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The banks are using the Bank of Israel's recent 2.5% increase in key lending rates to bolster their own profit margins, charge business sources.

The sources said that the banks have not raised the interest that they pay out on large deposits by the full extent of the central bank's rate increase, keeping 0.1-0.2% to themselves.

A banking source denied yesterday that this was an attempt by the banks to boost their profits, but rather reflects an adjustment of interest within the liquidity duties of the banks.

The banking source explained that the liquidity obligations require banks to deposit 6% of all their accounts for one week and 3% of all their deposits for up to a year in a non-interest-bearing account at the central bank.

Since these sums do not earn the banks interest, they compensate themselves by not raising their own rates of interest by the full amount of the central bank's increase. The total sum of this liquidity obligation currently stands at NIS 42 billion.

Nevertheless, there has been an increase recently of the financial margins - the gap between the interest banks pay on deposits and the interest they charge on loans - after they had been eroded due to intense competition between the market players.

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The banking source said the increase in financial margins was the result of higher interest charged on banking credit rather than interest paid on deposits. According to the first-quarter financial reports of the country's banks, each one improved its financial margins.

Discount to entice new clients

In an effort to bring in new customers, Israel Discount Bank is offering interest-bearing checking accounts with no management fees and low interest charged on credit. The offer will apply only to new customers for up to one year.

Checking accounts in Israel generally do not pay interest on debit balances. Discount is attempting to use this campaign to strengthen its position in the battle for the lucrative private customer business, particularly as profit margins have been whittled away in the competition for corporate customers.

Discount recently reduced its corporate market activities due to the heavy losses it suffered in the real estate and telecommunications sectors, and also because of its low capital ratio, which limits the bank's ability to provide further credit to the corporate world. Discount denies that these factors have resulted in the departure of private customers, claiming that its new campaign will increase its market share.

Though interest-bearing checking accounts are not the norm in Israel, the benefit has been occasionally offered as a special promotion. For example, United Mizrahi Bank earlier this year offered interest-bearing check accounts for those earning NIS 15,000 a month or more.

According to Discount's promotion, the bank will pay prime minus 4% interest (4.6% today) on positive balances of new checking accounts. Though this is much lower than the interest payable on deposit accounts, the bank hopes to attract customers due to the novel approach.