Israel Capital Market
- The Banking Sector
- General Description
The banking sector in Israel is unique in nature comprising of high concentration and less competition. According to a report by the Bank of Israel increase in concentration in the banking sector in the country is a trend that commenced from 2011 after a period of reduced concentration between 2004 and 2011 (Aizescu, 2012). The high concentration levels in the Israeli banking sector is classified under “large monopolies”. This is because a significant proportion of the sectors in lie in between monopoly and free competition. This is the situation in Israel because the country’s banking sector is comprised of few large monopolies dominating the market. According to Aizescu (2012), there are five major banks in the country controlling 94% of the market. These banks include Leumi, Hapoalimm, Mizrahi-Tefahot, Discount, and First International Bank of Israel. Of the five, two; Leumi and Hapoalim control 58% of the market.
As a result of such concentration, David Zaken, who is the Bank’s Supervisor acknowledges that the concentration of the banking sector in the Israeli market is considerable higher than the European Union average. The situation in Israel’s banking sector may be partially attributed to the merge of respective mortgage banks owned by Discount Bank and Bank Leumi (Aizescu, 2012). The high concentration levels in the banking sector of Israel presents numerous challenges to the Israeli population whose main source of credit is the banks. As a result of the minimal-to-none competition between the banks present in the country, the citizens benefit little as opposed to the situation in other economies with competition banks.
- Key Historical Development Milestones
The history of the banking sector in Israel is closely tied to the Zionist Movement, which took place at the onset of the 20th century. This was before the declaration of Israel as a state in 1948. The Anglo-Palestine Bank was the first bank to the founded in 1903, and it is currently branded Bank Leumi; one of the two largest stakeholders in the banking sector (FIEO, 2011). Of major significance in the banking sector of Israel is the bank stock crisis that occurred in 1983 resulting the nationalization of most of the banks existing during the time of the collapse of stocks. The government still remains the major stock holder in most of the banks currently present in the country including privately held banks (Aizescu, 2012). However, it sold majority of the stocks it held in Bank Leumi and Discount bank in 2005 and 2006 respectively. The government also owned Bank Mizrahi (currently Bank Mizrahi-Tfahot) and Bank Hapoalim but later sold them to private investors in 1996 in1998 respectively.
- Regulators and Sphere of Activity Beyond Traditional banking Activity
Apart from the traditional banking activities, banks in Israel are limited to specific activities are dictated and regulated by the bank of Israel. The sphere of activities for Israeli banks include insurance of securities, exchange or foreign currency, management of payment systems, insurance of credit, financial and economic consultancy, investment in securities, intermediation in financial and economic transactions within its allowed business circle among others (Aizescu, 2012).
- Recent Developments and Forecast Challenges
The major developments that has characterized the banking sector in Israel during recent years includes the increased concentration alongside the merging of mortgage banks as well as the acquisition of smaller banks by the big market players (FIEO, 2011). Major forecast challenges associated with the banking sector in the country include the political instability present which may greatly affect the financial dynamics affecting the economy of the country.
- Long Term Saving Channels
- General Description
There are several channels in Israel that accommodate long term savings. The major financial institutions that accommodate long term savings include the banks which dominate the sector. However, there also exists non-banking financial institutions that offer similar long terms savings services (FIEO, 2011). The increase in the non-banking financial institutions aiming at long term investors has mainly been catapulted by the increased need for contractual saving financial institutions. Increased demand has been brought about by rising public knowledge on the significance of long-term savings by the public (Aizescu, 2012). Other institutions in the long-term savings sector include the insurance companies; particularly those that offer life insurance policies, pension funds and bonds accommodated by the government, institutional investors, portfolio managers and mutual funds among others.
- Regulators and Key Historical Development Milestones
With the dominant players being banks, the major regulator is the Bank of Israel which regulates the banking activities; including those associated with long term investments. Major development milestones in the area include the increase entrance of non-banking institutions offering long-term savings services which has resulted in increased competition and better savings rates for the general population (Aizescu, 2012). This is opposed to the monopolistic run banking sector in which the dominant players determine the rates and face little-to-no competition. In 2004, the number of contractual saving institutions’ saving portfolios rose 7% in comparison to the previous year indicating increased savings by the general Israeli population (FIEO, 2011). However, this could also imply a shift from the banking sector in favor of contractual savings institutions.
- Recent Developments and Forecast Challenges
In addition to this, there was a decrease in investments directed towards government bonds as purchase of private bonds and stocks increased. In light of the changes currently characterizing the money and capital markets, the major forecast challenges lies in the weak cooperation between the supervisory bodies and the respective institutions (FIEO, 2011). This in turn makes regulation tedious and establishment of the relevant information for the forecast difficult (Inter-ministerial committee report, 2004).
- Securities Market
- Scope, Securities Distribution and Recent Developments
The securities market in Israel is controlled by the Israel Securities Authority in accordance to the Securities Law of 1968. The Israel Securities Authority distributes issued securities based on real profits. This is achieved the profit test which is carried out to determine a company’s cash flow. In the past few years, the ISA has implemented a series of policies to ensure effective regulation of the securities market. A major portion of these changes were implemented in 2012 (FIEO, 2011). The regulatory initiatives were implemented with the aim of increasing investor protection, reinforcing gatekeepers, preserving public trust and improving disclosure by companies. All the changes implemented were in line with the Israel Securities Authority Roadmap also published in 2012. Most of the changes currently being implemented on a yearly basis are based on the Israel Securities Authority Roadmap.
- Types of Tradable Securities, Trade Volumes and Trade Systems
In reference to the Report on the Activities of the Israel Securities Authority for 2012 (2013), there are several types of tradable securities including shares, corporate bonds, mutual funds and exchange-traded funds (ETFs). By the end of 2012, there were 539 corporations trading on the Tel Aviv Stock Exchange; the sole public market dealing with the trade of securities in Israel. Of the mentioned 539 corporations, 497 were companies that traded only in Israel while forty two traded on foreign stock exchanges in addition to the local trade market. The companies trading in the market include 72 companies that issued only bonds (referred to as bond companies), 23 financial instrument companies and 13 channel companies (banks and insurers). In the same year, the business sector in the country raised NIS 2,784 million in warrants, shares, and convertible bonds. NIS 2,396 million of the NIS 2,784 million were raised from the local market (FIEO, 2011). This is a drop in comparison to the previous year whereby NIS 3,988 million were raised. The following year (2013), the capital market accumulated NIS 25,479 million through bonds as compared to NIS 31,979 million recorded in 2011. In reference to warrants, the business sector accumulated NIS 513 million from exercise of warrants in 2013 as compared to NIS
1,189 million from 2011 (Report on the Activities of the Israel Securities Authority for 2012, 2013).
At the end of the year 2012, there were 1,276 active mutual funds in the market. This is an increase from the 1,261 mutual funds recorded at the end of 2011. However, the fund managers dropped from 22 in 2011 to 21 in 2012 as recorded by the Israel Securities Authority. The value of assets under management of mutual funds in the country stood at 170.1 billion in 2012 as opposed to 142.3 billion in 2011. The observed increase has been as a result of increased capital gains which has been linked to the increasing capital trends in the economy (FIEO, 2011).
During the same year, there were five active exchange-traded funds (ETFs) group of issuers. ETFs series were 464 in 2012 as compared to 459 in 2011 valued at NIS 68.9 billion and NIS 56.8 billion respectively (Report on the Activities of the Israel Securities Authority for 2012, 2013). Lastly, there was NIS 224 million value of assets under the management of licensed portfolio managing firms at the end of 2012 as compared to NIS 222 million in 2011. The Tel Aviv Stock Exchange uses an order-driven automated computerized system that depicts real time information. It comprises of a central order book trading system that provides clearing, settlement and depository services.
- Savings Rate
- National and Private Saving Rates
Israel has a gross national savings rate of approximately 20.068% as determined by the World Bank in 2013. The private savings rate in Israel is among the highest in the world, standing at 12% in 2010 after the leading country which is France (IsraelStrategist.com, 2011). This has greatly assisted the country in cushioning against the global economic crisis. In addition to the high private savings rates, Israeli households also maintained a low leverage rates as compared to developed states across the world (Report on the Activities of the Israel Securities Authority for 2012, 2013). As a result of these factors, the banking system has managed to maintain financial stability in the country attaining a conducive capital adequacy ratio. This was especially significant in the global crisis years of 2008-2009.
- Inflation Rates and its Influence on Developments in the Capital Market
There has been a fluctuation in the annual inflation rates in Israel over the past decade. The inflation rate was at an all-time low of -1.84% in 2003 and despite a steady rise from 2004-2005 (1.21%-2.39%), the rates dropped to -0.10% in 2006. The annual inflation rates further rose through the next three years. In 2010 however, the inflation rate stood at 2.66% compared to 2011s’ 2.18%, 2012s’ 1.63% and 2013s’ 1.84% (FIEO, 2011). As a result of the inflation rates which has posted a steady growth during the past two years, there has been reduced investment in the capital markets. In addition to the reduced investment in the capital market, there has also been a reduction in the amount of both public and household savings in the country (IsraelStrategist.com, 2011). However, the inflation rates are still manageable at the moment and pose no significant risk to the development of the capital market in the country. However, it remains established that however small the rates of inflation is in the country, it has slowed down the rate of capital development in the country.
- Alternative Investment Markets and Effects of their Growth on the Capital Market
The country is faced with various alternatives markets for investments away from the capital market. The major concern for most of the investors in and out of the country has been the numerous geopolitical challenges that have affected the country and greatly impacted the development of investment markets in the economy. However, some of the alternative investment markets in the country include export market, industrial market, equities market and real estate market among others. The export market in the country has witnessed a 19% growth from 2009-2012 prior to a six fold increase between 1985 and 2009 (IsraelStrategist.com, 2011). There has also been a similar rise in the number of investment opportunities available in the industrial market and real estate market. The increase and development in the alternative markets has positively influenced the capital market by increasing the cash flow and growth in the country’s GDP.
Aizescu, Sivan. Israeli banks became more concentrated, less competitive in 2012. 2012. Retrieved December 24th, 2014 from http://www.haaretz.com/business/.premium-1.533606
Inter-ministerial committee report. Structural reform in the capital market. 2004. Retrieved December 24th, 2014 from http://mof.gov.il/Committees/PreviouslyCommittees/BacharReformaCommittee/Bachar_Report_Eng.pdf
Federation of Israeli Economic Organizations. The Israeli Economy and the Global Economic Crisis. 2011. Retrieved December 24th, 2014 from http://www.industry.org.il/_UploadsCl/dbsAttachedFiles/m11211.pdf
Report on the Activities of the Israel Securities Authority for 2012. 2013. Retrieved December 24th, 2014 from http://www.isa.gov.il/Download/IsaFile_7850.pdf
IsraelStrategist.com. WHY ISRAEL? 2011. Retrieved December 24th, 2014 from http://israelstrategist.com/whyisrael/