The Minister of Finance announced his intention to promote a law for the payment of interest on overdrafts as part of an overall move to encourage competition in the banking sector. The answer is definitely positive. This can be done through a legislative procedure coordinated with the Bank of Israel while establishing criteria.
Is the move a good one? That’s another question. Along with media and public benefits, the move could end up harming the weaker sections.
This move has already been considered several times in the past by Israeli governments and never came to fruition. The decision was to leave the market open for free competition between the banks, without government intervention.
The mechanism for implementing the move speaks of two steps: one, payment of interest on a daily or periodic right balance in the current account. The second, offsetting right days with the obligation days during each month and paying interest to the customer or the bank according to the weighted average of the balances during the month.
The advantages for promoting the move:
Broad public customer satisfaction.
A trend of increasing savings and proper education of the public (instead of the situation today where the system educates the public to take loans and credit).
Stimulating the economy to generate income from savings can increase economic activity throughout the economy (of households and companies and corporations).
Development of short-, medium- and long-term deposit routes, above the minimum level required by the legislator in the current account.
A response to the protest of the hi-techists and investors “pulling their funds abroad”.
The disadvantages of implementing the move:
Aggressive government intervention in the free market of banks’ commercial activity.
Increased costs of the banks, and the decrease in their profitability.
Challenging legislation and implementation that will add costs to the banking system.
The main concern – a large part of households today live within their credit limit, that is, they are in the red for a large part of the month in their bank account. The main concern is that in order to finance the legal obligation to pay interest, the banks will increase the interest on the minus. Something that will cause significant damage to the weak strata and will continue to enrich the strong strata.
It is worth noting that this practice of interest on the plus is common in many countries, especially in Europe and some countries in Asia and Latin America. As examples of countries that have implemented similar solutions include: Germany, Switzerland, Austria, Belgium, France, Italy, Spain, Portugal, Greece, Japan, Australia, New Zealand. But most countries follow a free market policy without interfering in the banks’ activities on the subject. It is important to note that the interest rate, eligibility criteria and other terms and conditions may vary between countries and may change over time.
Ofir Angel, chairman of the consulting firm Marriage Israel