One of two major Israeli financial institutions, the Israel Discount Bank, has informed its Palestinian counterparts that it will terminate its correspondent banking relationships by September 1. Bank Hapoalim, the other Israeli bank involved, is reportedly considering a similar move. These relationships are critical for handling transactions that enable the import of essential goods into the West Bank, including 100% of its fuel, 93% of its electricity, and 35% of its water from Israel. Trade with Israel accounts for 55% of Palestinian imports and 85% of its exports.
Economic experts warn that an end to these banking ties would quickly lead to the unavailability of essential goods and could foster a black market environment prone to exploitation by terrorist groups. The Israeli finance ministry is in talks with the banks to find a way to safely continue these relationships, acknowledging the potential for "negative implications for economic stability in the region." The core issue stems from the Israeli banks' concerns about potential international lawsuits alleging money laundering or terrorism financing.
This impending crisis deepens existing economic pressures on the West Bank, which has already faced punitive measures from Israel following the October 2023 Hamas-led attack. These measures include the withholding of billions of dollars in import taxes collected by Israel on behalf of the Palestinian Authority (PA) and the cancellation of work permits for tens of thousands of West Bank residents. The PA is already in a severe financial crisis, partially withholding salaries, cutting hospital and school services, and reducing welfare support. Palestinian officials have appealed to foreign governments to intervene. Three Palestinian banks handle these critical import transactions: Cairo Amman Bank, Arab Bank, Al-Quds Bank, Bank of Jordan, and Jordan Ahli Bank.
The West Bank economy is heavily reliant on Israel; for instance, it imported $3.65 billion worth of goods from Israel in 2024 and exported $1.47 billion. The shekel is the primary currency, and Palestinian banks rely on Israeli correspondent banks for clearing transactions, as they lack direct access to Israeli financial institutions. The Palestinian Authority estimates a backlog of $7.5 billion in withheld taxes. Additionally, Palestinian banks face issues with excess cash liquidity due to Israeli limits on cash transfers from the West Bank, a cap that has not kept pace with economic growth and negatively impacts bank profits, with some estimates suggesting a 20% reduction.
