Memorandum of Law to Promote Competition in the Banking Sector

The Memorandum proposes enabling the establishment of small banks, setting tailored supervisory mechanisms, reducing legislative barriers, and encouraging competition and innovation in the banking market. The purpose of the law is to increase competition in the banking system, particularly with respect to banking services provided to the retail sector.

The Memorandum follows an inter-ministerial staff process and an interim report published on the subject in August 2025, and is intended to enshrine the team’s recommendations in legislation.

Key points from the Memorandum

• Adding definitions of “Small Bank” and “Micro Bank” into the Banking (Licensing) Law, 5741-1981: The addition of these definitions would allow for a graduated legislative framework with respect to the scope of provisions applicable to banks according to their size. According to the Memorandum, a “Small Bank” would be a bank whose asset value does not exceed five percent of the total asset value of all banks in Israel, and a “Micro Bank” would be a bank whose asset value does not exceed two and a half percent of the total asset value of all banks in Israel.
• Abolition of certain license types: Abolishing licenses for a mortgage bank, an investment finance bank, a business development bank, and a “financial institution.” This would enable the development of new banks that can initially offer a limited suite of banking services and expand over time without the need to cancel a particular license type and obtain a broader license.
• Expanding permissible activities for Small Banks: The Supervisor of Banks would be authorized to expand the list of permitted activities for Small Banks, thereby allowing the addition of new activities for Small Banks in line with developments in the financial system. This flexibility would support the development of more innovative business models.
• Parallel control by certain institutional entities: An entity who controls a Micro Bank would be permitted, in parallel, to hold control in a fund management company, a management company of a joint investment trust fund, a portfolio management company, or a corporation that controls any of the foregoing. This measure is intended to enable existing non-bank players – who possess prior experience in underwriting and extending credit, an existing customer base, financial reputation, and sufficient equity, and are controlled by a holding company that also controls one of the foregoing entities (fund management company, management company of a joint investment trust fund, portfolio management corporation) – to obtain a banking corporation license and realize the competitive potential embedded in the proposed framework.
• Waivers and exemptions from certain provisions of the Banking (Service to Customer) Law, 5741-1981 and the Financial Information Services Law, 5782-2021: For example, exemptions from the obligation to provide access to data for new data sources for various periods. This provision would ease the technological and regulatory costs associated with data access obligations for new market entrants at the outset of their operations. A similar exemption proposed as well with respect to payment account managers for payers under the Regulation of Payment Services and Payment Initiation Law, 5783-2023, regarding granting access to a payer’s payment account for the purpose of providing basic and advanced payment initiation services.
• Temporary exemption from the Officers’ Compensation Law: Under the Memorandum, the provisions of the Senior Officers’ Compensation in Financial Corporations Law, which limit executive compensation, would not apply to a Small Bank until 10 years have elapsed from the effective date of its license. The exemption is intended to prevent a scenario in which obtaining a banking license triggers a reduction in executive compensation in a manner that could dampen the willingness of senior officers to lead the transition of such entities into banking corporations.
• Provisions regarding issuance processing: Under the Memorandum, during the four-year period commencing one year after the law’s effective date, a bank whose assets exceed five percent of the total assets of all banks would process the issuance of the charge cards it issues through a processing company – namely, the credit card companies – and would allow such company to be a party to the charge card agreement. This is intended to avoid a chilling effect on credit card companies seeking to obtain a banking license. Additionally, during the aforesaid period, such a bank would not process issuance for more than forty percent of the new charge cards it issues to its customers through a single processing company.

As noted, the Memorandum constitutes another step toward enhancing competition in the banking system and, in particular, in banking services provided to the retail sector, including households and small and medium-sized businesses, by encouraging the entry of smaller non-bank players, establishing a tiered licensing and supervisory framework, and more.

The Memorandum is open for public comment until 25 November 2025.

The key points set out above are not exhaustive and do not purport to summarize all provisions in the Memorandum. They are provided as general guidance only and do not constitute legal advice or a legal opinion on the subject.

To access the Memorandum of Law to Promote Competition in the Banking Sector (Legislative Amendments), 5786-2025, click the link.