Two major Israeli financial institutions are preparing to sever correspondent banking relations with Palestinian lenders, threatening to disrupt commercial activity, imports, and exports across the West Bank, according to Reuters.
Israeli Banks Set to Cut Ties with Palestinian Lenders
Israeli officials and the head of the Palestinian central bank stated that Israel Discount Bank will end its association with Palestinian banks on September 1, while Bank Hapoalim will follow on October 1, according to Reuters. Since the Oslo Accord peace agreements in the 1990s, the Israeli government has tasked Discount and Hapoalim with providing these correspondent services because Palestinian banks lack access to the Israeli payment system and cannot otherwise clear transactions in shekels, the dominant currency in the West Bank, as reported by Timesofisrael.
Risks, Transactions, and the Indemnity Waiver Crisis
The two Israeli banks have long expressed concern that providing correspondent services could expose them to lawsuits over alleged Palestinian money laundering and terror finance, according to Timesofisrael. Yahya Shunnar, governor of the Palestinian Monetary Authority, noted that Discount and Hapoalim process 51 billion shekels ($16.6 billion) a year in transactions for the Palestinian Authority, and that 90% of Palestinian trade—including food, fuel, and medicines—passes through Israel, as detailed by Reuters.
The disruption stems partly from the administration of indemnity waivers. Israeli Finance Minister Bezalel Smotrich oversees the waiver mechanism enabling cooperation between Israeli and West Bank lenders, but has repeatedly withheld signing waivers that allow Israeli banks to handle transactions from Palestinian banks, according to Timesofisrael and Reuters. Due to Smotrich’s refusal to sign the waiver extension until recently, Discount and Hapoalim lost patience and issued their cutoff notifications, according to Timesofisrael. An Israeli official confirmed that Smotrich agreed earlier in the month to sign a waiver granting indemnity to Israeli banks until the end of 2026, tying the move to an announcement allocating NIS 1.3 billion ($431 million) to fund 34 new West Bank settlements, as reported by Timesofisrael.
Broader Economic Strain and Excess Shekel Surpluses
The impending banking cutoff compounds an already severe economic crisis across the occupied West Bank. Mohammad Manasra, the deputy governor of the Palestinian Monetary Authority, described the conditions as economic warfare
in an interview with AP News, pointing out that the Palestinian banking system holds more Israeli shekels than it can manage. Because employers in Israel and its settlements pay laborers in cash and Israeli citizens purchase goods in the West Bank, physical currency accumulates faster than Israel allows out, creating a surplus trapped inside Palestinian banks that neither earns interest nor turns into loans, according to AP News. Israel limits cash transfers from the West Bank banking system to 18 billion shekels ($5.9 billion) a year.
Shunnar warned diplomats in Ramallah of profound consequences for regional stability if the channels are severed, while Israel’s finance ministry acknowledged that discontinuation could increase risks of money laundering and terrorist financing by forcing a shift to unregulated, cash-based alternatives, according to Reuters.
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