Israeli banks plan to cut services for Palestinian banks, officials say

Israeli and Palestinian officials said Israeli banks have told Palestinian counterparts they plan to end important banking services within weeks, raising concern about an economic crisis in the West Bank. Palestinian banking officials said five Palestinian banks that depend on Israel's Bank Hapoalim for correspondent banking services are set to lose access on August 13. Banks using Discount Bank face a September 1 cutoff.

The banking links help finance imports from Israel to the occupied Palestinian territory, including electricity, water, fuel and food. They also support wage transfers for Palestinians working in Israel. The two Israeli banks act as a link between the Palestinian and Israeli financial systems by processing transactions in Israeli shekels, which are also used in the Palestinian territories.

Israel's finance ministry confirmed that Bank Hapoalim and Discount Bank had proposed cutting ties with Palestinian counterparts. The ministry said the banks had announced their intention to stop providing correspondent banking services because of the overall risk environment and growing concern about private lawsuits against banking entities. It said it was discussing the matter with the banks to try to allow correspondent banking activity to continue in a safe and responsible way while protecting Israel's security and economic interests.

The Israeli government renews an indemnity every six months to protect Israeli banks from legal liability for transactions processed on behalf of Palestinian banks. An Israeli banking official said commercial banks no longer want to carry the risks, including possible exposure to money laundering or terrorist financing, and said the arrangement had been intended to be temporary. The official said the waiver was no longer enough and that the banks wanted the state to take responsibility.

Discount Bank said it had raised its concerns with the government because of increasing risks linked to providing the services and because of its responsibility to depositors and shareholders. Hapoalim said the matter was under review.

Experts interviewed by AFP warned that cutting the banking links could push more transactions into cash, increase the risk of a banking crisis and expand the informal economy. A Palestinian businessman with close ties to a local bank said the Palestinian Authority is the largest borrower from local banks because it uses them to finance public-sector salaries and budget deficits. He said that if the banks collapse, the Authority collapses. The Palestinian Authority is already under strong financial pressure after Israel suspended transfers of customs revenues it collects on the Authority's behalf. Those revenues account for about two-thirds of the Authority's income.