Palestinians in the West Bank use the Israeli shekel, but beyond this commonality, the two financial systems are radically different.
In Israel, as in many advanced economies, digital payments are growing rapidly, replacing transactions once done with banknotes and coins.
But in the West Bank, a territory under partial Israeli military control since 1967, cash is still king.
Tasir Freij, who owns a hardware store in Ramallah, told AFP he now has to pay a 2% commission to deposit paper money because his bank is reluctant to receive it.
“It’s a crisis (…) and we are feeling the effects,” Freij told AFP.
Much of the paper money is brought in by the tens of thousands of Palestinians who work inside Israel or the Jewish settlements in the West Bank, and who receive their wages in cash.
Palestinians walk outside a currency exchange office in Ramallah, West Bank, October 5, 2021. (ABBAS MOMANI / AFP)
Experts and businessmen say the accumulation of hard currency risks choking the Palestinian financial system.
Freij was concerned that buying goods abroad usually requires converting shekels to foreign currencies, especially dollars or euros, but the abundance of shekels in the market forced him to accept painfully unfavorable rates.
The Palestinian Monetary Authority, which functions as the central bank in the West Bank, has warned that paper shekels are piling up because it has no way of returning hard currency to Israel.
PMA Governor Firas Melhem told AFP that the accumulation of liquidity was “a very serious problem”, causing headaches for banks and businesses.
“If the problem is not resolved quickly, the Palestinian market will become a dumping ground for the shekel,” he added.
The shekel was established as the official currency in the West Bank and Gaza Strip as a result of economic protocols known as the Paris Agreements that followed the Oslo accords between Israel and the Palestinian Authority.
Much has changed since those 1994 accords.
As they rely more on digital transactions, Israeli banks no longer want to reabsorb the paper money that accumulates in the West Bank but does not flow quickly through the Israeli economy.
The Bank of Israel cited security as another reason.
“We stress that uncontrolled money transfers could be misused, including for money laundering and terrorist financing, and would not comply with international standards on the prohibition of money laundering and terrorist financing. “The bank told AFP in a statement.
Palestinian banks have tried to encourage customers to moderate their cash deposits, but this risks limiting the banks’ available capital, which would reduce their ability to offer loans.
The difficult cash surplus situation has fueled renewed calls by some Palestinian experts to abandon the shekel, either in favor of a single Palestinian currency or that of another nation, including the dinar. Jordanian, which also circulates in the West Bank.
The Palestinian Monetary Authority is also pushing the Bank of Israel to take back more hard currency.
But Melhem stressed that the Palestinians should also “keep up with the evolution of financial technologies” and move towards more cashless payments.
Times of Israel staff contributed to this report.