Bridging the Divide A Case Study in Regulating Faith-Based Financial Institutions

Gmachs are volunteer-run institutions that play a key role in Israel’s ultra-Orthodox community, offering interest-free loans and other services based on trust and religious values. Unlike traditional loan associations, Gmachs rely entirely on community deposits, with no interest charged. Depositors, Gmach managers, and guarantors participate to perform a good deed (Mitzvah), enhance social standing, or assist friends or relatives. Some depositors also use Gmachs as a commitment device to save for specific goals. Regulation has become necessary to protect against uncalculated risks by depositors and potential fraud, including tax evasion and money laundering. Despite the political influence of ultra-Orthodox parties, regulations were enacted, driven in part by pressure from the US FACTA (Foreign Account Tax Compliance Act). This paper examines the legislative process, highlighting both its successes and challenges.