Bank Hapoalim and Discount to delay exit from Palestinian Authority at Bank of Israel's request

The two Israeli banks acting as intermediaries for the Palestinian banking system, Bank Hapoalim and Discount, are expected to postpone the cessation of operations until the end of the year, Globes has learned. The move follows a direct appeal from the Bank of Israel, which asked both to continue providing financial services in order to prevent an economic shock. As far as is known, a final decision has not yet been made, but discussions are underway to make this possible.

Bank Hapoalim and Discount have served for decades as correspondent banks for the financial system in the Palestinian Authority. This activity is effectively an "oxygen line" for mutual trade amounting to tens of billions of shekels per year, and enables current payments for goods and services. The volume of trade with the Authority is estimated at more than 20 billion shekels per year, consisting of both exports and imports. A complete severance of relations could have paralyzed trade, led to a monetary collapse on the West Bank, and harmed many Israeli companies.

In recent years, pressure from both banks to end the engagement has increased due to exposure to heavy legal and international risks regarding the prohibition of money laundering and terror financing. Continued activity was made possible only subject to letters of indemnity and exemption from lawsuits from the state. In recent months, the concern among the banks has risen, and at times the letters of indemnity were issued more frequently than before and for short periods of a few months, which created ongoing uncertainty in the system.

As a long-term solution, the government previously approved the establishment of a dedicated government company that would take over the management of the activity and release the commercial banks from responsibility, but due to legislative delays and bureaucracy, the company has not yet begun to operate. The current compliance with the Bank of Israel's request is intended to buy additional time to formulate a response, against the backdrop of heavy international pressure, primarily from the US administration, to prevent the collapse of the Authority.

This week, The New York Times reported that Yahya Shunar, the Palestinian governor, warned of the consequences of the banks' disconnection and added that he received a message from the Bank of Israel: prepare a plan to create an alternative to the shekel. This is a move that is expected to be complex and have consequences and shocks for trade relations.