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

Israeli banks Discount and Hapoalim have announced plans to sever banking operations with the Palestinian Authority by September or October 2026, raising concerns about significant financial disruption in the Palestinian territories. This move is expected to halt bank transfers, forcing a shift to cash or foreign currency transactions, which could cause chaos in the Palestinian economy and complicate trade, especially since nearly all Palestinian foreign trade passes through Israel.

The cessation of banking services will prevent Palestinian workers from receiving salaries via bank transfers and create severe difficulties for merchants, including Israeli exporters and importers who trade with the Palestinian Authority. The transition to cash payments also poses security risks, as intelligence agencies will find it harder to monitor financial flows compared to regulated banking channels.

The Bank of Israel has previously opposed cutting correspondent banking ties with the Palestinian Authority, warning that it would harm trade relations and the Palestinian economy. Israeli businesses may face legal challenges due to Israeli laws limiting cash transactions to 6,000 shekels for businesses, unless special government permits are granted.

The banking disruption stems from concerns over compliance with international anti-terror financing and anti-money laundering laws. Israeli banks fear exposure due to links with the Palestinian Bank, suspected of channeling funds to families of terrorists. Despite government-issued indemnity letters protecting banks from legal repercussions, the temporary nature of these protections and foreign correspondent banks' reluctance to engage have pressured Israeli banks to withdraw.

Efforts to establish a government-backed correspondent bank to mitigate risks have stalled under the current government, delaying solutions. Discussions continue about extending indemnity coverage until the end of the year, but it remains uncertain if this will satisfy banking institutions. Meanwhile, the financial instability threatens to spill over into Israeli businesses and complicate payments for utilities like electricity in the Palestinian territories.