The Banking Sector: When Temporary Solutions Exceed Their Capacity.. What is the Hidden Impact of Postponing Installments?

SadaNews Economic Report - In the midst of major crises, exceptional decisions are often made. These decisions are more likely to succeed when implemented at the right time and executed as temporary solutions that prioritize humanitarian considerations over financial calculations. But what if this period extends, and these temporary solutions turn into a permanent reality? Here, the hidden repercussions begin to emerge, revealing challenges that were not anticipated.

Since the beginning of the war on the Gaza Strip nearly two years ago and the blockade on the West Bank provinces, the Palestinian banking sector has intervened with direct relief and humanitarian aid amounting to tens of millions of dollars. All of this came in cooperation with the Palestinian Monetary Authority, in addition to postponing the deduction of installments due from employees in Gaza. This was in response to official instructions on one hand, and an awareness of the extent of suffering faced by Palestinian citizens on the other. Although this measure of deducting installments deprived banks operating in Palestine of monthly revenues, the priority was given to humanitarian considerations over financial gains.

However, with the repeated decisions regarding the postponement of installment deductions for four consecutive times, the latest being an extension until the end of 2025, the outlines of a real crisis have silently begun to take shape within the Palestinian banking sector. Initially unclear, today it has become an accumulated burden that requires a different kind of thinking.

Here, we speak candidly about the failure of the political and governmental leadership in Palestine to find solutions to these crises, fully aware that part of their inability to find solutions is a result of an Israeli financial blockade and sometimes an Arab one. However, ultimately, we do not absolve them of their responsibility as they are the legally and officially responsible parties for the Palestinian economy and its political situation.

The first of these repercussions is the unprecedented accumulation of installments, which will put some clients in a position to bear later obligations that exceed their actual ability to repay. What is perceived today as temporary relief may later turn into a heavy burden that psychologically and financially traps them and may lead to a widespread rise in borrower defaults, thus causing an economic disaster that will affect everyone.

As for banks, the situation is more complicated. The postponement decision means frozen liquidity, an increase in the volume of deferred loans, and an expansion of overdue current accounts, directly affecting the bank's lending capacity and its financial sustainability.

These conditions have led some banks to implement the instructions of the Palestinian Monetary Authority to grant "relief loans" or tawarruq, or to open temporary overdrawn current accounts, as tactical temporary solutions to bridge the gap. However, in reality, these are merely delaying the crisis without tangible, real solutions.

All of this occurs at a time when banks are still required to meet their commitments to depositors, manage their operating costs, and maintain liquidity and capital adequacy ratios that ensure their stability and prevent any shakes in public confidence in them. This includes granting loans to the Palestinian government and the ongoing dependence on banking sector lending, and sometimes putting pressure on banks to grant the government loans during every financial crisis faced by the Palestinian Authority, as is the case these days.

Banks are going through a crisis that threatens their stability and continuity, amidst direct losses in Gaza, the inevitable defaults of the majority of their beneficiaries, the complete disappearance of private sector resources in Gaza, partial in the West Bank, and the unclear future regarding the repayment of facilities from their clients in the two halves of the homeland, as well as the government’s debt to them and the crisis of shekel accumulation. Thus, it is unjust for the banking sector to face these challenges alone.

The inability of the government and the official Palestinian political level regarding financial and economic matters is primarily transferred to the banking sector and secondarily to the private sector, which is illogical.

Banks operating in Palestine are going through a complex crisis these days that threatens their stability and continuity. Between direct losses in Gaza estimated in hundreds of millions of dollars due to financial losses from buildings, properties, and cash, or significant losses as a result of setting aside credit and operational provisions to cover the risks of credit facilities granted in Gaza, and the defaults of the majority of beneficiaries from their facilities for their projects in the sector, and the complete disappearance of the private sector resources in Gaza, and partially in the West Bank, and the ambiguity surrounding the future repayment of facilities from their clients in both halves of the "homeland", along with the scale of the debt of the authority to them and the crisis of shekel accumulation, it is unjust for the banking sector to face these challenges alone.

This is a national crisis and the solution must be national as well. The key to the solution lies in wise management through a comprehensive program formulated in consultation with the relevant parties, addressing the roots of the crisis rather than merely its manifestations, and including clear mechanisms to dismantle these challenges. For banks are not just financial institutions; they are the lifeblood of the Palestinian economy, and if this lifeblood is exhausted, the economic body will not remain intact.