Financial Crime World

West Bank’s Cash Conundrum: Circulation Remains Outside Banking System

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The Palestinian West Bank (WBG) is facing a peculiar problem - its cash circulation remains largely outside the banking system, making it challenging for businesses and individuals to manage their finances effectively.

Shortage of Regular Shipments

According to recent estimates, the regular shipments of Israeli shekels (NIS) into the WBG’s banking system fall short of the actual inflows from various sources, including Palestinian workers in Israel and informal trade. In 2021, estimated shekel inflows reached NIS 20 billion, while regular shipments were capped at NIS 16.6 billion, with an additional NIS 4.6 billion in exceptional shipments.

Experts’ Concerns

The current system is unsustainable and prone to disruptions, according to experts. “The exceptional shipments are ad hoc and unpredictable, making it difficult for banks to manage their liquidity,” said a senior official from the Palestinian Monetary Authority (PMA).

Proposed Solutions

Several solutions have been proposed to address this issue:

  • Deposit Excess Shekels: Allow Palestinian banks to deposit their excess shekels in the PMA’s vaults instead of holding them in each branch.
  • Cash Reserves: Permit banks to use cash in their vaults as part of the 9 percent reserve requirement.

Limitations and Concerns

However, these proposals are not without limitations. For instance:

  • Using the PMA’s vaults would displace rather than solve the problem.
  • Allowing banks to use cash for reserves would only shift the burden of holding and transporting the cash from commercial banks to the PMA.

Alternative Solution: Dollarization

Another potential solution is dollarization, which could theoretically eliminate the need for cash transactions in shekels. However, this approach may be impractical given the volume of trade and formal flows between WBG and Israel.

Outlook

As the situation continues to unfold, it remains unclear how Palestinian businesses and individuals will navigate the complex web of cash circulation outside the banking system.