Israel: New Policy for Cash Distribution Takes Hold (September 2010)
Currency News is running a periodic series of case studies examining the different models for cash circulation around the world. The first such case study, in July 2009, looked at Norway, where the central bank has outsourced all aspects of currency, including note destruction. In March this year we looked at a diametrically opposite model, in China, where the central bank has maintained direct control over processing, distribution and the destruction of vast amounts of cash in the world’s largest country. In this issue we examine Israel, a country which is realising the benefits of a new policy implemented a year ago to privatise cash distribution, according to the Head of the Bank of Israel’s Currency Department, Mordechai Fein.
Israel is a small country – measuring 22,000 sq km with a population of 7.5 million. The Bank of Israel was founded in 1954, and a year later the Israeli Pound was introduced. In 1980 this was replaced by the Shekel, which five years later was redenominated and became the New Israeli Shekel (NIS). This has lasted up until the present day, although a new series is now on the cards for introduction within the next three years.
Cash handling is undertaken by the Bank at its headquarters in Jerusalem. The cash office in Tel Aviv was closed down in 2005. A third cash office, in Haifa, was closed in the 1990s.
The process, however, was not without problems. One of the main ones was that Bank was not allowed, by law, to charge fees for cash handling. Everyone, from the public to retailers, was entitled to exchange money at the Bank at no charge, with the Bank bearing the entire costs of counting sorting and replacing notes and coins. ‘Retailers were trucking in coins and notes to be counted, sorted and exchanges at a huge cost to us’ said Fein. ‘It was as if we were their employees - providing them with a service yet unable to charge for it’
This resulted in a distortion of resources allocation (of the 35 or so people employed in the currency department, two thirds were involved in cash handling). Added to this, there were no formal standard requirements for note quality, most processing of facing notes was done manually, contingency inventory was concentrated in the Bank’s vaults only and there was a lack of data on the cash activities of the commercial banks, resulting in an inefficient cash distribution policy.
The problems affected not just the Bank, but the commercial banks and the Israel Postal Service too. For them, these included the high costs of transporting cash to and from the Bank's headquarters in Jerusalem, and little or no transfer of information between them on demand and supply, resulting in redundant expenses to the banking system.
Moreover, the technology for locating suspect notes that the banks did themselves recycle was limited, resulting in the recirculation of unfit and, in some case, counterfeit notes.
This all changed in October 2009, when the Bank’s new policy regarding the operation of the cash system went into effect. Its objectives were to maintain a high quality of cash in circulation, reduce the costs of cash handling both to the Bank of Israel and to those whose businesses involve handling cash, and raise the level of service to the public. The new policy will also enable the distribution of the Bank’s contingency vaults in order to spread the risk. And the new law which recently went through parliament will also enable the Bank to charge fees for its services.
At the heart of the policy is the effective privatisation of cash handling with the creation of eleven new cash centres, owned and operated by the commercial banks and equipped with new sorting systems configured and approved by the Bank. These centres are the only entities in Israel allowed to deposit and withdraw cash from the Bank and distribute cash to the public, retailers and commercial banks. Each cash center is entitled to host two kinds of vaults which are owned by the Bank – one for deposits (which are held on the Bank’s account) and the other for holding contingency stocks and to be opened only in the event of an emergency.
With responsibility for recirculation of fit notes now vested in these centres, a new computer network has been installed that shows in real time surpluses and deficits in the system, enabling the commercial banks to buy and sell cash between themselves.
Only unfit notes can be returned to the Bank. Fit notes returned will result in a fine. Standards regarding accuracy in counting, fitness levels and suspect notes have been laid down by the Bank in accordance with standards generally accepted worldwide. The Bank also periodically requests samples of fit notes from the cash centres to ensure that they are working to those standards, and can – if it wishes – send its people into any of the centres to carry out spot checks.
The Bank itself, meanwhile, has upgraded its sorting and shredding systems (originally installed in the early 1990s), with a new high speed system. It has also purchased a machine to pack coins returned to the banks and the public in rolls, instead of in nylon bags as before. This will make coin packaging uniform, as new coins are received from the mints packed in rolls – a change that, says Fein, will also save costs, storage area, and labour input, and improve the convenience and safety of coin handling.
The results, one year on, have been beyond expectations according to Fein. There have been no issues with counterfeits turning up in ATMs (as there were before introducing the new policy), and banks are happy at saving transport costs and being free to purchase currency from whomever they wish within the banking system.
Israel is a small country – measuring 22,000 sq km with a population of 7.5 million. The Bank of Israel was founded in 1954, and a year later the Israeli Pound was introduced. In 1980 this was replaced by the Shekel, which five years later was redenominated and became the New Israeli Shekel (NIS). This has lasted up until the present day, although a new series is now on the cards for introduction within the next three years.
Cash handling is undertaken by the Bank at its headquarters in Jerusalem. The cash office in Tel Aviv was closed down in 2005. A third cash office, in Haifa, was closed in the 1990s.
The process, however, was not without problems. One of the main ones was that Bank was not allowed, by law, to charge fees for cash handling. Everyone, from the public to retailers, was entitled to exchange money at the Bank at no charge, with the Bank bearing the entire costs of counting sorting and replacing notes and coins. ‘Retailers were trucking in coins and notes to be counted, sorted and exchanges at a huge cost to us’ said Fein. ‘It was as if we were their employees - providing them with a service yet unable to charge for it’
This resulted in a distortion of resources allocation (of the 35 or so people employed in the currency department, two thirds were involved in cash handling). Added to this, there were no formal standard requirements for note quality, most processing of facing notes was done manually, contingency inventory was concentrated in the Bank’s vaults only and there was a lack of data on the cash activities of the commercial banks, resulting in an inefficient cash distribution policy.
The problems affected not just the Bank, but the commercial banks and the Israel Postal Service too. For them, these included the high costs of transporting cash to and from the Bank's headquarters in Jerusalem, and little or no transfer of information between them on demand and supply, resulting in redundant expenses to the banking system.
Moreover, the technology for locating suspect notes that the banks did themselves recycle was limited, resulting in the recirculation of unfit and, in some case, counterfeit notes.
This all changed in October 2009, when the Bank’s new policy regarding the operation of the cash system went into effect. Its objectives were to maintain a high quality of cash in circulation, reduce the costs of cash handling both to the Bank of Israel and to those whose businesses involve handling cash, and raise the level of service to the public. The new policy will also enable the distribution of the Bank’s contingency vaults in order to spread the risk. And the new law which recently went through parliament will also enable the Bank to charge fees for its services.
At the heart of the policy is the effective privatisation of cash handling with the creation of eleven new cash centres, owned and operated by the commercial banks and equipped with new sorting systems configured and approved by the Bank. These centres are the only entities in Israel allowed to deposit and withdraw cash from the Bank and distribute cash to the public, retailers and commercial banks. Each cash center is entitled to host two kinds of vaults which are owned by the Bank – one for deposits (which are held on the Bank’s account) and the other for holding contingency stocks and to be opened only in the event of an emergency.
With responsibility for recirculation of fit notes now vested in these centres, a new computer network has been installed that shows in real time surpluses and deficits in the system, enabling the commercial banks to buy and sell cash between themselves.
Only unfit notes can be returned to the Bank. Fit notes returned will result in a fine. Standards regarding accuracy in counting, fitness levels and suspect notes have been laid down by the Bank in accordance with standards generally accepted worldwide. The Bank also periodically requests samples of fit notes from the cash centres to ensure that they are working to those standards, and can – if it wishes – send its people into any of the centres to carry out spot checks.
The Bank itself, meanwhile, has upgraded its sorting and shredding systems (originally installed in the early 1990s), with a new high speed system. It has also purchased a machine to pack coins returned to the banks and the public in rolls, instead of in nylon bags as before. This will make coin packaging uniform, as new coins are received from the mints packed in rolls – a change that, says Fein, will also save costs, storage area, and labour input, and improve the convenience and safety of coin handling.
The results, one year on, have been beyond expectations according to Fein. There have been no issues with counterfeits turning up in ATMs (as there were before introducing the new policy), and banks are happy at saving transport costs and being free to purchase currency from whomever they wish within the banking system.
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