Israeli Government Delays Legislation to Support Palestinian Banks Amid Looming Financial Crisis

Palestinian commercial banks in Ramallah, Nablus, and Hebron currently hold about 15 billion shekels in cash that cannot be converted into digital currency, creating a severe liquidity problem. This situation worsens as Bank Hapoalim and Bank Discount have announced they will cease correspondent banking services with Palestinian banks within a month, effectively cutting off the financial pipeline that allows shekel transfers between Palestinian banks and Israeli banks in Tel Aviv.

This disruption threatens critical transactions, including payments from the Palestinian Electricity Company to the Israeli Electricity Company and commercial payments to Israeli suppliers of food, fuel, and medicine. Approximately 90% of Palestinian trade passes through Israel, with these two banks processing about 51 billion shekels annually. Palestinian Monetary Authority Governor Yahya Shunnar described the situation as a "cliff," warning of an imminent systemic financial crisis.

The Israeli government has repeatedly postponed legislation needed to establish a government-owned company to take over the correspondent banking role, a plan agreed upon in 2017 to relieve Israeli banks from legal and financial risks. Although the company is technically ready to operate, legislative amendments required since 2022 remain stalled due to political reluctance, especially following the October 7 attacks. The current government extends indemnity letters to Israeli banks every six months, with the latest extension valid until the end of 2026, but the banks plan to exit the arrangement by the end of August.

The delay risks destabilizing the Palestinian financial system and the Palestinian Authority, which relies heavily on these banking operations for salary payments and budget management. The breakdown will also impact Israeli companies supplying goods and services to the Palestinian market, potentially leading to unpaid debts and loss of financial oversight. Attempts to shift to digital payments are hindered by international credit card companies classifying transactions in Palestinian territories as cross-border, incurring additional fees that discourage their use.

The Israeli Finance Ministry acknowledges that halting correspondent banking could increase money laundering and terrorism financing risks by pushing transactions into unregulated cash channels. Despite having a ready solution, the government’s political impasse leaves the financial system vulnerable, with the next government expected to face the crisis upon taking office in early 2027.