The banking correspondence agreement signed between the Palestinian banking sector and Israeli banks expires at the end of this October, which gives the latter legal cover against any lawsuits that may be filed in American or Israeli courts regarding issues of so-called terrorist financing.
Since the Israeli war of annihilation on the Gaza Strip on October 7, 2023, the banking correspondence agreement has become a headache for banks operating in the Palestinian market, due to the delay of the Israeli Ministry of Finance in signing its extension.
Two banks
Currently, the Israeli Discount and Hapoalim Banks manage Palestinian banks’ relationships with the banking system in Israel, which consists of sending and receiving cash transfers, especially those related to trade payments.
To protect them from lawsuits filed against the Palestinian Authority and its banks in the United States on charges of “transferring funds to terrorist groups,” Israel issued a decision 3 years ago to protect these two banks from any charges. This decision is renewed annually, with the signature of the Minister of Finance.
Without this protection, the Palestinian Authority will be stripped of immunity, and Israeli banks will also be exposed to lawsuits both inside Israel and in American courts.
Israelis with American citizenship had previously filed lawsuits against Palestinian banks or those operating there, during the past years, such as the Arab Bank, the Bank of Palestine, the Cairo Amman Bank, and the Palestine Investment Bank, on charges related to financing terrorism, before these lawsuits were dropped.
Since the war on Gaza, the correspondence agreement has been renewed every three months instead of a full year, as its last renewal was last July, for the period between August and October 2024.
The importance of the relationship
The relationship with Israeli banks is primarily a Palestinian banking interest, because cash transfers for trade purposes between the two sides will not take place without this relationship.
The volume of trade between the two sides per month amounts to approximately 800 million dollars, according to data from the Palestinian Central Bureau of Statistics, while the value of transfers for all purposes exceeds approximately one billion dollars per month.
Israeli banks are a major key to the access of many Palestinian banks to the global banking system. Without this relationship, the majority of banks in the Palestinian banking sector will lose most of their basic functions as banks with full powers.
The total assets of the Palestinian banking sector amount to approximately 22 billion dollars, while customer deposits as of the end of last August exceeded 17.5 billion dollars, and facilities approached 12 billion.
There are 13 local and foreign banks operating in the Palestinian banking market, with 7 local and 6 foreign banks, including 5 Jordanian and one Egyptian, according to data from the Palestine Monetary Authority.
Under the Paris Economic Protocol, the Palestine Monetary Authority supervises the banking sector and acts as the official financial advisor to the Authority in Ramallah in the occupied West Bank.
The Monetary Authority regulates all types of banking activities, including its foreign activities, licensing locally established banks, their branches and affiliated bodies, joint ventures and offices representing foreign banks, and approving control over shareholders.
The trade that will be most affected is that which takes place between… The Palestinian side andIsrael and directly, such as electricity and water payments, for example, as the Palestinians import 90% of electricity from Israel, and approximately 80% of water.
If the banking correspondence agreement is not extended, the Palestinian market will face a scarcity of many vital commodities, most notably fuel, as the Palestinians import 100% of it from the Israeli side, in addition to other vital commodities.
International concern
Last Friday, major countries led by the United States warned Israeli Prime Minister Benjamin Netanyahu that his government would cause the collapse of the Palestinian economy through the banking sector.
This came in a letter sent by the US Treasury Department and seven of its allies around the world to the Israeli Prime Minister’s Office on October 25, as the American website Axios reported on Sunday.
The website reported – from the letter it reviewed – that Treasury Secretary Janet Yellen and seven foreign counterparts warned Netanyahu that his Finance Minister Bezalel Smotrich may be on the verge of causing the collapse of the Palestinian economy.
Smotrich is authorized to approve the extension of financial correspondence between banks in Israel and the West Bank, without which the Palestinian banking system may collapse.
According to the letter, Washington and its allies are concerned that Smotrich will not sign the extension of the agreement, and that the collapse of the banking system may have serious repercussions, including the collapse of the Palestinian Authority and a security crisis in the West Bank.
Smotrich – one of the most extreme politicians in the Israeli government – presented a number of demands to Palestinian banks to prevent illicit financing “pertaining to financing the families of Palestinian martyrs and prisoners.”
The administration of US President Joe Biden informed Israel – last week – that it had decided that Palestinian banks had met the conditions set by Smotrich.
The Israeli security cabinet is likely to discuss the issue.
Last Friday, the finance ministers and heads of central banks in the G7 countries ended their meetings in Washington.
