The structural problem of Arab businesses
While government believes future growth potential of Israeli economy lies within Israel's Arab population, the new measures will struggle to overcome structural problems within the sector.
In the past week, the government introduced two new measures designed to tackle one of the toughest challenges the Israeli economy faces: increasing employment rate and eradicating poverty in the Arab sector.
On Sunday the government approved the establishment of a ministerial committee for Arab Sector Affairs that will be headed by Prime Minister Benjamin Netanyahu.
The Committee will handle issues related to minority populations in Israel, in the fields of employment, welfare, education, health and economic development.
In addition, Economy Minister Naftali Bennett decided to extend for four years the activities of the SAWA foundation. The non-profit organization provides loans of NIS 5000-20000 to women in the Arab sector seeking to build small businesses.
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Under the program, women in Arab villages will be given loans for one year, with each woman receiving the loan together with a group of other borrowers. Each member of the group will act as a guarantor for the loans of the other group's members. The loan is intended to help the women establish or expand a business that operates within the household and increases its income.
Economy Ministry officials noted that according to evaluation studies conducted during the past three years since the establishment of the program, women who received such a loan increased their income by more than NIS 2000. In addition, 99 percent of the loans given until today have been paid off.
The government's premise, which is based on studies conducted by the most important financial bodies in Israel and in the world, is that the future growth potential of Israeli economy lies within the Arab sector (and the Haredi sector).
With no wave of economic growth seen on the horizon, the only way Israeli economy can bring an influx of workers into the job market, that would produce more, earn more and hence also spend more – is by raising the employment rate of Arab women and Haredi men.
Are the steps taken by the government in the past week the key to solving the problem, or are the issues of poverty and unemployment within the Arab sector rooted deeper than we thought, in severe political and cultural problems? Can the solution for these matters come from an assistance fund or a ministerial committee?
Only 6.5 percent of businesses are owned by Israeli-Arabs
Data collected by the business information company Dun and Bradstreet point to the scale of Arab-owned businesses as the main cause for economic gaps between them and the rest of the population.
According to the data, businesses owned by Israeli Arabs constitute 6.5 percent of all businesses in the state of Israel – even though they make up more than 20% of the population.
Dan and Bradstreet, a company whose main activity is the assessment of business' ability to return a loan, indicate that businesses in the Arab sector are at a high risk level.
"When we look at all the businesses in the Arab sector and calculate the average of their level of risk, we find that the probability of failure for businesses in the Arab sector is 12 percent higher than the general probability within the economy," said Tzah Berki, Dun and Bradstreet VP Data and Research, and Chief Economist.
According to the company's data, the Arab business sector is characterized by a different division than that of the general business sector. Most businesses owned by Israeli-Arabs belong to six main branches: construction, food retail, restaurants and cafes, moving services, and garages and construction materials. Is the high risk level related to the fact that Arabs tend to work in more dangerous fields?
'The change begins in politics and education'
"It is true that in the Arab sector there is a prevalence of certain branches that we know to be high risk, for example the moving services and the restaurant and café industries", Berki added."However, I don't think that's the cause. I think the sector has other difficulties that are unique to it.
"For example, the sector is mostly peripheral, and it is safe to say that businesses in the periphery are not doing as good as those located in the center. The periphery is made up of lower socio-economic layer of society, and that affects consumption.
Moreover, its accessibility to financing sources is lower. The two things feed on each other. When there are problems of access to credit, the risk rises, and when the risk rises, the accessibility is decreased.
Berki's remarks indicate that improving the accessibility of funding sources for Arab business owners could help raise business rates in the Arab sector, but that their source of economic problems lies elsewhere – in the exclusion of Arabs from Israel's employment and trade centers, due to a lack of investments in infrastructures that connect Arab villages with the country's center and due to the disparities between standards of living in Arab villages and Jewish communities.
"The real change must begin in politics and continue in education. Once we have peace and an equal presence of populations in Israel, we will begin to see economic equality as well. Economy is merely a mirror image of society," said Berki.
Economy Ministry: The banks compete over Arab clients
Economy Ministry sources are convinced that the problem in the Arab sector of access to credit has been resolved. "A few years ago we saw…that we can't reach the Arab sector, said Ran Kiviti, who heads the ministry's small and medium business department.
"We included into the fund the Mercantile Discount Bank, which has a strong presence in the Arab sector. After its inclusion we turned it into a bank that issues loans guaranteed by the state, and the rate of applications from the Arab sector grew to the extent that it more or less equaled the rate of Arabs in the population.
"And so currently, we have no data that indicate that Arab businesses are at a higher risk level, because the rate of Arab businesses that receive state-guarantee credit is the same as their rate in the population, and the bank does not issue loans to high-risk businesses."
According to Kiviti, in recent years we can even begin to see banks competing over Arab customers. "Under the new fund that we established two years ago, one could see that Bank Leumi and Bank Hapoalim are active among the Arab population.
"Meaning, they discovered the potential of 20% of the population that's interested in loans. The banks know…that there's potential for growth in this population."
If that is the case, why does the government focus on such financing projects? If the problem of access to credit was indeed resolved, why not concentrate on programs that try to tackle other causes for poverty and unemployment in the Arab sector?
"In general, our actions are targeted at sectors which we see as having great potential for increasing production," Kiviti said. "We discovered there was a problem with women in the villages. The accessibility to workplaces in small villages is low, and the population living there is from a weaker socio-economic section.
"The women there are at a greater disadvantage than even the general population. I don't think that a woman who utilizes this fund would otherwise be able to receive a state-guaranteed loan from a bank."
