Palestinian banks in the eye of the storm: the lifeblood of the economy is choking

As the Palestinian economy teeters on the brink of collapse, Palestinian banks have not been spared the repercussions of the crisis. Rather, they have become the eye of the storm, facing increasing pressures between the hammer of financial crises and the anvil of political challenges. They have transformed from a development actor into one struggling for survival.

Banks in any economy are a fundamental pillar of stability and growth. However, the complex Palestinian reality—due to the occupation, division, and successive crises—has left this sector in a fragile state, despite apparent signs of stability. The World Bank's 2024 report highlighted the features of the worsening financial crisis through its analysis of the level of public spending and the Palestinian Authority's reliance on the local banking system. The updated 2025 report reaffirmed the seriousness of these trends, warning of direct repercussions that threaten banking and financial stability as a whole.

The Palestinian banking system consists of 15 banks (7 local and 8 foreign). Despite this number, it is noted that more than half of banking facilities in some years go to public sector employees, placing banks at risk whenever the financial relationship between the government and the occupation over clearance revenues deteriorates. Conversely, funding for productive projects does not exceed 15–20% of total facilities, while development financing tools are almost nonexistent in Jerusalem due to the legal and political complexities imposed on the city.

In the absence of a comprehensive development vision, banks are turning into consumer finance providers, dominated by personal loans and car or home financing, at a time when the Palestinian market is in need of productive investments and operational projects.

This approach, based on linking facilities to stable sources of income (such as employee salaries), contributes to reducing short-term risks, but it also weakens banks' ability to contribute to driving the economy, making them more vulnerable to any disruption in government financial flows.

On the other hand, the challenges facing the banking system are not limited to the banks' relationship with the government. They extend to the political and security environment, which hinders financial transfers and imposes Israeli restrictions on the movement of funds, particularly the shekel. This has led to a real liquidity crisis for banks, placing them under the threat of sanctions or gradual collapse if these restrictions persist.

The escalating crisis of the shekel hoarded within the banking system, due to Israeli banks' reluctance to accept surplus cash, is deepening the liquidity crisis and weakening banks' ability to lend or even maintain their daily obligations to their customers. At the same time, the Monetary Authority faces a complex balance between the need to intervene to protect the banking system and the constraints imposed on its monetary sovereignty.

It is estimated that the percentage of public sector employees borrowing exceeds 50% of the total number of borrowers, a percentage that reflects the extent to which the banking system is intertwined with the stability of government salaries. Furthermore, the percentage of economic projects financed by banks in Jerusalem and its surrounding areas remains extremely limited, creating a funding gap in one of the most sensitive areas in need of economic and political support.

Despite these challenges, the efforts of banks and the Monetary Authority to maintain relative stability in the banking system cannot be denied, through precautionary measures, financial allocations, and restrictions on unsafe lending. However, this stability remains fragile and dependent on continued external financial inflows and the government's resilience, which has become increasingly risky.

The reality of Palestinian banks today is a direct reflection of the fragile political and economic environment and a serious indicator of the depth of the crisis. Because banks represent the lifeblood of the economy, any congestion in them will impact every aspect of economic life, from the labor market to investment, from individuals' ability to spend to companies' ability to grow.

Hence, protecting the banking sector requires an integrated approach that includes:

● Expanding the productive base of the Palestinian economy, to create alternative and independent sources of income.

● Strengthening financing tools for small and medium enterprises.

● Political and international pressure to lift Israeli restrictions on cash transfers.

● Restructuring the relationship between banks and the government to reduce excessive interdependence.

● Building sovereign tools to enhance the Monetary Authority’s ability to intervene effectively in times of crisis.

● Establishing a bank emergency fund to enhance the ability to confront short-term crises.

In conclusion, the banking crisis is no longer merely a technical issue to be addressed through financial measures. Rather, it has become a sovereign issue par excellence, requiring a national strategic vision that redefines the role of banks as a lever for the economy, not merely a tool for crisis management. Protecting the banking sector cannot be separated from the Palestinian economic independence project, which begins with liberation from financial dependency and proceeds through the restoration of sovereign decision-making and the building of a robust, productive economy.

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