Questions and Answers from the PMA Regarding the ILS Accumulation Crisis

What currencies are legally permitted for circulation?

The currencies legally permitted for circulation in Palestine are: the ILS, the U.S. dollar, the Jordanian dinar, and the euro. The ILS accounts for the largest share of currency in circulation, as it is the primary currency used in day-to-day transactions and in the purchase and sale of goods and services.

Why is the ILS considered legal currency in Palestine?

Under the Paris Economic Protocol signed in 1994, the ILS was designated as the primary currency in circulation in Palestine. It is used for payments and the purchase of essential goods and services.

What does the correspondent relationship between Palestinian and Israeli banks mean?

It refers to the relationship between a Palestinian bank and an Israeli bank, through which ILS cash is transferred to settle payments for goods and services imported from and exported to the Israeli side.

Approximately 85% of Palestinian exports go to Israel, while around 55% of total imports come directly from the Israeli market, including essential goods and services such as electricity, water, fuel, and food products. All of these commercial transactions are conducted in ILS. The annual average volume of banking transactions (including cheques and transfers) between the two sides amounts to approximately 50 billion ILS annually.

What are the risks of severing the correspondent relationship with Israeli banks?

It would negatively impact the supply of essential goods and services to the Palestinian market—such as fuel and electricity—which can only be financed through official banking channels. This could also force the use of cash for financing other goods, leading to a rise in informal market activity and the associated risks. The Palestinian banking sector maintains a broad and stable network of correspondent relationships with banks around the world. Moreover, any threats to sever correspondent ties with Israeli banks do not affect customer deposits, which remain safe and fully secure.

What does the ILS accumulation problem in banks operating in Palestine mean?

The ILS accumulation problem refers to the inability to transfer ILS currency (both banknotes and coins) from Palestinian banks to Israeli banks. As a result, large amounts of ILS accumulate in the vaults of Palestinian banks, hindering their ability to fund their correspondent accounts with Israeli banks. These accounts are essential for executing financial transactions related to the import and export of goods and services between Palestine and Israel.

What are the reasons behind the accumulation of ILS in Palestinian banks?

The accumulation of ILS is primarily due to restrictions and limits imposed by the Israeli side on the transfer of ILS cash, which do not meet the operational needs of Palestinian banks to execute and finance commercial transactions between the two sides. It is worth noting that one of the main sources of ILS cash in the Palestinian banking system comes from in-cash purchases by Palestinians living inside Israel, as well as the wages of Palestinian workers in Israel, which are mostly paid in cash.

What are the negative impacts of ILS accumulation on Palestinian banks?

The inability of banks to transfer excess ILS cash and replenish their correspondent accounts limits their ability to perform their role as financial intermediaries in facilitating trade between the Palestinian and Israeli sides, thereby deepening the crisis. In addition, banks bear the costs of storing, securing, and transporting large volumes of cash between branches, along with the risks involved in handling such transfers. They also suffer from the loss of alternative investment opportunities for these funds.

Why don’t banks utilize the accumulated ILS by increasing ILS-denominated lending in the local market?

The ILS deposited in banks are primarily intended to finance foreign trade with Israel, specifically for purchasing essential goods and services. Only the remaining portion of these funds is available for local lending purposes. It is important to note that Palestinian banks continue to provide loans in all currencies, including the ILS, in accordance with their approved lending policies.

What efforts has the PMA made to address this issue?

The PMA has engaged in continuous communication with the Israeli Central Bank, as well as with various local and international institutions, highlighting the risks and consequences of preventing Palestinian banks from transferring the cash they hold. These efforts aim to ensure the continuity of correspondent banking relationships, facilitate commercial transactions, and guarantee the availability of essential goods and services to Palestinian citizens. In addition, the PMA has directed banks to take all possible measures to increase their capacity to accept cash deposits and to provide the necessary liquidity to support commercial operations. It has also worked on strengthening the infrastructure required for the use of electronic payment methods to reduce reliance on cash transactions.

To what extent is the banking sector stable in light of these challenges?

Notwithstanding the significant challenges and risks posed by the current situation, including the ILS accumulation crisis, the Palestinian banking sector continues to maintain high levels of capital adequacy and liquidity in accordance with relevant international standards. The sector remains stable and continues to play a vital role in sustaining the economic cycle and meeting the full range of banking and financial needs of its customers and the broader economy. The total assets of the banking sector have reached approximately USD 25 billion, while deposits have increased to around USD 20 billion.

How can citizens help reduce the ILS accumulation?

Citizens can contribute by adopting electronic payment methods instead of cash for purchasing goods and services, particularly at fuel stations. For high-value transactions, they should use cheques and bank transfers, while minimizing cash usage in all financial transactions.