Palestinian Banks Face Crisis With Over 15 Billion Shekels Stuck

Palestinian banks are grappling with an unusual liquidity crisis, holding an excess of over 15 billion shekels in cash that they cannot return to Israel in sufficient quantities. The Governor of the Palestinian Monetary Authority, Governor of the Palestinian Monetary Authority, warned that this situation strains liquidity management and limits the banking sector's ability to fund its usual operations. The problem is exacerbated by threats to correspondent banking relationships with Israeli banks and the freezing of clearing revenues, creating simultaneous pressures on the financial sector.

The Palestinian economy heavily relies on the shekel for daily transactions, including trade, wages, and personal and business settlements. However, the inflow of cash to banks is not matched by an equivalent outflow route back to Israel or conversion into usable balances for banking settlements. These restrictions lead to a buildup of banknotes in bank vaults, incurring additional costs for storage, insurance, and transportation, and complicating liquidity management, especially when banks need to settle obligations or provide funds for commercial activities. Cash hoarding does not equate to readily usable liquidity; trapped cash does not function like transferable balances held by correspondent banks.

The issue is further compounded by the ongoing reliance on correspondent banking relationships between Palestinian and Israeli banks, which are crucial for foreign trade transfers, payments, and settlements. While existing arrangements were extended until December 31, 2026, Governor cautioned that this temporary measure is not a permanent solution. He called for stable arrangements to ensure the continuity of these relationships and permit the return of shekel cash in line with economic activity needs. Data indicates that Israeli banks Hapoalim and Discount process approximately 51 billion shekels annually related to the Palestinian Authority, with about 90% of Palestinian trade dependent on transactions via Israel.

The liquidity crisis impacts the economy by potentially causing difficulties for traders and companies in depositing cash, making transfers, and settling payments. It also increases operational burdens on banks and reduces their financial flexibility. While the shekel surplus does not automatically halt payments or cause shortages, it creates additional risks if cash return restrictions persist alongside disruptions in correspondent banking, particularly as foreign trade depends on timely settlement channels.

Despite these challenges, Governor affirmed that the Palestinian banking sector's capital adequacy ratio exceeds 17%, and banks continue to operate. This highlights the distinction between liquidity and cash management challenges and banks' solvency indicators. Digital payment solutions can reduce reliance on physical cash and its accumulation, but they do not resolve the issue of already accumulated funds or replace the need for cross-border transfer and settlement channels. A lasting solution requires arrangements for returning shekel cash commensurate with economic activity and ensuring long-term correspondent banking relationships to mitigate risks for banks and traders.