JERUSALEM — Israeli banks are approaching a Sept. 1 deadline that could sharply disrupt financial ties with the Palestinian Authority, threatening billions of shekels in trade and potentially creating economic fallout for businesses on both sides.

Bank Hapoalim and Israel Discount Bank have for decades served as correspondent banks connecting Israel’s financial system with Palestinian banks.

Those relationships allow payments to move between Israeli and Palestinian businesses and support more than NIS 20 billion in annual trade involving goods and services.

But the banking arrangements have become increasingly difficult to maintain because of legal exposure involving money laundering, terrorist financing and other compliance risks.

The Israeli government has provided the banks with indemnity and legal protections allowing them to continue operating, but those protections have repeatedly been temporary.

Without continued protection, the banks have warned they could sever their relationships with Palestinian financial institutions.

The Sept. 1 deadline now brings that question directly into focus.

The Bank of Israel has asked the banks to continue providing services in order to prevent a potentially severe economic disruption, and discussions have been underway over postponing the cutoff.

No final long-term solution had been reached when those discussions were reported.

The economic stakes are significant.

A complete break in correspondent banking ties would make it much more difficult for Palestinian businesses to pay Israeli suppliers and for Israeli companies to collect payments from Palestinian customers.

It could also interfere with salary transfers, commercial transactions and the movement of shekels through the Palestinian banking system.

Israeli officials have previously approved the creation of a government company that could eventually take over the correspondent-banking role from commercial banks and shield them from the legal exposure they say has become increasingly difficult to accept.

That system, however, has not yet become operational because of legislative and bureaucratic delays.

For now, Bank Hapoalim and Israel Discount Bank remain the financial bridge.

The issue has also drawn international attention because of concerns that a sudden banking cutoff could destabilize the Palestinian economy and create wider economic and security consequences in the West Bank.

The Palestinian economy is heavily dependent on the Israeli shekel and on access to Israeli financial institutions.

Any disruption therefore extends well beyond banking.

Israeli manufacturers, wholesalers, food suppliers, construction companies and other businesses that sell into Palestinian markets could also be affected if payments are interrupted.

The Bank of Israel’s intervention reflects those broader concerns.

The immediate question entering Sept. 1 is whether another temporary arrangement will be reached or whether the banking relationship will begin moving toward an actual cutoff.

Either way, the deadline highlights a larger unresolved problem Israel has been trying to address for years: how to maintain necessary commercial activity with Palestinian financial institutions while protecting Israeli banks from legal and regulatory exposure.

Until a permanent mechanism is established, each extension simply pushes that decision further down the road.

JBizNews Desk | Jerusalem

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