Financial Crime World

West Bank’s Cash Crisis: Why Palestinian Banks are Struggling with Excess Shekels

The West Bank’s economy is characterized by a significant portion of transactions being conducted in cash, outside of the banking system. This has led to a chronic issue for Palestinian banks, struggling to manage their liquidity due to a mismatch between regular cash shipments and actual inflows.

A Chronic Liquidity Crisis

According to estimates, shekel inflows into the Palestinian banking system have consistently exceeded the regular cash shipment limit set by the Bank of Israel (BoI). For example:

  • In 2010, estimated inflows from Palestinian workers alone reached NIS 6.3 billion, while the regular shipment limit was only NIS 3.6 billion.
  • In 2021, shekel inflows into the banking system were estimated at NIS 20 billion, while regular shipments reached NIS 16.6 billion.

This means that Palestinian banks are still facing a significant liquidity crisis, with exceptional shipments above the annual limit helping to ease the problem over the years but remaining unpredictable and unreliable for banks’ liquidity management.

Experts’ Insights

Experts point out that estimated inflows may be an underestimate, given:

  • The recent increase in formal Palestinian workers allowed to work in Israel and Israeli settlements
  • The growth of financial inclusion
  • Decreasing informality in employment data

Proposed Solutions

Some experts have suggested:

  • Allowing Palestinian banks to deposit their excess shekels in the Palestine Monetary Authority’s (PMA) vault instead of holding it in each branch. However, this would merely displace rather than solve the problem.
  • Dollarization, but this would be impractical given the volume of trade and other formal flows between the West Bank and Israel.

Conclusion

The Palestinian banking system continues to struggle with excess shekels due to the mismatch between regular cash shipments and actual inflows. To address this issue, policymakers need to find a more sustainable solution that takes into account the growth of financial inclusion and informality in the region.