JERUSALEM, July 16 (Reuters) - A committee headed by Israel's banking regulator has recommended opening up the market to Internet banks and allowing non-bank institutions to lend more to households and small businesses to boost competition and lower borrowing costs.
Israel's banking system is dominated by two large banks -- Leumi and Hapoalim, with a combined market share of about 60 percent -- and three smaller lenders, with around one-third of the sector's revenues derived from fees paid by customers.
Public anger about charges which are viewed as unjustified or excessive, such as those for withdrawals and deposits, prompted the government and central bank to appoint the panel to find ways to increase banking and credit competitiveness.
"The findings point to a number of characteristics of the banking system, which include: a high level of concentration that inhibits competitiveness; a low level of profitability by international standards; and a low level of operational efficiency relative to banks in the developed countries, which is partially due to high wage costs relative to the banks' scale of activity," the panel said in an interim report on Monday.
The committee was led by Bank of Israel Supervisor of Banks David Zaken, who said its recommendations aimed to increase choice and improve transparency.
The report noted that a growing proportion of credit has been provided to large borrowers by non-bank institutions that manage pension funds, but that households and smaller businesses have no real alternative to the banking system. Some 90 percent of credit to this sector is provided by banks, the report said.
The panel's key recommendations include allowing the entry of new players such as Internet banks and credit unions, and more lending by institutional investors, to raise competition.
"Implementation of the recommendations and measures presented in this report will bring about greater competitiveness in banking services for ... households and small businesses, with respect to the price they pay for services, the total amount of credit available in the market, and the quality of service," the report said.
Zaken told Reuters that an "initiative to start an internet bank in Israel has been going on for some time" but he declined to give details. The probability of an Internet bank in the near future, he said, "depends on the progress of entrepreneurs."
But Alon Glazer, a banking analyst at Leader Capital Markets, was sceptical of such a venture since it may be tough to get licences from the Bank of Israel. Even if there was an Internet bank, it probably will not take a large market share, he added.
The panel also recommended making it easier to close accounts, allowing customers to compare online the interest rates offered by banks, and the cancellation and control of a number of banking fees.
The public will have 30 days to respond before final recommendations are published. The banks have also yet to respond.
"It is important the recommendations are implemented quickly for the benefit of households, small businesses and the economy," said Bank of Israel Governor Stanley Fischer.
Glazer said the committee's intentions were good but that there was unlikely to be a revolution in the industry. Banks' profits will probably not be harmed much either since sources of profit are varied and they will find other areas to compensate.
"The harm is only a few percent, if at all," he said.
Israel's banking index was down 1.2 percent at midday in Tel Aviv. (Reporting by Steven Scheer; Editing by Catherine Evans)