Israeli banks to continue working with Palestinians through 2026,

Israel's new government will need to find a solution that will allow Israeli banks to continue working with their Palestinian counterparts after a deal was reached to continue services until the end of ‌2026, a senior Bank of Israel official said on Tuesday.

Two Israeli banks had been set to halt working with Palestinian banks — Israel Discount Bank on September 1 and Bank Hapoalim in a month — due to concerns over the risks of associating with possible terrorism financing and money laundering. But after negotiations with the Finance Ministry, the banks ‌have agreed to delay severing ties until the end of 2026, Bank of Israel Deputy Governor Andrew Abir said. "Then, it will be an issue for ‌the new government to decide who should be carrying on that burden of the business of correspondent banking with Palestinian banks," he told Reuters. "The deadline has been pushed off."

Israel heads to elections on October 27, with a ruling coalition possibly in place by year-end. Discount and Hapoalim have been providing correspondent services with Palestinian banks through a series of indemnity waivers signed by Israel's finance minister.

WAIVERS ⁠ALLOW FOR ​PAYMENTS The current minister, Bezalel Smotrich, oversees ⁠the waiver mechanism that enables cooperation between Israeli and Palestinian banks. He is against a Palestinian state, and has been opposed to signing waivers but has relented on that issue several times due to ⁠U.S. and Israeli government pressure.

The waiver lets Israeli banks process shekel payments for services and salaries tied to the Palestinian Authority without the risk of being charged with money laundering ​and funding terrorism. Without it, Palestinian banks would be cut off from the Israeli financial system. The Palestinian Monetary Authority estimates that Discount and Hapoalim process ⁠51 billion shekels ($17 billion) a year in transactions for the PA while 90% of Palestinian trade — such as food, fuel and medicines — passes through Israel.

"The long-term solution is to get a permanent agent ⁠who ​will provide correspondent bank services between Palestinian and Israeli banks, whether that's Bank Hapoalim and Discount continuing or whether it's a government company that will take over for them. But some form of permanent player to carry out correspondent banking needs to be settled upon," Abir said. In July, Yahya Shunnar, governor of the ⁠PMA, said that over the past decade the PA had built up its anti-money laundering framework to international standards. The United States and the UK, he said, ⁠assessed that the PA's "counter-terrorism financing practices meet ⁠or exceed international standards when the concern raised is financial integrity risks."

When asked whether the PA could shift to another currency other than the shekel, Abir said it was not likely since "the Palestinian economy is so interlinked with the Israeli ‌economy that, for all purposes, ‌the shekel is the obvious choice of currency that they use." ($1 = 3.0348 shekels)