After years of rumors, here-say, and unwritten code that outlawed the use of credit cards by Israeli nonprofit organizations, the newest version of the Nihul Takin [Certificate of Proper Management] from Israel’s Rasham Ha’amutot [Registrar of Charities] clearly permits the use of credit cards by Israeli charities…kind of.

Unfortunately, vague unwritten guidelines have now been replaced by confusing and unrealistic written rules. Progress?

So should your amutah [Israeli Charity] use a credit card? As no two charities are the same, that answer is best left to your organization’s board, accountant, and/or lawyer.

What I can do, however, is share the research I have done and practices I have witnessed from countless nonprofits, which will hopefully save your organization precious time. 

WHAT’S  THE PROBLEM WITH CREDIT CARDS?

Israel’s Registrar of Charities takes issue with credit cards, as written in the Nihul Takin:

“Use of credit cards by an amutah [Israeli Charity] constitutes a problem because it does not enable the signature of two authorized signatories as is required, and it therefore adversely affects control over the way in which the amutah’s funds are handled.” – Nihul Takin (See below for links to the full text.)

(In short, proper financial oversight is practiced when transaction are signed by at least two signatures, but a credit card transaction can be executed by just one person.)

HOW SHOULD MY AMUTAH USE ITS CREDIT CARD?

The Registrar acquiesced in its newest version of the Nihul Takin (the third and final draft was released in June of 2010) to the use of credit cards by Israeli charities.  Israel’s Registrar of Charities lists two options whose lack-of-clarity and wordiness, unfortunately, require me to translate its instructions and has led various experts unsure as to what to recommend:

Option #1

“A credit card that is limited to the amount permitted for use as petty cash, and uses it solely for permitted petty cash expenditure…which contains a restriction on the amount of a one-time item of expenditure (such as charged card) or a monthly limit of expenditure (such as a card with a credit facility limit of a small amount).” - Nihul Takin

Translation: A credit card can replace petty-cash, used for similar purposes.

Pro: Some consider this option to be the simplest and most straight forward because it allows for a credit in the organization’s existing bank account.

Con:  Regulations (specifically those issued by the Income Tax Authority) do not specify the proper types of petty cash expenditures nor the monthly limit for petty-cash, the optimal credit limit for this kind of card is hard to know.

Con: If the Registrar is still, indeed, worried about the possibility of executing transactions by a lone signatory, this solution doesn’t address this dilemma.

 Option #2

“A credit card, as to which the payment thereof is subject to the existence of a monetary balance in a designated account opened for the purpose of use of such a card. The use of a card of this type will be subject to transfer of funds to the designated account following a signed instruction by two authorized signatories of the amutah, for the purpose of a particular item of expenditure, noting the purpose of the transfer…for example in order to make payments that can only be made through the internet, payment of a fee to the Registrar, expenses incurred during travel abroad etc.” – Nihul Takin

Translation: Open a separate account that is designated strictly for credit card. The card’s limit will be backed by cash that will be transferred from the organization’s main account. The instruction to transfer the money that will serve as the card’s collateral will be signed by at least two people.

Pro: Even though the card is used by a single individual, the usage is pre-approved and the transfer of the collateral is authorized by the magic number of two.   Those in favor of this option feel that with two signatures approving the transfer, the amutah is better protected should its governance and financial practices be audited in the future.

Con: There is an additional headache and possible additional fees (depends on your bank) for opening/managing an additional account.

Con: The Registrar actually envisions a flexible card limit that will change according to the needs and approval of the organization.  Very few cards will actually allow this and the charity might find itself in the defensive position vis-a-vis the Registrar despite having the magic “two.”

Not only are some experts unsure as to which option is the best to recommend, other professionals actually advise not use a credit card at all.  As one lawyer put it, “This language is purposely confusing, telling me without a doubt that the Registrar really doesn’t want charities to use credit cards.”

And this lawyer is probably right.

Conversations I have had with lawyers and accountants hint that the Registrar of Charities only approved the use of credit cards by Israeli charities due to public pressure and that (not-so) deep down, it hasn’t changed its belief that a credit card is dangerous.

BUT THE SECTOR NEEDS MORE

This last suggestion, while not one of the options suggested by the Registrar, does play it safe.  The logic of that last lawyer is pretty sound, that is, except for one thing: today’s businesses NEED a credit card.  Internet purchases, certain standing orders, and corporate accounts — just to name a few — won’t accept another type of payment.

But maybe more importantly, by opting out of using a credit card, a charity is allowing the Registrar to dictate unfair and unrealistic business conditions that can cost the nonprofit valuable money and time.

(For example, take one client that is forced to shop at the local mini-mart because he can’t open a corporate account at a neighborhood supermarket since his lawyer recommended against using a credit card.)

Furthermore, if a credit card isn’t allowed for the organization then often employees or board members are forced to use their own personal cards.  Not only can this be an incredible burden on the individual that needs to be reimbursed (especially with bigger expenditures like airline tickets), but this method actually exhibits less control, transparency, and fiduciary responsibility than a credit card owned and managed by the charity.  (And I say this last point even knowing that the Registrar has accepted reimbursements as a valid payment method for years.)

Instead of being intimidated by the Registrar’s awkward wording, I would like to see charities push back, using the cards in a responsible and financially-smart manner — and defending this usage should ever and whenever it be called into question.  Only by showing the Registrar the impractical nature of the current guidelines can Israel’s nonprofit sector garner enough public support to force the Registrar of Charities to rewrite these inadequate “suggestions.”

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

The Nihul Takin: For a link to an English version of the Nihul Takin can be found on the Registrar’s website here or can be directly downloaded from my site here (the relevant paragraphs about a credit card are on page 34).  The Hebrew version is also available from my site here (with the relevant paragraphs on the bottom of page 25).  To learn more about the document and why it is a must-read for anyone thinking of joining the board of an Israeli charity, please read my previous post, “Israel’s Nihul Takin Manual Now Available in English!.”  Links to the Nihul Takin are in that post, as well.

Life Before the Update: If you’re wondering what Israel’s Registrar of Charities’ response used to be, you can read one of my earliest posts from July 2009, “Can My Israeli Nonprofit Have a Credit Card?”

Photo Credit: “Credit Card Debt” by DebtCovered

PayPal is coming to Israel, reported Haaretz on September 13th. While this is great news for those individuals buying up those priceless items on eBay, nonprofits should be a little less enthusiastic.

PayPal, Haaretz summarized:

Provides a secure method of transferring payments between online buyers and sellers, without the need for either party to reveal their credit card or bank account information.

In an age where online buying increases daily, PayPal is an invaluable tool. (I personally use PayPal because of its great buyer protection program). So much so that other companies have followed suit. Google launched its “Google Checkout” back in 2006 and in Israel, Walla! introduced Buy and Pay in the same year (Walla! announced the closing of this service this September).

In the United States, PayPal, owned by eBay, is much more than a way for customers to shop at their favorite stores. It is a secure and easy way for nonprofit organizations to receive donations via the internet.

So you can imagine how excited I was when I heard that PayPal was coming to Israel. After all, this was chance for nonprofits in Israel to receive donations either in NIS or USD from any PayPal account, anywhere in the world. Even thinking strictly locally, PayPal’s average commission of 2.5% (not even including the benefit that many nonprofit qualify for) is a much better alternative than VISA or Isracard (two leading Israeli credit card companies), that charge Israeli charities commissions of between 3 and 5%. In July, a PayPal representative confirmed its pending arrival in Israel and I drafted my post “Defining an Israeli Nonprofit Organization” for PayPal Israel to prove to them that Israel nonprofits are rigidly administered.

Alas, it was not to be.

When I was speaking to the aforementioned PayPal representative in September, he let me know that PayPal Israel is run under a different charter than PayPal USA. Only in the USA can the service be used to transfer donations. PayPal Israel, however, can only be used to pay for goods received or services rendered.

While this fact does not and should not detract from the tremendous service that PayPal renders to USA charities, this provision in their by-laws was a proverbial buzz kill.

PayPal, if youre listening, please change your charter and help a brother out.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

The Answer

The answer should hopefully be “yes,” nonprofit organizations can use credit cards.  Credit cards have become an integral part of running any kind of business; whether it be a not-for-profit or a for-profit corporation.   Credit cards are safer than cash and are the preferred method of payment when shopping on the internet.  Not to mention, the ease of an itemized monthly billing statement.  Nonprofit governing agencies should love credit cards and promote their use whenever possible.

But, alas, in Israel the answer is no…kind of.  Cryptic, but true. That is to say that in my experience as a banker, I have both ordered credit cards for charities that wanted them and canceled credit cards for charities that were told it was “illegal” to have them.

Why is it so Complicated?

Khok Ha’amutot [The Nonprofit Law] in Israel does not restrict a charity from ordering or using a credit card.  The law details that the default by-laws of an organization require at least two authorized signatories to sign on all transaction requests.  The law also allows for changes in the organization’s by-laws.  Examples of common changes include requirements for certain combinations of signatories that are dependant upon the amount of a transactions, as well as, permission for less than two people to sign.  This last one is pertinent as credit card transactions are viewed by the Rasham Ha’amutot [Israel's Registrar of Nonprofits] as having been approved by only one signatory.

Included in the law are the various subcategories or licenses that an Israeli nonprofit can obtain (for a full list and description please view my previous post “Defining an Israeli Nonprofit”).  Among these statuses is the Nihul Takin, or Proper Management status.  As the name implies, this license is provided to organizations that are viewed as being run well; and the Rasham has its own definition of what “being run well” means (the determination is currently left up to the complete discretion of the Rasham).  The Registrar believes that all decisions should be approved by a minimum of two signatories.  While the State law allows for only one, those organizations that want to earn their Nihul Takin status are forced to adhere to the ultra-amutah standards of kosher behavior set by the Registrar of Charities.

As previously discussed, the Israeli government and many foreign foundations use the Nihul Takin as the benchmark to determine if an Israeli nonprofit is eligible to receive a grant.  So while the State law allows for credit cards decisions, the Rasham frowns upon them.  Frowning upon, of course, is not the same as outlawing them.  And since the audits done by the Rasham are subcontracted out to a wide variety of accounting firms there seems to be no set rule.  I, personally, know of charities that the first thing they were required to do was destroy any existing credit cards while a few nonprofits seem to have not been asked at all.  Go figure.

Current Possible Solutions

I have seen organizations adopt the following solutions:

1. Create an Israeli “Friends of” organization.  Being as only the “main” amutah is concerned with obtaining a Nihul Takin, some organizations have started a brother/sister organization in Israel.  This organization absorbs the expenses and practices that are frowned upon for Nihul Takin status; thereby allowing the main amutah to avoid any troubles when applying for its Nihul Takin.  Recent auditing laws and practices designed to combine all financial statement of “related” amutotare making this option less workable.  A licensed accountant can advise if this option is relevant and feasible. 
2. Having the foreign “Friends of” organization apply for a credit card.  For this option to work, the foreign supporting charity would have to operate a bank account in Israel.  Even though this organization operates in Israel, it is not subject to Israeli charity laws (this is true even for foreign charities registered in Israel).  As such, this account can absorb the expenses and practices that are frowned upon for Nihul Takin status.  Just remember, this account must reported to the United States and should conform to IRS standards.  Somewhat simpler.  Still ask an accountant.

Hopeful Signs

I was meeting with a colleague who is a partner of a leading accounting firm in Israel.  This individual is an expert in the area of amutah financial matters and has been invited to participate in various Knesset committees concerning amutot.   In one such meeting a few months ago, the issue of credit cards for amutot arose.  The matter was supposed to be covered over a short time but ended up taking up the next hour and a half.  This person presented to the committee an article that delineated the reasons why a credit card is important and numerous ways how an organization can provide proper oversight for credit card usage; for example, one idea presented was that two signatories sign on every credit card statement.  He told me that after heated debate a few MKs were even asked to join.  It was made clear that credit cards are a way of doing business in modern times and that the Nihul Takin should reflect this.  The Rasham Ha’amutot promised to take this under advisement and provide a solution.  Let’s hope we see something sooner rather than later.

Conclusion

So how do we proceed in the interim?  Like I said, credit cards in Israel are cryptic.  Ask your accountant for the final answer and he or she will let you know if it is worth ordering a card or not. 

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

It is logical to assume that if a bank wants to appeal to the nonprofit community then it has to understand the nonprofit organization’s way of thinking (that’s where I come in).  The opposite should also be true.  If a charitable institution wants to appeal to a bank then it must understand the bank’s way of thinking. This is especially the case when using or applying for credit from a bank.

In the past two months alone, four organizations have turned to me trying to understand why their bank was acting a certain way when it came to credit. A few examples:

• One organization had a large line of credit in one account that was guaranteed by cash in a different account. As far as the nonprofit was concerned, this wasn’t credit and should, thus, not be charged any accrued interest fees.
• Another organization didn’t understand why its Israeli bank felt uncomfortable giving a temporary line of credit against a foreign currency check deposited in its account. After all, the bank had the “cash.”
• A charity was upset that a bank didn’t want to approve a mortgage backed by the property that was being purchasing. The institution was convinced that its request was backed by solid collateral.

I wanted to take the opportunity over the next few blogs to review how a bank looks at certain types of credit and what steps an organization can take to make itself more appealing to a bank. First, let’s start with the basics and review the various types of credit available.

Overview

• Checks
• Credit Card
• Line of Credit
• Loan
• Mortgage
• Bank Guarantee / Letter of Credit

Checks

• Checks are promises. Checks are trust. Let us be absolutely clear, checks are not cash.
• Checks can be rejected, bounced, or not honored. Cash can be immediately used, or if you prefer, stored in a mattress or placed in a medium to large size swimming pool.
• In Israel, checks can be bounced for lack of funds only on the day after the check is deposited.
• In America, checks can be rejected up to a half a year or a year later. I have seen cases where a US dollar check cleared and the client used the money only to have the US bank call and bounce the check a month later.
• Banks do not want to put themselves in a position where they or their client will have already used the funds of the check, only to find that the check bounced a few days or weeks later (as seen above).
• Expect to wait at least two days for Israeli checks to clear.
• Foreign currency checks are cleared either through the bank (expect at least 7 business days) or through collection (anywhere from two weeks to two months).

Credit Cards

• A credit card in Israel are different that in the States and other places.
• In Israel, the cards are quasi-debit cards (with only one exception that I know): Debit cards, because the card is created and guaranteed through a bank (see below); Quasi because the payments do not come immediately out of an account, but rather only once a month.
• Credit cards are guaranteed by the bank. In other words, whether or not a client has money in his or her account, the bank is forced to by the bill.
• Credit card bills must be paid IN FULL on their due date.
• Because banks assume full responsibility of a card, the credit line will always be against some sort of security/collateral. Collateral can include expected salary (personal accounts), existing mortgage, or cash.

Line of Credit

• As of a few years ago, the Bank of Israel decreed that no account can have a line of credit without prior approval and request of the client. In short, the client has to sign more forms than before.
• Depending on the bank, this may hamper its ability to release credit on the same day or to cover a minus in the account that was incurred the previous day.
• One does not need to use a line of credit. It is an optional loan, so to speak.
• Banks differ in their fees for establishing a credit line. Some fees are not even based on whether the line is used. Fees can include interest (if line is used) and/or a credit issuance fee (amalat haktza’at ashrei). Speak to your bank to get all the fine print.
• Like credit cards, lines of credit are traditionally issued against expected salary (personal accounts), existing mortgage, or cash.

Loan

• Loans and lines of credit serve the same purpose.
• Loans generally come with a filing or processing fee (pitichat tik). The name can vary, depending on the bank. This fee may or may not be a percentage of the loan (check this out).
• Check with the bank about early repayment fees. Some banks have, others don’t. Prices and conditions vary.
• Loans are traditionally issued against contracts (business/nonprofit accounts), cash, guarantors, stock, property or cash.

Mortgage

• Mortgages are essentially loans, issued only against property.
• Unlike, general collateral, in mortgages, the property is intrinsically linked to the loan. The property cannot be used as security for any other dealings between a client and the bank.  This can only be changed with the bank’s and client’s approval and , of course, subsequent additional paperwork.

This is only the tip of the iceberg. I will be dealing with various nuances and applications in future posts.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey