The Clearance and Accumulation of Shekels: Political Crises Driven by Politics, Not Money

Exclusive Economy SadaNews- Amid the accumulating complexities in the economic relationship between Palestine and Israel, the crisis of clearance and the accumulation of shekels in banks operating in Palestine emerges not merely as a financial challenge but also as a political issue that necessitates urgent intervention from the high authorities in the Palestinian Authority.

Reframing the Crisis as a Political Issue

Contrary to what some promote, the crisis of cash accumulation in banks operating in Palestine cannot be confined to a purely financial framework. It does not stem from dysfunction at the banks either concerning the implementation of the requisite professional care for combating money laundering or from pricing policies and collecting commissions to cover related operational costs; rather, it extends to being a political crisis that necessitates intervention by the political leadership, the Council of Ministers, and the Palestinian Monetary Authority to devise strategic solutions that align with its true nature.

In this context, the objective of these strategic, long-term solutions should be to provide alternatives and practical channels for these banks to facilitate their banking operations according to the professional standards governing their work, especially concerning the management of cash positions, particularly in the shekel currency. This would enable these banks to meet the needs of their clients, be they companies, traders, or individual citizens, while taking into account that all these parties operate within a complex and pressured economic environment closely linked to the policies imposed by Israel on the ground, primarily those of the Israeli Ministry of Finance and the Central Bank of Israel.

Mechanisms for Converting Shekels to Foreign Currencies

An ordinary citizen assumes that the conversion from shekels to dollars within the banks operating in Palestine occurs internally. However, the reality is more complex, as every process of converting foreign currency, whether shekel, dollar, dinar, or euro, obligates the bank to purchase the required currency from external correspondent banks in Israel, the region, and internationally. This imposes a strict obligation on banks to maintain cash balances with correspondent banks to cover these operations, which poses a direct risk to the financial soundness and banking reputation of these banks if they fail to provide the necessary credit balances to cover these operations.

From this standpoint, the requirement for banks to maintain their foreign currency reserves necessitates that banks either ship cash deposited by clients, which accumulates in their vaults, to fund their accounts with correspondent banks or borrow these necessary balances from correspondent banks through money market operations or from the Palestinian Monetary Authority as an obligated entity to support the banks' needs in this regard.

Herein lies a central problem: banks are in need of actual banking balances of these foreign currencies to meet the demands of their clients, especially to complete import and export operations, and to engage with correspondent banks in Israel and around the world. However, the accumulation of shekels and the lack of stable channels to convert it from cash balances in banks' vaults to banking balances in their accounts constrain the ability of banks operating in Palestine to build adequate banking reserves to cover these demands, especially since the bilateral commercial relationship with Israel constitutes at least 60% of the volume of Palestinian foreign trade.

It is also noteworthy that the act of clients depositing cash with the bank and the bank accepting this deposit, resulting in available balance in the client's banking account, does not necessarily mean that this balance has been converted directly into a banking balance in the bank’s accounts with correspondent banks. Instead, it requires that these cash balances be actually sent to the correspondent banks for them to credit their value to the banking balances of the banks, which exemplifies the issue of cash deposits in shekel currency fundamentally.

Decline in Cash Supply System Capacity After October 7

Prior to the recent security events, banks operating in Palestine relied on three main sources for cash supply in shekel from the Israeli central bank. The first source: direct cash shipments every three months worth 4.5 billion shekels, according to agreements between the Palestinian Monetary Authority and the Central Bank of Israel. These funds are converted into the balances of banks operating in Palestine with the Israeli correspondent banks that represent the banks operating in Palestine in clearance operations within the Israeli banking system. Through these amounts, banks operating in Palestine carry out banking operations based on their clients' requests.

The second source: monthly clearance revenues averaging 800 million shekels, which are funneled back into the Palestinian banking system through bank transfers rather than cash. The third source: the wages of Palestinian workers in Israel, which add monthly between 1 billion to 1.5 billion shekels, and were received in cash by the Palestinian economy until early 2023, when it was mandated by the Israeli side to pay the dues of regular Palestinian laborers (not illegally employed) in Israel through bank accounts. However, a large portion of informal (illegal) labor remained outside of this system and continued to receive their wages in cash in shekels. With the onset of the war in Gaza, this source also stopped almost completely in both its aspects.

These inflows constituted a total of about 10 billion shekels every three months, equivalent to approximately 40 billion shekels annually. However, under current conditions, most of these channels have halted, leaving only direct cash shipments, which are insufficient to meet essential trade exchange needs, especially given that the mutual trade relationship in Palestine is restricted to over 60% with the Israeli market as previously mentioned. This has forced some banks operating in the Palestinian market to find extremely costly alternative means to provide banking reserves of shekels to ensure the continuation of essential supply channels from the Israeli market to the Palestinian market, such as electricity, water, flour, and fuels. These banks found themselves compelled to borrow from the Palestinian Monetary Authority at rates reaching 4%, and to enter into currency swap arrangements in international money markets with correspondent banks at a high cost to provide shekels in exchange for other currencies like the dollar. Knowing that banks' vaults have exploded with the accumulation of shekels, these funds essentially hold no value unless they are shipped to the Israeli central bank and converted into banking balances in Palestinian banks' accounts with Israeli banks.

It is noteworthy that in recent years, Palestine has not taken the initiative to amend the Paris Agreement, considering the economic changes that have occurred, particularly regarding the feeding of shekels into the balances of the accounts of banks operating in Palestine with their Israeli counterparts.

The Dependency of Palestinian Banks and Its Impact on Inter-Trader Commerce

The Palestinian banking sector is almost entirely dependent on the Israeli banking system concerning the shekel, the most widely circulated currency in the Palestinian market. This dependency weakens banks' ability to diversify their cash sources and exposes them to acute economic risks.

With the decline in the balances of banks operating in Palestine within the Israeli banking system due to the irregular process of shekel supply to the Israeli central bank, banks operating in Palestine find themselves, as previously mentioned, compelled to borrow to cover the expenses of importing strategic goods, such as wheat, energy, water, fuels, and basic services. This negatively impacts the independence of Palestinian financial decision-making, increasing the volatility of inter-trader relationships. Furthermore, there is the often-overlooked but very important issue related to renewing the guarantee message from the Israeli Ministry of Finance to the Israeli correspondent banks to continue providing correspondent services to banks in Palestine, which expires in November 2025. If it is not renewed, it will lead to the complete cessation of banking relations with Israel, not just regarding the issue of cash supply in shekels.

The Crisis of Trust in the Local Banking Sector

Despite the great efforts made by the banks operating in Palestine during various crises, from the clearance crisis to the COVID-19 pandemic, and the recent war, they face societal backlash and criticism that does not reflect reality. What is puzzling is that banks are left to fend for themselves against this criticism, attempting to convince people that the issue lies on the Israeli side while the Palestinian government remains strangely silent and incomprehensively passive as it exerts maximum pressure on the banking sector monthly to borrow to cover its expenses, watching helplessly as the sector is attacked as if it operates in a neighboring country.

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The Editor-in-Chief of SadaNews comments: "Here I ask, why hasn’t the government or the relevant ministries, which know and truly understand the reality of the problem, issued any clarifications about what is happening? Are these banks not Palestinian national institutions and the backbone of the Palestinian economy?"

The banks have not hesitated to play their national role in supporting the community's resilience, and the recent government salary disbursement—which was provided entirely through these banks funding equal to 100% of the value of the last two withheld clearance invoices by the Israeli government—is not far away. However, these banks today face a complex challenge between managing the accumulated liquidity and the absence of independent options for engaging with foreign markets while simultaneously managing their media image and brand before citizens and traders frustrated by the lack of solutions to these problems.

Therefore, this crisis calls for urgent political action to reshape the monetary relationship with Israel and establish an independent banking strategy that enables banks operating in Palestine to deal confidently with international banks. The solution to the problem begins with recognizing its political, not just financial, nature, and from supporting banks instead of placing on them responsibilities they cannot address alone as, in the end, they are profit-oriented commercial institutions and not governmental entities responsible for resolving political issues.