Israel Extends Banking Ties with Palestinians to End 2026

Israel's next government will be tasked with finding a long-term solution for correspondent banking services between Israeli and Palestinian banks, following an agreement to postpone a cutoff until the end of 2026. Bank Discount and Bank Hapoalim had planned to cease dealings with Palestinian banks due to concerns over money laundering and terror financing risks. Bank Discount was set to stop services on September 1, with Bank Hapoalim to follow a month later, but negotiations with the Israeli Ministry of Finance secured a delay.

Andrew Ovser, Deputy Governor of the Bank of Israel, stated that the extended deadline places the responsibility for a permanent solution on the incoming government. This government will need to determine whether the current banks will continue providing services or if an alternative governmental entity will be established. Currently, these banking services rely on exemptions and guarantees signed by the Israeli Finance Minister, allowing banks to process Shekel payments for the Palestinian Authority's services and salaries without facing legal risks.

The issue carries significant economic weight, as the Palestinian Monetary Authority estimates that the two banks handle approximately 51 billion Shekels annually for the Authority. Furthermore, about 90% of Palestinian trade, including essential goods like food, fuel, and medicine, passes through Israel. Ovser emphasized the necessity of a permanent banking service provider given the continued economic interdependence, and suggested the Shekel will likely remain the primary currency in the Palestinian economy due to the challenges of adopting another.

This postponement comes ahead of the Israeli elections scheduled for October 27. With a new government and coalition expected before the year's end, the Palestinian banking issue emerges as a critical economic challenge for the incoming administration.