Derisking Israel: A Blueprint for Economic Resilience

In a world characterized by economic volatility and geopolitical uncertainty, Israel stands as a prime example of how strategic financial interventions can foster resilience and innovation. Imagine a small Israeli tech startup poised to develop groundbreaking technology but held back by financial constraints, saturated capital markets dominated by traditional banks, and risk aversion. Here, the concept of derisking becomes crucial—transforming challenges into opportunities through a blend of private market and nonprofit collaboration.

The Economic Challenge for SMEs in Israel

Israel’s economy, particularly for small and medium-sized enterprises (SMEs), faces unique challenges due to geopolitical tensions and frequent periods of conflict. SMEs form the backbone of Israel’s economy, comprising 97% of all businesses and employing 42% of the workforce, yet they only have access to 16% of bank capital  They are therefore vulnerable to economic downturnsand an inherent risk of loss. While impact capital is growing, it remains limited in scale, leaving a gap that must be addressed to foster sustainable growth.

In many cases, financial institutions, including traditional banks, are saturated with capital but remain reluctant to invest in higher-risk sectors like SMEs. This is where blending risk and leveraging multiple forms of capital—private, public, and philanthropic—can help derisk investments, ensuring that these crucial sectors receive the funding they need to thrive.

Community Development Financial Institutions (CDFIs) are well-suited to address this gap by providing capital to underserved markets while absorbing a portion of the risk. However, the potential of blended capital in Israel remains underutilized, despite its proven effectiveness in other parts of the world. Blended finance, which combines philanthropic and private investment, creates a mechanism for spreading risk, attracting capital, and supporting economic growth, especially in high-risk environments like Israel’s.

Philanthropy’s Role in Economic Resilience

At Ogen, Israel’s sole social lender, we work to fill these gaps by absorbing risks that others shy away from, empowering Israelis to embrace the economic risks necessary for growth. Our mission transcends financial assistance; we aim to derisk Israel’s economy by offering affordable, life-changing loans to SMEs, social enterprises, and individuals who have been underserved by conventional financial institutions.

Economic theory highlights that effective risk management is essential for stable growth. In Israel, where risks are high, derisking is not just a strategy; it is a national imperative. Philanthropy plays a critical role here, offering a way to absorb risks that private investors may avoid. Leveraging philanthropic capital allows us to provide interest-free and low-interest loans, offering not only immediate financial relief but also building a foundation for long-term economic resilience.

Our recent emergency fundraising campaign, which raised over $80 million for economic relief, underscores the crucial role nonprofits play in stabilizing Israel’s economy. This philanthropic support, coupled with personalized financial mentoring, ensures that businesses can rebuild and thrive, further strengthening the country’s economic framework. Philanthropy absorbs the risks, enabling private capital to flow more freely into these high-potential sectors. Crucially, our underwriting team with combined experience of over 50 years, makes the decision on loan origination, rather than the mainstream banking system, which is often risk adverse.

Blended Finance: A Systemic Solution

Blended finance is a model widely used in developing countries, and it forms the cornerstone of our strategy. By combining philanthropic funds with private investment, we reduce risks for financial institutions, making it safer for them to lend to Ogen. This is more than a short-term solution—it is a systemic approach to long-term economic sustainability.

Blended capital remains underutilized in Israel, despite its enormous potential. It allows for the alignment of multiple sources of capital, each playing a role in absorbing different levels of risk. By strategically combining these funding streams, we bridge gaps that neither the private market nor philanthropy can solve alone. Our success in attracting major international investment firms to consider issuing bonds in Israel, even during periods of conflict, demonstrates the untapped potential of this approach. This is especially crucial when international rating agencies are determining the country’s creditworthiness.

Philanthropy alone cannot shoulder the burden of derisking an entire economy. Government involvement and private sector collaboration are essential. For instance, negotiating government loan guarantees alongside philanthropic efforts amplifies impact, extending the reach of our programs and leveraging official support to mitigate risks for investors. In times of crisis, government action is crucial to ensure the continuity of financial systems and mitigate the potential economic fallout. By stepping up, the government can provide crucial guarantees and risk-sharing mechanisms that reassure both private and philanthropic capital, ensuring a continuous flow of funding into key sectors.

Building a Resilient Future for Israel, and Other Countries

Our model serves as a blueprint for other countries seeking to achieve financial inclusion through strategic partnerships and innovative financial mechanisms like blended capital. By absorbing risk, we create the conditions where innovation and entrepreneurship can thrive, contributing to a more resilient and dynamic economy.

Derisking goes beyond offering financial aid—it represents a comprehensive vision of sustainable growth for Israel, driven by robust financial systems, innovative risk management, and collaborative partnerships. For SMEs to thrive, a supportive ecosystem is essential—one that includes fiscal stimulus packages, government backing, and a national focus on financial literacy. These systemic interventions are crucial for creating a more resilient economic future.

Ultimately, our mission at Ogen is to absorb risks so that Israelis can take them. The need for innovative financial solutions, such as blended finance and derisking strategies, is more urgent than ever, especially with projections indicating that over 100,000 businesses are at risk of closing—threatening to reverse Israel’s currently low unemployment rate. By providing capital to SMEs and underserved markets, we are not only addressing immediate financial constraints but also laying the groundwork for long-term economic resilience. In this time of heightened uncertainty, derisking isn’t just a financial strategy—it’s an imperative for safeguarding Israel’s economic future.