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Palestinian banks walk economic, security tightrope http://today.reuters.com/news/articlenews.aspx?type=inDepthNews&storyid=2006-10-25T124451Z_01_L17851434_RTRUKOT_0_TEXT0.xml&src=102506_0917_FEATURES_in_depth
Wed Oct 25, 2006
By Mohammed Assadi
RAMALLAH, West Bank (Reuters) - Bankers in the Palestinian territories worry less about boardroom battles and more about the daily fight to stay in business.
The threat of U.S. sanctions has stopped banks dealing with the government. Disgruntled state workers, largely unpaid since March, have been vandalizing automated teller machines and other bank property. And the economy is in freefall.
Some experts say the chaos threatens the long-term viability of the 11 Palestinian banks operating in the Gaza Strip and the occupied West Bank. A dozen Arab banks with branches here have also been badly hurt.
"Demand for credit is small because investment is shrinking and companies are either downsizing or closing," said independent Palestinian economist Samir Abdallah.
Fearful of being hit with U.S. anti-terrorism sanctions and lawsuits, banks have refused to deal with the Hamas government since the militant Islamist movement took office in March.
Washington regards Hamas as a terrorist organization and along with the European Union cut aid to the Palestinian Authority over the movement's refusal to recognize Israel.
At the same time, tighter credit requirements for government workers, who have not been paid full salaries for around seven months, and a dramatic contraction in economic growth this year, have shrunk other banking business.
The World Bank has estimated growth per capita in the Palestinian territories would fall by 27 percent in 2006 because of the aid embargo and Israeli restrictions on movement.
"We are struggling to get our money back from those who have loans. Our big concern is to recover our debts and not to give credit," said a senior banker in the West Bank city of Jenin.
SOUND BASE
Despite the crisis, financially banks are fairly sound, said the Palestine Monetary Authority, which acts as a central bank.
Its figures show total cash deposits of $4.1 billion in August, compared to $4.2 billion last December, the month before Hamas won elections.
While many customers, mainly government workers, have withdrawn their savings, remittances from Palestinians overseas have increased, bank officials say.
The officials say they are encouraging banks to increase their capital as a cushion against further shocks. Total bank capital has grown to $424 million in the past 18 months from $316 million, they added.
But economic experts warned that the banks need to be able to build their loan books and earn fees from transactions.
There are few other ways to make money. Banks have invested only $100,000 in the nascent Palestinian stock market, for example, the monetary authority said.
"Banks won't face a dire financial crisis and they won't go bust. What we are seeing is that banking activity has gone cold," said economist Naser Abdel-Karim.
The number of banks operating in the Palestinian territories grew after the signing of the 1993 Oslo peace accords with Israel on expectations that investment would flow in. Before that, Israeli banks operated in the occupied areas.
But hopes of building a sustainable economy foundered when final status peace talks collapsed in 2000 and a Palestinian uprising erupted. Hamas's rise to power further dimmed the prospects for peace.
Banks quickly severed ties with the new government. They also balked at transferring Arab and Islamic donations to the cash-strapped Palestinian Authority to avoid U.S. censure.
"Such restrictions inflict losses on us but it is better than risking all our business. It's the lesser of two evils," said one senior local bank official.
Banks have not bothered trying to recover $750 million in overdue loans to state workers and past governments, although several banks have stopped giving credit to state workers.
Of 165,000 government workers, some 55,000 have bank loans. If 12 months pass without recovering overdue loans, banks have to declare all of them as doubtful accounts and make provisions to safeguard deposits. "Banks cannot endure this situation indefinitely," said a senior official at the Monetary Authority.
Adding to the headaches, Israeli troops have raided banks three times since the uprising began six years ago, taking millions of dollars from accounts they suspected were connected to militant groups, the Monetary Authority said.
And recently, some frustrated government workers have vandalised banks in the West Bank and Gaza, accusing them of automatically deducting a percentage of overdue debts when a few partial salary payments have been made.
The attacks, which destroyed computers, furniture and ATMs, were carried out after four armed factions accused banks in June of "starving" the Palestinians.
"This is not a friendly environment for banks. (But) pulling out of the market would be costly and they are not weighing that as an option," said Abdel-Karim.
In a rare positive sign, major Israeli banks have put on hold, at least until mid-November, plans to terminate banking services they provide to Palestinian banks, the Monetary Authority has said. Israeli banks had also feared running foul of U.S. anti-terrorism and money-laundering rules. Officials have indicated Israeli banks would be willing to make further extensions to the deadline. Israeli banks clear transactions from Palestinian banks made in shekels.
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