Israeli Banks Plan to Cut Financial Transfers to Palestinian Authority, Threatening Economic Stability

Israeli banks Discount and Bank Hapoalim are set to halt their banking transfers to the Palestinian Authority (PA) between September and October, raising concerns over a looming financial crisis in the Palestinian territories. This disruption could force a mass shift to cash or foreign currency transactions, complicating trade and salary payments for Palestinian workers. Almost all of the PA's foreign trade passes through Israel, so the cessation of banking correspondence threatens severe economic and security consequences.

The Bank of Israel has previously opposed stopping these transfers, warning that ending correspondent banking relationships would significantly harm trade ties and the Palestinian economy. The move also risks spilling over to Israeli businesses, including exporters and importers linked to the PA. Additionally, Israeli law limits cash transactions, potentially putting merchants at legal risk unless special government exemptions are granted.

The crisis stems from concerns over compliance with international anti-terror financing and anti-money laundering laws. Israeli banks face risks due to their connections with Palestinian banks, especially Bank of Palestine, suspected of channeling funds to families of terrorists. Despite temporary government guarantees to protect banks from legal repercussions, these assurances are limited and insufficient, particularly with foreign correspondent banks possibly refusing to cooperate.

Efforts to establish a government-owned bank to manage these risks have stalled under the current Israeli government, which fears accusations of facilitating terror financing. The finance minister's delays contributed to Discount Bank's decision to sever ties. Discussions are ongoing to extend government guarantees until year-end to appease banks, but uncertainty remains. Meanwhile, the PA's ability to pay local utility companies and maintain economic stability is in question.

This financial disruption highlights the complex intersection of security, legal, and economic challenges in Israeli-Palestinian relations, with significant implications for both Palestinian residents and Israeli businesses.