Dedicated License to Provide Guarantees in Israel

Backdrop: Opening the Guarantee Market to Nonbank Entities

Israel’s guarantee market is expected to open to additional nonbank players under a reform designed to increase competition and expand financing options in the economy. In addition to opening the market, the reform is intended to ensure that guarantee providers can fulfill their obligations even in the event of widespread guarantee exercises.

Legislative amendments included in the 2026 Economic Plan Law remove barriers to nonbank entities’ entry into the guarantee market in order to increase competition. As a result, the Capital Market, Insurance and Savings Authority (CMISA) published a proposed policy for regulating the guarantee market, including a dedicated licensing track and strict requirements relating to capital adequacy, liquidity, risk management, and corporate governance.

CMISA emphasizes that, unlike other credit activities, the main risks associated with guarantees are not limited to the borrower’s repayment capacity. They also include the guarantor’s ability to fulfill its obligations to beneficiaries when guarantees are exercised. Given the off-balance-sheet exposure to potentially sudden, widespread guarantee exercises and the potential harm to third parties relying on those guarantees, CMISA formulated a policy to establish a regulatory and supervisory framework for the guarantee market.

Dedicated Licensing Track and Prerequisites

The draft update to the licensing procedure introduces, for the first time, a designated licensing track for the guarantee market and defines the prerequisites and documents that applicants must submit. Among other things, applicants must submit a comprehensive document describing their business activities, including a detailed business plan, a classification of the types of guarantees that they intend to issue, segmentation of their target audiences and guarantee beneficiaries, and the average and maximum terms of the guarantees.

With respect to corporate governance, license applicants must maintain complete separation between marketing, sales, and client-acquisition systems and underwriting, credit approval, and operational functions, to ensure that underwriting processes are not hierarchically dependent on the sales function or influenced by business objectives. Applicants must also implement a defined approval hierarchy for issuing guarantees and a control mechanism requiring the approval of two authorized signatories for each guarantee issued, each change in terms, and each extension of validity.

Equity and Liquidity Requirements from the First Shekel

The financial requirements will apply from the first shekel of the guarantees provided. Each entity must maintain minimum equity of ILS 2 million, which increases in direct proportion to the company’s exposure, calculated at approximately 6% of risk assets.

Entities must also maintain a liquidity cushion under an internal liquidity model that takes stress scenarios into account; disclose their binding agreements or term summaries with banking corporations or institutional entities for lines of credit and immediate liquidity in the event of widespread guarantee exercises; and maintain an ECL (expected credit loss) provision model for guarantees issued, based on the guaranteed party’s internal risk rating.

Risk Management and Board Involvement

License applicants must formulate an orderly policy for underwriting, collateral management, and stress testing, and define strict exposure limits for single borrowers, groups of related borrowers, high-risk economic sectors, and geographic and product concentrations. Applicants must also review their stress scenarios at least once every six months and actively incorporate the results into their risk limits and risk appetite.

The board of directors, or a delegated board committee, must approve the risk management policy and the capital adequacy and liquidity document at least annually and appoint an independent risk manager at officer level. These obligations shift responsibility for risk management from the professional echelon to senior management.

Guarantees Pursuant to the Sale (Apartments) Law – Additional Prerequisites

Entities seeking to provide guarantees under the Sale (Apartments) (Assurance of Investments of Persons Acquiring Apartments) Law, 1974 must meet additional prerequisites, including methodologies for monitoring developer failure, construction and engineering, and real-estate market risks; dedicated stress tests for the construction and real-estate sectors; and a reinsurance plan that includes a self-risk threshold and a defined indemnity mechanism.

Entities must also implement a closed construction loan procedure, including a separate construction loan account for each project into which all project cash flows are deposited, and a mechanism for releasing credit tranches contingent on engineering inspection reports confirming construction progress and prior approval by the credit committee.

Practical Significance: Business Opportunities with a High Entry Barrier

For nonbank credit providers, fintech companies, and other entities seeking to enter the guarantee market, the reform presents significant business opportunities but also a high regulatory entry barrier. Capital adequacy and liquidity requirements, as well as corporate governance obligations, require advance preparation of the relevant corporate structure and financial and operational infrastructure.

CMISA clarifies that this is only the first stage and that it intends to continue expanding the regulatory framework for the guarantee market in line with market developments and experience gained from implementing the reform’s directives, including through additional reporting and supervisory requirements. Relevant entities should begin assessing whether their activities are compatible with the proposed requirements and consider participating in the discussions of the comments.

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Adv. Efrat Cohen is a senior partner and head of the firm’s Regulation Department.

Adv. Avihai Tal is an associate in the firm’s Regulation Department.

Barnea Jaffa Lande’s Regulation Department advises financial institutions and regulated financial service providers on licensing procedures and preparations for regulatory amendments, including assessing their implications for entities’ operations, corporate governance structures, and compliance requirements.