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:
-
Full reserve . Usual banks make money from lending, and therefore must use the money in the positive-balance current accounts as a (fractional) reserve. This makes all customers, even those that give or take no loans at all, indirect partners in the sin of usury. A kosher bank will not make money from lending, and thus will be able to keep full reserve, which is also much safer for the customers than the fractional reserve system.
-
Non-negative balance . Usual banks make money whenever a customer's balance is negative. Thus they have an incentive to "help" their customers get into more and more debts. Most households cannot resist the temptation to draw more money, and thus they end up living in a permanent negative balance - the maximum negative balance allowed by their bank. A kosher bank will not make money from lending, and thus will not allow negative balance at all. This will make households live with what they have, and reduce the temptation to go into ever-increasing debts.
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:
-
Safekeeping . A kosher bank can hold a safe and allow its customers to buy precious metals or other commodities. This will allow the customers to keep the value of their money in the long run. Halachically, this is better than a deposit that is linked to a certain index, because a linkage of a loan is considered a form of usury, while in a safe, there is no loan, the commodities actually belong to the customer. The bank will earn from the commisions on buying, selling and holding the commodities in the safe. Such services are already given by some companies around the world, such as BullionVault, but not in Israel, which makes it an attractive business opportunity.
-
ÌStock trade . A kosher bank can supply the usual services of trading in the stock market, with a Jewish twist: for each company, supply data about its conformance to Jewish values, For example: whether it keeps the Shabbat, whether it pays wages on time, whether it keeps the moral laws regarding the environment, etc. This data can, initially, be based on self statements by the companies themselves. It can be assumed that most companies will tell the truth, as any lie will be discovered quickly by the competitors. Thus, customers will be able to select stocks based on their values.
-
Bank guarantee . From a banking point of view, a guarantee for a loan is equivalent to a loan in terms of risk, but it can be cheaper because it does not require funding. Therefore, instead of giving a loan to a customer, the bank can give a guarantee, in the same size and for the same period as the original loan. The guarantee will be cheaper, and it will allow the customer to accept an interest-free loan from a Gmach.
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:
-
Appartment partnership - a replacement for a mortgage (
Link to Simcha Kaufman's paper ).
-
New business partnership -
similar to existing models of risk capital, the bank participates in
funding the new business, and in return, receivs part of the revenues.
-
Academic studies partnership - the bank participates in funding the academic studies of the customer, and in return, receives part of the salary that the student receives after he starts working in his profession.
-
Wage partnership - the bank gives a standard interest-free loan, but the loan is measured in terms of the average wage, and so the return is also linked to the average wage (
Link to Raphael Yechezkel paper ).
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:
- 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.
- 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.