Israel Delays Banking Cutoff With Palestinian Banks Until End of 2026

Israel has agreed to postpone a planned cutoff of banking relations with Palestinian banks until the end of 2026, according to Andrew Ovser, deputy governor of the Bank of Israel. The decision shifts the responsibility for finding a permanent solution to the next Israeli government, which will need to determine how correspondent banking services between Israeli and Palestinian banks will continue.

Israeli banks Discount and Hapoalim had planned to cease dealings with Palestinian banks due to concerns over money laundering and terror financing risks. Discount was set to stop services on September 1, followed by Hapoalim a month later, but negotiations with the Israeli Ministry of Finance led to the postponement.

Ovser stated that the new deadline requires the incoming government to identify a permanent entity to handle these crucial services, whether through the continued involvement of the two current banks or the establishment of an alternative government body. These services currently rely on exemptions and guarantees signed by the Israeli finance minister, allowing Israeli banks to process shekel payments for the Palestinian Authority's services and salaries without facing legal risks.

Without these arrangements, Palestinian banks could become isolated from the Israeli financial system. The Palestinian Monetary Authority estimates that the two banks process approximately 51 billion shekels annually for the PA, and about 90% of Palestinian trade, including essential goods, passes through Israel.

Ovser emphasized that a sustainable solution necessitates a permanent entity for correspondent banking, given the deep economic interdependence. He also suggested the shekel would likely remain the primary currency in the Palestinian economy due to this linkage. The delay comes ahead of Israel's elections on October 27, with a new government expected to form by year-end, leaving this sensitive financial matter to the incoming administration.