Smotrich Blocks Palestinian Banking Reform, Increasing Risks for Israeli Banks

The ongoing banking crisis involving Palestinian banks is often misunderstood as an economic issue benefiting the Palestinian Authority, but it is primarily a security measure aimed at preventing terror financing, according to the official stance of the Israeli government and security agencies under Prime Minister Netanyahu and the Likud party. The legislation stalled by Finance Minister Bezalel Smotrich was intended to establish a government company to handle payments between Palestinian banks and the Israeli banking system, replacing Bank Hapoalim and Discount Bank. This mechanism is crucial for Israel's control over Palestinian imports and utilities, as 100% of Palestinian fuel, 93% of electricity, and about a third of water come through Israel.

The Paris Protocol, not the Oslo Accords, created this financial structure, which Israel has never sought to reduce. Without this system, an unregulated financial vacuum would emerge, filled by cash, money changers, unmonitored trade channels, and cryptocurrencies, all of which facilitate terror funding. In November 2024, the security cabinet, led by Netanyahu who also serves as Finance Minister, extended the indemnity arrangement for another year, with only Itamar Ben-Gvir opposing. Smotrich, a cabinet member, has repeatedly blocked the legislation for four years despite agreeing to its necessity.

The separate government entity was designed to isolate financial risks, especially under the 2017 US Taylor Force Act, which prohibits American and international financial institutions from dealing with Palestinian banks due to terror financing risks. Without this legislation, the risk remains with the two largest Israeli banks, Hapoalim and Discount, threatening their global banking relationships and Israel's foreign trade clearance. Smotrich’s obstruction transfers this risk from the state to private banks, increasing it.

Repeated short-term indemnity extensions have become political bargaining chips, with each renewal tied to unrelated political demands, such as funding new settlements. Banks have reacted cautiously, aware that the lack of legislation could lead them to sever ties with Palestinian banks independently, which would cause a major financial disruption. Smotrich has framed the banks as the problem, portraying himself as a savior, reversing the actual situation.

The issue remains under the Finance Ministry despite its security implications, raising questions about why the Prime Minister and Defense Ministry do not hold authority over this critical matter. Even if legislation passes immediately, implementation will take six to eight months, with the first bank expected to disconnect by the end of August 2025. The government’s pattern of deferring decisions to future administrations risks abandoning the entire financial system for political gain during election seasons. Smotrich’s tenure as Finance Minister is characterized by delay, irresponsibility, populism, and politicization of professional decisions, endangering Israel’s financial stability.