On 18 February 2018, the Bank of Israel published  a long awaited document  setting out criteria  for receiving  a control  permit  for controlling  an Israeli credit  card  (or clearing) company.  This publication follows  the recently  published  reduction  of interchange  fee rates that  await  final confirmation by the  Bank  of Israel.

The background  for  the  documents  is the  anticipated  sale of  the  controlling  interest in leading  Israeli credit  card  companies  Leumi Card and Isracard  by Bank Leumi and Bank Hapoalim, respectively.  These sales are the result of the “Strum  Law”1   from 2017 that requires Bank Leumi and Bank Hapoalim to divest their holdings in their credit card businesses in order to enhance competition in the Israeli credit market for households and small businesses.

In the document,  the Bank of Israel mainly relies on the existing criteria already in place for receiving control permits for Israeli banks while introducing  certain easements, notably the possibility  for private equity funds to acquire credit card companies.

The main requirements and considerations  applicable  to potential acquirers include:

  • A holding  of at least 30% of the means of control  in a credit  card  company  which constitutes the controlling  interest. In some cases this threshold may be reduced to an indirect holding of 20%, as long as the direct holding in the credit card company is at least 30%.
  • One-third of the controlling  interest may be pledged (i.e., 10%). Any shares exceeding the minimum holding requirement of 30% may also be pledged.
  • Financial robustness demonstrated  by equity equal to 150% of the value of the means of control constituting the controlling  interest.
  • In relation to an applicant  that is a private equity fund, a current  (or past) permit  for controlling  a similar corporation in an OECD country.
  • The experience of the fund managers and investment committee as officers or controlling interest  holders  in a similar corporation in an OECD country  or in a corporation that controlled  such corporation.
  • Additional  data  shall be examined,  such  as the fund’s  leverage  ratio  and the level of decentralization among the limited  partners in the fund. The management shall be required  to demonstrate  that receipt  of funds  from investors  and limited  partners  is subject to anti money laundering examinations in compliance with OFAC, EU and Israeli policies.
  • The means of control constituting the controlling  interest shall be held by a trustee (as in the case of controlling  interests in Israeli banks).

Financing the acquisition and dividends

The document states that  the  acquisition of a credit card company may  not  be  financed by a vendor  loan from  the selling bank. Further, the dividend  policy  of the credit  card companies requires approval of the Supervisor of Banks in the Bank of Israel.

It  is  noteworthy  that  the  Bank  of  Israel  has  stated  that  it  expects  to  approve/reject applications within  four  months from  its  confirmation that  the  required documents were provided.

According  to local market estimates,  Bank Leumi and Bank Hapoalim are expected  to initiate  the processes  for the sale of the credit  card companies  within  H1 of 2018. The banks are also examining the possibility  of taking the credit  card companies public  and the  chosen route will be  affected by  the  price offers  from  potential purchasers and  the pricing by the capital market.