Bank Hapoalim B.M. Business Information, Profile, and History

History of Bank Hapoalim B.M.

Bank Hapoalim was founded by the labor movement in Palestine in the early 1920s and set as its task to "assist, adopt, further and grant financial or any other assistance to all branches of activity of the institutions, federations or groups organized by the workers for the purpose of improving the conditions of their members in accordance with cooperative principles." Bank Hapoalim's dedication to the Jewish workers' cooperative development in Palestine continued, albeit without its original zeal, well into the late 1960s. In 1969, however, the bank changed its image, placing emphasis on becoming the international banking institution that it is today. With a high international profile and a focus on corporate profits came broadened responsibility and national influence, and their accompanying challenges and problems. Today Bank Hapoalim is the largest of Israel's commercial banks, with 340 offices in 14 countries around the world.

The political and social environment of Palestine after World War I has had a lasting influence on business ventures in Israel. Political and social tensions were rapidly heating up when the Jewish labor movement began to organize itself in 1920. At that time Palestine was governed by a British mandatory government, established after World War I in the wake of years of neglectful Ottoman rule. The British government's goal was to facilitate the development of both the Jewish National Home and the indigenous Arab population so that the two factions would join cooperatively in self-government.

Anti-Semitism in Poland and Hitler's steady rise to power sent Jewish immigration to Palestine soaring from the early 1920s well into the 1930s. The Jewish labor movement was part and parcel of this immigration, as was the Histadrut, the Israeli federation of labor unions. Because the Anglo-Palestine Company, the Jewish commercial bank at the time, would not grant credit to the Histadrut, labor and Zionist leaders alike saw the need for a bank specifically designed to support the Jewish workers' efforts. On November 20, 1921 Bank Hapoalim was born as the official financial branch of the Histadrut.

From its beginning, Bank Hapoalim took a conservative approach. The bank was dedicated to providing capital to the Histadrut's agricultural, industrial, and marketing cooperatives. However, it gave loans selectively, and rarely supported any one endeavor completely.

The Zionist Organization in Palestine gave vital financial and managerial support to Bank Hapoalim at its start, and Zionists as well as labor leaders looked forward to selling shares at home and abroad. Three representatives of the Jewish labor movement in Palestine arrived in New York City in November 1921 hoping to sell shares in their newly opened bank. But Jewish laborers in the U.S. were not very interested in Zionism, while the wealthy American Jews who supported Zionism did not support the labor movement. In the end, the group, which had hoped to raise a quarter of a million dollars, managed to sell only $35,000 worth of shares.

The American Friends of the Histadrut was one of the groups that did invest, and with its help the bank separated amicably from the Zionist Organization in 1925. The labor leaders associated with Bank Hapoalim thought that it was important to supply their own bank managers, who would be concerned primarily with the labor movement. They chose Joseph Ahronovitz, editor of the labor publication Hapoel Hatzair, to be the bank's managing director.

In 1930, when the Great Depression was making itself felt in other parts of the world, Palestine was booming. One of the primary reasons for this economic upsurge was the increase in the number of Jewish immigrants and the capital they brought. The Jewish population in Palestine rose from 13% in 1922 to 30% in 1936; the sharpest increase came between 1930 and 1936. During this latter period many small new banks sprang up to serve the personal banking needs of the new immigrants. Bank Hapoalim, however, continued to do business mainly with the organizations of the Histadrut.

From September to November, 1935, there was a run on the Palestinian banks when Italy's invasion of Ethiopia provoked widespread fear of war. Many of the small banks folded, but with workers' trust in their bank and the help of Barclays and the Anglo-Palestine Bank, Bank Hapoalim survived.

Unfortunately, soon after this financial crisis had passed, the social and political situation in Palestine worsened dramatically. The difference in standards of living between Arabs and Jews increased in the mid-1930s. After attempted negotiations with the mandatory government to stop the influx of Jewish immigrants and then bouts of violence aimed against the government, the Arab rebellion began in April, 1936. The leaders of the five Arab political parties went on strike, demanding that Jewish immigration be suspended. Highly organized bands of Arab guerrilla fighters maintained by the Arab villagers attacked Jews throughout the country.

In May, 1939 the mandatory government published a White Paper that curbed the number of Jewish immigrants for the following five years. The White Paper also strictly limited the transfer of land from Arab to Jewish hands, to protect poor Arab villagers from being bought out by the Jewish immigrants. An outburst of Jewish violence followed, and social, economic, and political chaos continued until the start of World War II.

During this chaotic time, Bank Hapoalim's major business was to provide credit to the increasing number of agricultural cooperatives, or kibbutzim, being founded. In 1937 the bank's directors chose Avraham Dickenstein, a passionate believer in the potential of the Palestinian economy, to go on a fund-raising mission to the United States. He was driven not so much by ideology as by a keen business sense. Dickenstein knew he needed a key supporter to get started, and decided on U.S. Supreme Court Justice Louis Brandeis. Brandeis was interested in supporting the development of Palestine, but had disagreed with the starry-eyed approach that the first crew of fund raisers took in the 1920s. When Dickenstein arrived advancing rather conservative financial plans for development, Brandeis lent his support generously and influenced others to do the same. Dickenstein left the United States after ten months with 140,000 Egyptian pounds' worth of investments in Bank Hapoalim.

Ironically, it was World War II that brought Palestine out of its slump into a period of relative economic independence and stability. Trade routes in and out of the Middle East were largely cut off, calling for more self-reliance on the part of Palestinian manufacturers. Varied new industries cropped up, agricultural production increased, and British and Allied forces in the area turned to Palestine for a wide range of goods. Diamond production, an all-Jewish industry, replaced citrus fruits as the country's most valuable export. The Arab standard of living also improved due to greater prosperity, particularly better medical facilities.

The directors of the bank decided in 1941 to initiate a new corporation, independent of specific Zionist and labor concerns, to raise funds for investments in Palestinian industry and commerce. Avraham Dickenstein went back to the United States to start Bank Hapoalim's new subsidiary, the American-Palestine Trading Corporation (AMPAL). He arrived on a most inauspicious day: December 7, 1941, the day of the Japanese attack on Pearl Harbor. With the German army steadily advancing toward the Middle East, Dickenstein nevertheless managed to secure US$50,000 for AMPAL. With the momentum he stirred up, by 1946 AMPAL's capital reached US$2 million.

On May 14, 1948 the State of Israel was officially declared. The new government instituted an austerity campaign to deal with the huge influx of immigrants and the economic hardships brought on by the Jewish War of Independence, which lasted until June, 1949. Dickenstein, then director of AMPAL, told The New York Times in September, 1949 that this campaign had lowered the cost of living by 7.5% and eradicated the black market in just six months.

AMPAL and the Histadrut, and Bank Hapoalim through its association with these groups, were major contributors to Israel's fledgling economy. AMPAL was busy securing investments in Israeli industry and raising capital for use in general municipal development. In 1948 it began leasing ships to carry badly needed supplies and goods to manufacturers in Israel, and an independent shipping line, the American-Israel Line, soon evolved from these efforts. The Histadrut was a driving force in the Israeli economy, from construction to agriculture to industry, and continued to rely on Bank Hapoalim to finance its many operations.

In 1950 Bank Hapoalim merged with the Tel Aviv workers' savings and loan society, making it one of the three largest banks in Israel. In 1957 the bank merged with the rest of the savings and loan societies in Israel, except the one in Jerusalem, which merged in 1961. These mergers brought the majority of the workers' financial business to Bank Hapoalim, which could manage their money more skillfully than the small, often irregularly organized societies.

Merging with the savings and loan societies also meant that the bank operated on a more individualized basis than before. It began to open new branches rapidly, and offered a range of credit and personal savings plans, such as one to save for high school, which was not free at the time in Israel. These individualized plans in turn provided funds for areas of national development that the bank supported.

Steep inflation was the price of Israel's rapid economic expansion. To combat inflation, the government devalued the currency and did away with export and import regulations, causing a surge in foreign trade. Bank Hapoalim increased its foreign dealings by opening experimental offices in Switzerland and Latin America and participated in raising funds abroad for investment in Israel. Expansion continued until 1966, when inflation won out, pushing Israel into an economic depression that climaxed in early 1967. Following the Six Day War that year, when Israeli troops moved into and occupied the Sinai Peninsula, the West Bank, and Golan Heights, there was a short period of economic improvement. But by 1969 the Bank of Israel had to restrain the commercial banks to handle the shortened supply of capital.

The year 1969 was a turning point for Bank Hapoalim. Until then the bank's primary purpose had been to serve the domestic labor economy. But a new management team resolved that year to transform the bank into a modern international giant. Bank Hapoalim opened its first operating foreign branch in 1971 in London, distinguished from the representative branches of the mid-1960s. It continued to expand abroad and now operates branches in much of Europe, North America, and Latin America.

Unbeknownst to all but a few of the directors during this time, in 1972 Bank Hapoalim joined Bank Leumi, Bank Mizrahi, and the Discount Bank in buying and selling its own shares to falsely inflate their worth. Specifically, Bank Hapoalim bought and sold large amounts of AMPAL stock. It is natural enough for businesses to nudge their share values by doing this, but the banks' exaggerated trading, especially after 1979, increased their shares' values even above the 191% inflation rate for 1983. To raise capital for an intensive push abroad, the banks had all been competing for investors' money by offering artificially high yields and promising to buy back shares whenever shareholders presented them. By 1983 bank stock prices were listed at over three times the banks' adjusted capital. This was an economic crisis just waiting to happen, since bank stocks had remained ahead of inflation for a long time and, as such a sound investment, made up more than half of the total stocks traded in Tel Aviv.

In July, 1983 the government vowed to take decisive steps toward reducing Israel's inflationary cycle. One of these steps was rumored to be a drastic devaluation of the Israeli shekel. In the first week of October, investors, fearful of the imminent devaluation, rushed to sell their bank shares so they could buy dollars. Bank share prices collapsed. On October 6 banks were forced to buy back more than $1 billion worth of shares. Bank Hapoalim was at the time Israel's second largest bank, and lost the most in the collapse. On October 9 the government closed the market to prevent a complete crash, and on October 11, it devalued the shekel by 23%.

The Israeli government stepped in to save the banks and reopened stock trading on October 20, on the understanding that the banks would not buy and sell their own shares, and that the government would maintain the prices of the shares by guaranteeing to buy back investors' shares at set points in the future at their October 6, 1983 U.S. dollar value. By early 1989 this program had cost Israeli taxpayers $7 billion and left the government as owner of most of the shares.

In January, 1985 the Israeli cabinet formed an investigative commission to study the price collapse. In 1986 this commission's report recommended that the four heads of the commercial banks resign or be dismissed, and that major changes be made in Israel's stock market. The commission cited the banks' stock manipulation as the cause of the crash, but also called for the director of the Bank of Israel to resign because he was aware of the banks' activity but did not report it.

The banks claimed that they had been under immense pressure and competition from the government and other businesses to remain attractive to investors abroad. They saw regulating their stock prices as an integral part of maintaining a profitable international business for themselves and the country as a whole. Nonetheless, Giora Gazit, director of Bank Hapoalim in 1986, announced his resignation the day after the commission released its report, and Ephraim Reiner, president of AMPAL in 1986 and chairman of Bank Hapoalim in 1983, resigned two months later.

Since this crisis, Bank Hapoalim has been streamlining operations in Israel and looking for lucrative, reliable business abroad. The bank offered the Israeli public its first credit card, installed automatic teller machines in many areas to expedite personal transactions, cut down on office personnel, and closed branches in Israel.

In early 1989 the banks, nominally owned by the government since it had to buy most of their shares in its 1983 shareholder rescue plan, were trying to convince the government to return ownership to them. Since the government's shares are of a type that has no voting rights, Bank Hapoalim is controlled by the Histadrut even though the Histadrut owns only .11% of the bank's shares. In May, 1989 the government equalized voting rights for all shares, much to the distress of the banks, to make them more saleable. It plans to sell them to the highest bidder, but limit foreign ownership to 30% of each bank.

Meanwhile, the current management team is creating an impressive international niche for Bank Hapoalim as lender to small and mid-sized foreign companies. The bank will continue to trim its operations to a profitable level and mend its damaged image. Political, social, and economic conditions are unstable in Israel, as they have been for decades, yet prosperity and technological innovation are on the rise in many areas. Whatever the outcome of the government's sale, Bank Hapoalim will continue to be shaped by the influence of the government and Israel's social and political environment.

Principal Subsidiaries: Bank Otsar Hahayal Ltd. (50.1%); American Israel Bank Ltd.; Bank "Yahav" for Government Employees Ltd. (50.1%); Bank Massad Ltd. (51%); Israel Continental Bank Ltd. (62%); Bank Hapoalim (Cayman) Ltd. (68.6%); Bank Hapoalim (Switzerland) Ltd. (99.7%); Hapoalim (Latin America) Casa Bancaria S.A. (Uruguay) (68.6%); Bank Hapoalim (Canada); Israel-Ampal Industrial Development Bank Ltd. (36%) ; Industrial Bank Limited. (36%); Mishkan-Hapoalim Mortage Bank Ltd. (69%); Igrot Hevra Lehanpackot Shel Bank Hapoalim Ltd.; Bitzur Ltd.; Hapoalim Hanpackot Ltd.; Mit'ar Hevra Lehanpackot Ltd.; Tmura Heura Lehanpackot Shel Bank Hapoalim Ltd.; Te'uda Hevra Lehanpackot Ltd.; Tashtit Hanpackot Ltd.; Revadim Properties Ltd.; Investment Company of Bank Hapoalim Ltd. (43.5%); Hapoalim Leasing Ltd. (43.5%); Isracard Ltd. (43.5%); Eurocard (Israel) Ltd. (43.5%); Ampal-American Israel Corporation (36.0%); Ampal (Israel) Ltd. (36.0%); Nir Ltd. (36%); Hapoalim International N.V., Netherlands Antilles; Amot Investments Ltd. (34.2%); Diur B.P. Ltd. (80%); Clal (Israel) Ltd. (34.2%); "Delek" Israel Fuel Corp. Ltd. (30.9%); "Gmul" Investment Co. Ltd. (46.7%).