured loans, typically offered at usurious interest rates, often invokes violence.

Contrary to centuries of calumny by anti-Semites, Jewish law prohibits adding interest to loans. The Torah is explicit in its condemnation of usury. Among other sources, Exodus 22:25 states: “If you lend money to any of My people who are poor among you, you shall not be like a moneylender to him; you shall not charge him interest.” Clearly in this same spirit Maimonides in his Mishneh Torah identifies and prioritizes eight levels of bestowing “justice,” or tzedakah, upon the needy. The highest level is to “help sustain a person before they become impoverished by offering a substantial gift in a dignified manner, or by extending a suitable loan, or by helping them find employment or establish themselves in business so as to make it unnecessary for them to become dependent on others.”

It is precisely in this spirit that the Israel Free Loan Association (IFLA) was founded in 1990 by Professor Eliezer Jaffe, who is one of the founders of the Paul Baerwald School of Social Work at Hebrew University, former director of the Jerusalem Municipal Department of Family and Community Services, author and consultant. Observing the massive influx of new immigrants from the Former Soviet Union and Ethiopia he reckoned that a new social net was necessary to promote their successful integration into Israeli society once their initial year of government support came to an end.

Founded with an initial donation of $20,000, since opening its doors the IFLA has extended over $140 million in interest-free loans to more than 40,000 new immigrants and their families from the former Soviet Union, Eastern Europe and Ethiopia, and to thousands of veteran Israelis, from all backgrounds, in need. Its loans are directed to low income individuals and families, sometimes referred to as “the working poor,” especially when some unexpected crisis threatens to destroy what few assets they have.

In addition, the IFLA takes pride in having assisted the creation or expansion, of hundreds of small businesses throughout Israel through “Jewish interest- free micro-financing”. In contrast to other micro-financing schemes most notably active in Third World countries, the IFLA asks not a penny in interest. Each successful new enterprise not only sustains its owner and his or her family, but also brings additional jobs and business to secondary and tertiary businesses. Such micro-financing is a tool for socio-economic development that strengthens Israel’s economic infrastructure.

The IFLA is not the only free loan association, or “gemach,” in Israel, but it is undoubtedly the largest. Furthermore, because it employs a scrupulous system of due diligence the loan repayment default rate is less than 0.1 percent. This makes it possible for the IFLA to “recycle” each loan for “extra value.” In the course of a year, depending on the repayment schedule, the same $5,000 may go out 2 – 3 times. The same principle applies to larger loans of up to $20,000 though their “recycling” or “turn around” time is longer.

Israel is proud that her economy appears to have sustained less damage during the recent worldwide recession than the economies of many other larger, older and more developed nations. Nevertheless, the gap between Israel’s wealthy citizens and her poor or nearly poor continues and is severe. This is evident to anyone who has noticed the contrasting lifestyles of the country’s relatively new upscale areas and most everywhere else. Life in overdraft is still common.

This situation has resulted in an unprecedented number of loan requests, so many in fact that the IFLA has been caught short. To alleviate this situation, a good friend and supporter of the IFLA has presented it with a $1 million matching grant. Until the grant is depleted, for every dollar contributed this donor will contribute one half-dollar, up to one million dollars. This will produce an additional $3 million for general loans, thereby directly assisting thousands of individuals who seek a responsible and respectable solution to their current financial crisis.

Offering micro-financing for profit in less developed world economies is a relatively new and growing trend. Among Jews the practice of interest-free loans has existed for millennia. It continues to prove its value even within modern Israel’s complex economy.

Ardie Geldman is Director of Development, Israel Free Loan Association.