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What’s so gray about the “gray market”?

What is the gray market and why you should not borrow money on it.

Although everyone knows that it’s not worth doing business with grey market lenders, the grey loan market generates huge sums of money every year. So what is the gray market and why it is not recommended to approach it.

What isa grey market?

The “gray market” is a term for a financing system that operates outside the established system (banks, insurance companies and credit companies). The volume of loans granted on the gray market is estimated at NIS 150 billion a year, constituting about 10% of the banking system’s activity in Israel1.

The term “gray” is usually associated with the provision of loans to customers whose request for financing is refused by the institutionalized financial system, and who, due to their financial situation, are considered customers whose risk of not repaying their debt is too high. Sometimes, the availability of credit in the gray market is one of the factors in turning to this channel for taking out a loan.

The variety of entities operating outside the established system is great. From those who operate in a fairly institutionalized manner (such as charitable organizations) to criminal elements that take criminal measures (threats, violence, etc.) to collect the debt if it is not repaid. In this document we will refer to loans granted by entities of the second type.


To date, there is no regulatory supervision of entities operating in the gray market, and they operate without licensing or control, both over the volume of credit provided by them, credit terms and interest rates, and the manner of collection. The only supervision that exists is within the framework of the Prohibition on Money Laundering Law, by the department responsible for this purpose in the Ministry of Finance.

Despite the existence of the “Regulation of Nonbank Loans, 5753-1993” Law, which defines the conditions and ways of granting a loan, these entities act contrary to it without any reference or enforcement on the part of government officials.

GrayMarket Credit Conditions

The entities operating in the gray market extend credit to customers who were rejected by the established entities due to their definition as high-risk borrowers whose ability to repay the debt is questionable.

In order to insure themselves, grey market entities impose “draconian” credit conditions that usually contravene the law, for example:

  1. Opening a portfolio fee – in the amount of about NIS 500-1,000 per loan. The fee for opening the portfolio is deducted from the total amount that the borrower receives when taking out the loan. (For example, a person who borrowed NIS 20,000 will actually receive NIS 19,500).
  2. Effective annual interest rate: This interest rate can amount to hundreds of percent (according to the Law, the maximum permitted interest rate for entities that provide nonbank credit is 2.25 times the interest rate published monthly by the Bank of Israel).
  3. Interest on arrears – for every late payment, there is an automatic penalty of 6%-10% of the loan amount, in addition to the high monthly interest rate.

Conclusion: In order for the future not to be black, it is necessary to avoid taking loans on the gray market under any circumstances!!

1Source: Report of the Conclusions of the Team to Examine the Regulation of Currency Service Providers, Ministry of Justice, February 2015

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