Israeli banks have notified their Palestinian counterparts that they plan to end key correspondent banking services within weeks, according to Palestinian and Israeli officials, triggering concerns over a potential economic crisis in the occupied West Bank.
The banking links are crucial for financing imports from Israel, including electricity, water, fuel and food, besides facilitating salary transfers for Palestinians employed in Israel.
"This is not simply a technical banking matter. These channels are a cornerstone of the infrastructure that underpins our trade, our commerce, and the daily life of millions of people," Palestinian Monetary Authority Governor Yahya Shunnar told journalists on Thursday.
Banking Services to End Within Weeks
Shunnar said five Palestinian banks that depend on Israel's Bank Hapoalim for correspondent banking services will lose access from Oct 1, while banks working through Discount Bank face a Sept 1 deadline.
Together, the two Israeli banks process around 51 billion shekels ($16.5 billion) in Palestinian transactions every year, including payments linked to the 90% of Palestinian exports routed through Israel.
Shunnar warned that ending correspondent banking services would paralyse the Palestinian financial system.
"This is not a slope, it's a cliff," Shunnar said.
Israeli Government Seeks Solution
Israel's Finance Ministry confirmed that Bank Hapoalim and Discount Bank had proposed ending their correspondent banking relationships with Palestinian lenders.
"In light of the overall risk environment and the growing concern over private lawsuits against banking entities, the Israeli banks recently announced their intention to discontinue providing correspondent banking services," the ministry said on Wednesday.
The ministry said it is holding discussions with the banks to "enable the continuation of correspondent banking activities in a safe and responsible manner, while safeguarding the security and economic interests of the State of Israel".
The two banks currently act as the link between the Israeli and Palestinian financial systems by processing transactions in Israeli shekels, which are also used in the Palestinian territories.
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Banks Cite Growing Legal and Financial Risks
The Israeli government renews an indemnity every six months to shield Israeli banks from legal liability for transactions carried out on behalf of Palestinian banks.
However, an Israeli banking official told AFP that commercial banks no longer want to shoulder the growing risks, including possible exposure to money laundering or terrorist financing, adding that the temporary arrangement was no longer sufficient.
"Risks have increased with the years and the waiver is not enough. They (the banks) want the state to take the responsibility," the official said.
Palestinian Authority, Jordan Banks Also at Risk
Maher al-Masri, Chairman of the Association of Banks in Palestine, warned that cutting banking ties could push more transactions into cash, raising the risk of a banking crisis and expanding the informal economy.
"If the banks collapse, the Authority collapses," a Palestinian businessman with close ties to a local bank told AFP, referring to the Palestinian Authority's position as the largest borrower in the West Bank.
The Palestinian Authority is already under severe financial strain after Israel suspended the transfer of customs revenues collected on its behalf. These revenues account for about two-thirds of the Authority's income.
Central Bank of Jordan Governor Adel al-Sharkas, who joined Shunnar at Thursday's briefing, said Jordanian banks operating in the Palestinian territories would also be affected.
"If this link (between Israeli and Palestinian banks) is stopped ... our banks find themselves holding a large shekel balance that cannot be transferred or sold," he said.
