Most companies fear about not having sufficient money. However for lenders within the occupied West Financial institution, the issue is that they’ve an excessive amount of.
The excess, which stands at Shk4.2bn, is one among quite a few strains in a monetary system that can be grappling with the fallout from the conflict in Gaza, and punitive measures imposed by Israel’s ultranationalist finance minister.
Bankers and officers say the money idling in West Financial institution vaults, equal to greater than $1bn, will not be solely depriving lenders of earnings and complicating transactions, however can be more and more a goal for thieves.
“It’s a problem,” one Palestinian official mentioned of the pile, which is predicted to achieve Shk8bn by the year-end, a determine equal to greater than 15 per cent of the West Financial institution’s financial output. “It creates a lot of difficulties for our banks and for Palestinian traders doing business with Israel.”
The surplus stems from a long-standing restrict imposed by Israel on the amount of money West Financial institution establishments can switch to the Israeli central financial institution. West Financial institution lenders use Israel’s foreign money in step with financial agreements signed within the Nineteen Nineties.
Earlier than the conflict between Hamas and Israel erupted in Gaza on October 7, the primary supply of bodily shekels within the West Financial institution was Palestinians who commuted to Israel for work and have been paid in money. They introduced as much as Shk20bn into the West Financial institution yearly, based on an individual acquainted with the scenario, whereas Palestinian residents of Israel who crossed the Inexperienced Line to buy within the West Financial institution introduced an extra Shk6bn-Shk7bn.
However Israel’s central financial institution solely permits West Financial institution lenders to ship it Shk18bn a yr, and over time, the banks have been left with more and more massive shares of bodily shekels.
For the reason that conflict broke out, Israel has prevented Palestinians from coming into its territory for work. However the money surplus has persevered, as a result of the uncertainty generated by the battle has led Palestinians who beforehand saved money at dwelling to deposit it in banks, whereas the downturn triggered by the conflict has led many to spend much less. The conflict has additionally fuelled the gray financial system, which is essentially primarily based on money.
The Financial institution of Israel advised the Monetary Instances it “set quotas reflecting legitimate economic activity requiring cash deposits”, when it stepped in after Israeli banks stopped offering money companies to Palestinian counterparts in recent times amid considerations over money-laundering and terrorism-financing. It added that the quotas had risen over time and “in some cases, an exceptional quota was granted”.
However others say the cap needs to be raised or scrapped. The IMF mentioned in 2022 that the restrict was “not commensurate to the shekel inflows into the Palestinian banking system”.
“We’re not seeing evidence of laundering of money through the West Bank that requires holding a tight restraint on excess shekels,” mentioned a diplomat. “I would look at [the cap] as a false constraint, but one that [the Israelis] firmly believe in and are not about to change.”
An audit of the Palestinian banking system this yr by US, UK and Swedish officers discovered it exceeded worldwide thresholds for countering terror-financing, based on individuals acquainted with the method.
Essentially the most direct influence of the cap on Palestinian lenders is that it deprives them of revenue. The IMF estimated in 2022 that holding extra shekel money lowered Palestinian banks’ earnings by about 20 per cent. In line with one Palestinian banker, the misplaced earnings for the sector amounted to $500mn between 2012 and 2023, a lot of which has accrued in recent times as rates of interest have risen.
“We can’t place it [on deposit to earn interest], we can’t lend it, because we don’t lend physical cash,” the banker mentioned. “This money could be put into the economy and be circulating and producing value.”
The scenario additionally reduces the liquidity accessible to banks for transactions with Israeli counterparties — forcing them into perverse workarounds. “At times we’ve had to get short-term borrowing to cover transfers and cheques, even though we have 10 times more sitting in our vaults,” the banker mentioned.
Bankers additionally fret about a rise in thefts. One individual acquainted with the scenario mentioned there have been eight armed robberies on banks within the West Financial institution final yr, double the earlier yr’s complete, and not less than three thus far this yr. Different officers mentioned the quantity was larger.
Some observers assume the thefts are as a lot to do with poor regulation enforcement as rising money piles. However a UN official mentioned the issue was being exacerbated by motion restrictions imposed by Israel since October 7, which made it tougher for banks to move money from much less well-protected branches to safer central vaults.
The quantities concerned have thus far not been vital when it comes to banks’ funds. However the UN official mentioned the thefts additionally raised safety considerations. “The more robberies there are, the more guns there are, the greater the risk of an incident that cannot be de-escalated,” the official mentioned.
In a bid to ease the strain, Palestinian banks have through the years tried charging prospects for deposits, and have every so often refused to take shekel money deposits in any respect due to the shortage of cupboard space. The Financial institution of Israel has additionally generally — because it did earlier this yr — allowed allocations from one quarter to be introduced ahead to the one earlier than.
However for the second, diplomats see little likelihood of the brink being raised on a extra sustained foundation, given the extent of hostility from Benjamin Netanyahu’s authorities — by which ultranationalists similar to finance minister Bezalel Smotrich maintain key roles — to creating any concessions to the Palestinians.
For the reason that begin of the conflict Smotrich has restricted transfers of revenues Israel collects on behalf of the Palestinian Authority, which workout routines restricted self-rule within the West Financial institution. He has additionally threatened to not renew a significant waiver that enables Israeli banks to offer correspondent banking companies to Palestinian counterparts.
The diplomat mentioned these two points had the potential to trigger way more quick injury to the West Financial institution’s financial system than the shekel surplus.
However they added that the money glut additionally wanted addressing. “There’s a fundamental economic reason for wanting to transfer the shekels,” they mentioned. “They’re an economic deadweight.”
