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Building Israel's Small Business and Microenterprise Sector: Israel Entrepreneurial Finance Initiative
Jan 01, 2005

Israel faces a major challenge to its economic growth. Those seeking to escape the country's growing poverty have had to confront the combination of an ongoing credit crunch, the technology market crash, recession, high unemployment, banking concentration (among the highest in the world), underdevelopment of a local equity and bond market, the Intifada, failed government initiatives in small-business finance and lack of public policies supporting financial innovations in credit management.

All these factors have converged to threaten surviving small businesses, start-ups and self-employment and thus hinder economic prosperity for the self-employed and small-business owners. Both long-term and more recent declines in annual GDP growth reveal structural challenges to maintaining economic activity that supports sustainable growth.

Despite the fact that small businesses represent over 97 percent of all firms in Israel, and comprise the only sector to have created new jobs in the last decade, these firms receive less than 5 percent of total bank credit. The overweighting of large firms in bank loan portfolios due to credit rationing, creates systemic economic risk, exacerbated by the country's growing long-term pension liabilities. Economic distress is particularly concentrated among several target populations, including minority groups, women, recent immigrants and the 60 percent of post-military youth who do not go on to college.

The Israel Entrepreneurial Finance Initiative, described in detail in this report by Glenn Yago and Betsy Zeidman, aims to develop and pilot a sustainable model for microenterprise and small-business development and financial growth. This Initiative represents the first comprehensive effort to engage the public, private and philanthropic sectors to address the challenges facing these firms. It leverages existing resources and introduces innovative financial technologies.

The Initiative's primary objective is to strategically deploy philanthropic contributions to develop a specific set of credit facilities and vehicles. The expanded financial and human capital facilitated by these mechanisms will help Israeli microenterprises and small businesses achieve economic independence, create private sector employment and contribute to the national economy.