Staving off crisis, Israeli banks reach agreement to keep working with Palestinian counterparts through 2026

A deal was struck to enable Israeli banks to continue collaborating with Palestinian counterparts until the conclusion of 2026, according to a senior Bank of Israel official. Israel Discount Bank and Bank Hapoalim had planned to cease their partnership with Palestinian banks due to apprehensions about risks of terrorism financing and money laundering.

Nevertheless, following discussions with the Finance Ministry, the banks have agreed to postpone the termination of ties until the end of 2026, stated Bank of Israel Deputy Governor Andrew Abir. The responsibility of continuing this correspondent banking business with Palestinian banks will then fall to the incoming government, as Abir informed Reuters.

Discount and Hapoalim have been facilitating correspondent services with Palestinian banks via indemnity waivers signed by Israel's Finance Minister. Current Finance Minister Bezalel Smotrich, who is opposed to a Palestinian state and has been hesitant to sign waivers, has yielded to U.S. and Israeli government pressure. This waiver permits Israeli banks to process shekel payments for services and salaries linked to the Palestinian Authority without incurring money laundering and terrorism financing charges. Without this waiver, Palestinian banks would be disconnected from the Israeli financial system.

The Palestinian Monetary Authority estimates that Discount and Hapoalim handle 51 billion shekels ($17 billion) in transactions for the PA annually, while 90% of Palestinian trade - encompassing food, fuel, and medicines - transits through Israel. The ultimate resolution is to establish a permanent agent to provide correspondent bank services between Palestinian and Israeli banks, whether it's Hapoalim and Discount continuing or a government entity replacing them.

However, some form of permanent player to conduct correspondent banking must be determined. In July, Yahya Shunnar, Governor of the PMA, noted that over the past decade, the PA had developed its anti-money laundering framework to international standards, with the United States and the UK assessing that the PA's counter-terrorism financing practices meet or surpass international standards when financial integrity risks are a concern.

When inquired about the possibility of the PA shifting to a different currency, Abir stated that it was unlikely as the Palestinian economy is deeply intertwined with the Israeli economy, making the shekel the most suitable option for their transactions.