'COVID forced us to innovate a new approach to philanthropy'

Balasha is spearheading the transition of what was once known as the Israel Free Loan Association (IFLA), an organization that has provided financial help since 1990, into something bigger.

MAY 2, 2021 21:15

The Ogen office. (photo credit: Courtesy) — The Ogen office.

(photo credit: Courtesy)

"The number of people needing our help during the pandemic led us to innovate a new approach to fundraising that has never been seen before in the philanthropic world," says Sagi Balasha, CEO of the Ogen Group. "We understood that the world of nonprofits cannot continue to rely on the benevolence of high net-worth individuals to make our solutions scalable and sustainable."

Balasha is spearheading the transition of what was once known as the Israel Free Loan Association (IFLA), an organization that has provided financial help to tens of thousands of needy immigrants and native Israelis since 1990, into something even bigger. Originally established to help new immigrants from Ethiopia and the former Soviet Union adjust to their new lives in Israel, the organization has now more than doubled its capital available for lending and evolved into a massive social lending enterprise offering a variety of credit solutions as well as financial guidance for low- and middle-income Israelis. To date, the fund has issued more than 67,000 loans, totaling over NIS 1.4 billion ($371 million).

"The IFLA was very successful," Balasha says. "Our founder, Eliezer Jaffe, applied the Jewish idea of providing free loans to the needy and developed it into the largest free loan society in the world, with more than NIS 200 million available to be lent out. The money that people would donate would be lent out to people facing economic challenges, and then, after it was paid back, would be reused and lent to a different household, creating long-term re-use of philanthropic capital. We were able to achieve a default rate of just 0.7%, meaning that 99.3% repaid their loans."

But when the talented and ambitious Balasha was offered the position of CEO of the fund in 2016, he accepted only after the organization got on board with the massive expansion plan he proposed. Balasha had previously served in the Finance Ministry's budget division as part of the group of sharp young economists known as Naarei Ha'Otzar, the boys of the Treasury. After that, he helped lead the project that transformed Israel's outdated Diaspora Museum in Tel Aviv to the new Anu Museum of the Jewish People that opened several months ago. His next challenge would have to be bigger.

UNDER BALASHA'S leadership, IFLA was renamed the Ogen Group, (Ogen is Hebrew for anchor) and took on a new corporate structure that divided its operations into five subsidiaries within two verticals.

The first vertical is social lending, as IFLA did. Under this, IFLA has been renamed the Ogen Free Loan Fund and continues to help individuals in economic distress. To its side is the Ogen Social Loan Fund, making low-interest loans to qualifying small- businesses, as well as non-profit organizations.

Meanwhile, a second vertical offers financial guidance to make sure that the loans it makes don't go to waste. To that end, Ogen acquired Keren Shemesh, a nationwide network founded in 2005 by the Edmond J. Safra Foundation with over 900 senior Israeli business leaders available to mentor small business entrepreneurs, in particular from Israel’s socio-economic periphery. During the pandemic, the organization also duplicated this model for the non-profit sector. Meanwhile, another subsidiary, Ogen La’Bayit, provides professional consultation and coaching to help Ogen borrowers improve their financial management and prevent financial distress.

"Essentially, we expanded in two different directions," Balasha says. "We expanded the interest-free model into a much bigger lending operation, and we took steps to ensure that our loans are life-changing by providing mentoring and coaching to borrowers."

ALL OF THOSE plans, however, were predicated on a different type of challenge: increasing Ogen's sources of capital so it could continue to fund future growth. That's where the idea of the social bank - and the complex financial instruments that would follow - came in.

"The idea of the social bank is to increase our resources available for non-profits, businesses and individuals by creating a place where people could deposit funds, like a regular bank. It took us two years to get approval to open such an operation, but we finally opened on January 1, 2020. Of course, we had no idea what the coming months would bring."

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"We realized very early after the COVID panic started that small businesses were about to be the first victims of the crisis, and that nobody would really help them. Banks and for-profit financial institutions would have to close their doors to them during their hardships. A suffering felafel stand in Ashdod, for example, wouldn't be able to provide a guarantor for a loan. So we approached the philanthropic community in Israel and around the world and said, we need your help to replace the guarantors. We need you to provide a risk mitigation cushion, because we want to provide much riskier loans. And the reaction of the philanthropic community was amazing. Within two weeks, we raised our first NIS 6 million as a risk mitigation cushion to help nonprofits, with about half coming from the Jewish Agency. Once we had that, we opened our doors to any non-profit that needed a loan, with no guarantors. We provided NIS 32 million to about 120 organizations."

"Next, we understood that we needed to find a similar solution for small businesses, without guarantors. In April, there was a news segment with a felafel store owner crying that he couldn't support his family, and that put the small businesses in the spotlight. I got a phone call from a big philanthropic family in Israel, and two weeks later, we received a check for $20 million. The same family also gave us another $10 million a few months later, and the philanthropic communities in America and Israel stood up."

Ultimately, Balasha says, Ogen was able to give NIS 158 million in loans in 2020, increasing its lending by some 230% in 2020. "We were on the frontlines of COVID, and ended up helping 3,500 families, businesses and non-profits during 2020. And we more than doubled the amount of money we had to lend, from NIS 200 million before the crisis to more than NIS 400m., on the way to NIS 500m."

Balasha gives one example of a particular small business that Ogen helped, a classic restaurant in Jerusalem. "The restaurant opened in 1994, and her husband died several years ago. She worked extremely hard to pull the business out of its debts, and in 2016, received a document from Hotzaa Lopoal that she was debt-free. When COVID started, she went to her bank for a loan and was rejected, because she had a record of being in debt years earlier. That's crazy. The banks don't want to service businesses like this. In this situation, some people go to the grey markets and get a loan for 20%. Fortunately, she heard about Ogen, and we gave her a reasonable loan at 3%."

"We have many stories like this," Balasha says. "One of our main challenges now is getting the word out so that more people know about us."

Nearly all this money came from traditional donations, including deposits from Google and wealthy donors. But then, we had an idea. "What if we could take NIS 50 million of the debt and bundle it as a securitized asset that could be sold to banks and investment houses?"

Ogen's financial team created a sophisticated financial structure that leverages the philanthropic guarantees on the loans to offer an asset that can deliver a competitive interest rate. "We are getting a lot of enthusiasm from the capital markets, with interest from a commercial bank and pension funds. We'll know in a few months whether we'll be able to raise the NIS 50 million."

"This is a hybrid structure of philanthropy and investment that benefits the donors, who can leverage their philanthropic money, as well as investors, who can make money and make an impact, without the two being at odds with each other,"Balasha says. "Nobody has ever done anything like this before."

While Ogen pursues this securitization model, the future of the rest of the social bank concept, with depositors and checking accounts, is a bit unclear, Balasha says. "We are a social financial institution, but a full banking license will come with a lot of regulation, while our current license gives us much more flexibility. The securitization model has huge potential for the future. We will have to see which path gives us greater flexibility to grow."

Ogen continues to move forward pushing the envelope in developing tools that will allow it to raise more capital for philanthropic lending. "Ogen's goal isn't to try to make profits," Balasha says. "We are looking to keep growing so that we can provide more social good."