Progress made in talks with Israeli banks to delay move that could collapse PA economy

Israeli authorities have made significant progress in talks with a pair of banks to delay their imminent plans to stop providing correspondent banking services to Palestinian financial institutions, a move that could collapse the West Bank economy, two sources familiar with the matter told The Times of Israel on Thursday.

Last month, Israeli banks Discount and Hapoalim informed their Palestinian counterparts that they would halt the provision of such services on September 1 and October 1, respectively.

The banks faulted the Israeli government, explaining that they had been assured roughly a decade ago that a new financial entity would be established to assume the task of providing correspondent banking services to Palestinian banks.

Successive governments, however, have dragged their feet on the matter, with finance ministers instead signing indemnity waivers meant to shield Discount and Hapoalim from possible legal liability.

Finance Minister Bezalel Smotrich began reassessing that policy as part of a host of steps aimed at weakening the Palestinian Authority. Over the past year, he signed waivers that only lasted for two weeks at a time.

Following pressure from the Trump administration, Smotrich agreed late last month to sign indemnity waivers for Discount and Hapoalim that are in effect until the end of the year, when a government slightly less hostile to the PA could take charge after the October 27 Knesset elections.

By that point, the Israeli banks had already lost patience and informed their Palestinian counterparts that they would nevertheless stop providing correspondent banking services in the coming weeks.

The notification sparked panic in Ramallah, with officials from the US and European Union intervening on the PA’s behalf, an Israeli official said.

Israeli officials have subsequently held talks with Discount and Hapoalim to resolve the issue and are nearing a solution that would see the banks postpone their plans in exchange for improvements to the indemnity waiver terms, a source familiar with the matter told The Times of Israel.

A source from each of the two banks confirmed progress was made in those talks, while clarifying that final decisions to delay their respective decisions to cease working with Palestinian banks have yet to be made.

The Oslo Accord peace agreements between Israel and the Palestinians in the 1990s established the Israeli shekel as the dominant currency in the West Bank and Gaza, but did not give Palestinian banks the ability to clear such transactions. Accordingly, the Israeli government tasked Discount and Hapoalim with providing correspondent banking services to Palestinian banks.

The service has allowed Palestinian banks to process cross-border payments for commercial activity, though the two Israeli banks have long expressed concern they could be exposed to lawsuits for alleged Palestinian money laundering and terror financing.

To mitigate the risk to the banks, a previous government led by Prime Minister Benjamin Netanyahu set up the Company for Correspondence Services in 2019, though Knesset legislation must be passed for it to begin operating. While a bill has been drawn up, successive coalitions have held off on advancing the legislation due to the perception it would benefit the Palestinians, and it became an afterthought amid other domestic debates and regional tensions.

After issuing their threat to halt correspondent banking services, Discount and Hapoalim hoped the government would respond by finally moving to have the legislation creating the Company for Correspondence Services passed, but that almost certainly will not happen now that the Knesset has dissolved ahead of the October election.

Nonetheless, Discount and Hapoalim are inclined to heed the pressures to continue providing the services in the hope that the legislation will be passed once a new government is sworn in, a source from one of the banks said.

The correspondent banking issue is not the only one that has pushed the PA to the brink of collapse.

For over a year, Smotrich has been withholding the transfer of over $6 billion in clearance revenues, which make up the bulk of the PA’s budget.

The far-right minister has taken other steps to severely hobble the Palestinian banking sector, which in turn has been unable to make use of billions of additional shekels languishing in West Bank vaults.

Additionally, Israel’s revocation of work permits for over 100,000 Palestinians due to security concerns after Hamas’s October 7, 2023, onslaught has caused unemployment to skyrocket to 35% in the West Bank.

The territory has also seen a massive rise in unchecked settler violence as well as the establishment of over 100 new outposts and settlements that have led to significant curbs on Palestinian movement, which has further hampered businesses’ ability to operate.

The Israel Defense Forces has also launched raids in West Bank refugee camps that have led to a major decline in terror attacks and have rendered thousands of Palestinians homeless.