Discount and Hapoalim Banks Cut Ties with Palestinian Authority, Impacting Israeli Businesses

Israeli banks Discount and Hapoalim have announced they will cease banking operations with the Palestinian Authority (PA) by September-October 2026, raising concerns about significant financial disruption in the Palestinian territories and spillover effects on Israeli businesses. The move stems from fears that continued transactions expose Israeli banks to international legal risks related to anti-terror financing and money laundering laws, particularly due to suspected links between Palestinian banks and terror financing.

The cessation of banking transfers will force Palestinian workers to receive wages in cash or foreign currency, complicating trade that heavily relies on Israeli intermediaries. This shift to cash transactions also poses security risks, as intelligence agencies will find it harder to monitor financial flows. The Bank of Israel has previously opposed cutting correspondent banking ties, warning it would severely damage Palestinian economic stability and Israeli-Palestinian trade relations.

Israeli businesses trading with the PA, including exporters and importers, will face payment challenges as cash transactions above certain thresholds violate Israeli laws limiting cash use. Without special government exemptions, these businesses risk legal violations. Additionally, payment difficulties to the Palestinian Electricity Company may worsen, although Israel currently offsets PA debts through tax revenue deductions.

The banking disruption follows the failure to implement a government-backed correspondent bank to absorb risks, a plan stalled due to political reluctance to assume responsibility amid terror financing accusations. The current "letters of indemnity" protecting banks from legal claims are temporary and may not reassure correspondent banks abroad. Efforts are underway to extend these protections until year-end while awaiting the next government’s policy decisions.

This financial breakdown threatens to create chaos in the PA’s economy, increase reliance on cash and foreign currency, and complicate Israeli-Palestinian commercial relations, with broader implications for regional security and economic stability.