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The recent escalation of the conflict with Israel wreaked havoc on Gaza's banking sector. But, despite both human and economic setbacks, the Palestine Monetary Authority (PMA) has ploughed on with its reform efforts, Jihad Alwazir, the central bank's governor tells CentralBankNews.com.
In times of crisis, cash is king - a maxim to which Jihad Alwazir, the governor of the PMA, will testify. "Our number one issue during the conflict with Israel was providing enough cash for the banking sector in Gaza," Alwazir tells CentralBankNews.com on the sidelines of a conference to commemorate Bank Negara Malaysia's 50th birthday. "The banking sector has to pay the wages of all of the aid workers and the staff of non-governmental organisations. There are also about 77,000 civil servants."
But providing currency during the conflict, which escalated in November and resulted in Israel launching an offensive on 27 December that lasted until 18 January, proved extremely difficult: "We organised a UN convoy to get currency through. But the day before it was due to go ahead the convoy was attacked and the driver was killed. And so we stopped that,"the governor says, adding that the PMA had cause to believe other lives were at risk: "The ATM machines that were working had crowds gathered around them and we had to stop that because we were worried that they would be attacked."
To alleviate the liquidity shortage, the PMA drew on its support from the international community, fostered by the institution's enforcement of tough anti-money-laundering legislation to keep Hamas, the militant group and political party which took control of Gaza in mid-2007, out of the baking system. The result: a letter dated 12 December from Tony Blair, the official UN envoy of the Quartet on the Middle East; Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF); and Robert Zoellick, the president of the World Bank, to Ehud Olmert, the then-Israeli prime minister.
The letter states that the restrictions on the regular monthly entry of currency into Gaza had prevented the government of Salam Fayyad, then prime minister of the Palestine Authority, from paying "critical" salaries and benefits to civil servants reporting to him, and the banks from operating and providing funds to depositors. "Confidence in the formal banking sector has been severely reduced, which could also affect banks in the West Bank. In addition, the restrictions are favouring the emergence of a black market that is providing this liquidity at considerable premiums and through unregulated channels," the letter says. "These actions pose a considerable challenge to the effectiveness of the Palestinian Authority, as well as to the Palestinian Monetary Authority, which is a respected partner to the Bank of Israel [hyperlink], the international institutions and the international community."
This letter, along with an American call to Olmert, led to the supply of notes worth Shk225m ($53m), which Alwazir terms as enough to "relieve some but not all of the pressure." "This barely covers one month's worth of liquidity," he says. "It's enough to prevent the collapse of the banking sector but not enough to put us on the track of normal operations. We've been using all kinds of mitigation measures, for instance there was a cap on the payments in cash from salaries, so employees can only receive half or a portion of their salary because of the shortage of liquidity."
As well as severely hampering the central bank's economic goals, the conflict also had a heavy human toll with the authority losing the manager of its Gaza City branch after his car was bombed in an Israeli attack.
"It's probably one of the most difficult environments to work in," the governor says, highlighting the challenges faced by the PMA: "Not only are you dealing with micro issues about liquidity at the branch level because of the Israeli-controlled checkpoints and the logistical quagmire that surrounds that, you also have these fire-fighting issues [that arise with the conflict]. With the financial crisis, the 21 Palestinian banks are worrying about reserves and financial stability. On a political level trying to maintain the neutrality and the survivability of the banking sector in Gaza is another challenge. It's always much more challenging than it would normally be."
But, despite this, the PMA has pressed ahead with its ambitious reform agenda.
"Regardless of the situation in Gaza we decided to push on with our reform programmes," the governor says. "We have SIA-PERAGO handling RTGS [real-time-gross-settlement system], and we're in the implementation and mobilisation phase. The system will have a major impact."
The PMA has also successfully launched a credit bureau and preparations for a national credit-scoring system, which the IMF has praised as one of the best in the world, recommending it to other central banks. "It's a zero-based system so even if you borrow $100 it will be in the system," the governor says. "We're adding the microfinance institutions into the database to give those that take microfinance loans the opportunity to get bigger loans from the banks without excess collateral."
The system represents an attempt to improve Palestine's very low deposit-to-loan ratios. "The ratio is one of the lowest in the region, partly because of the political risks. Part of it is because we have a lot of Jordanian banks, which accept deposits but don't give so many loans to the public," the governor says. "But we're addressing that through a better definition of risk and a better identification of opportunities while accepting that there are political risks." The PMA is taking other steps to improve the provision of loans, introducing fair-credit circulars, designed to enhance governance and eliminate many of the junk fees charged by lenders.
And it is already attempting to mitigate the impact of another conflict. "We are trying to install more point-of-sale systems and encourage the use of credit cards to try and reduce the credit shortage. But, though we have 600 units we want to send to Gaza, we're having problems getting them there."
The interview took place on 11 February
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