Are banks in Gaza jeopardizing economic sector?

Banks are limiting their facilities in the Gaza Strip, which reflects badly on the already ailing economy.

al-monitor A Palestinian woman leaves a bank on the first day of the Muslim holy month of Ramadan, in the southern Gaza Strip, May 6, 2019.  Photo by REUTERS/Ibraheem Abu Mustafa.

Jun 16, 2019

GAZA CITY, Gaza Strip — Banks operating in the Gaza Strip have been reducing the volume of facilities provided to the private sector in light of the deterioration of the economic situation.

On May 15, the Palestine Monetary Authority (PMA) released data showing that the total loans and facilities provided by banks operating in the Palestinian market to their customers in Gaza dropped by 3.2% in March compared to the same period in 2018.

The economy in the Gaza Strip has been struggling amid the ongoing Israeli blockade and the tense political relationship between Gaza and the West Bank. Since March 2017, the Palestinian Authority (PA) has imposed sanctions on Gaza by reducing payments of the salaries of its public employees in Gaza with 30% to 50%. The crisis climaxed with Israel cutting the Palestinian tax revenues allocated to the families of victims killed in confrontations with Israel and Palestinians in Israeli prisons. So far, the PA has refused to receive any reduced tax revenues.

Al-Monitor contacted PMA Gov. Azzam al-Shawwa who attributed the fluctuation in the available bank facilities to the deflation in economic activity in the enclave. He said, “The reduction in the facilities provided in the Gaza Strip has a negative impact on the capital turnover as well as on economic growth as it reduces market liquidity and affects trade movement.”

He noted that the political and economic situation in Gaza poses a challenge to the Palestinian economy. “A comprehensive plan is needed to ensure development and stability of the existing political situation. This would push banks to provide more credit facilities and allow customer deposits to grow again,” he added.

Moin Rajab, retired economics professor at Al-Azhar University in the Gaza Strip, told Al-Monitor, “The reduction of bank facilities would reduce the volume of transactions made by entrepreneurs and consequently the cash liquidity supply, causing a decline in economic growth.”

He noted that the ensuing economic troubles would adversely affect the situation of markets and wages, import and export, and limit the ability of citizens and companies to implement or develop investment projects.

Rajab argued that by cutting back on loans to citizens or businessmen, imposing complicated guarantees and conditions, and reducing the value of loans that may be offered for fear of default of payment, banks would drain capital and halt economic growth. “Banks are following a due diligence policy in providing facilities in anticipation of any risks that they may be exposed to,” he said.

He added that the policy of deflation goes against the economic recession and the great depression in the markets. “The banking system ought to apply an expansionary policy in granting facilities,” he said. “Banks play a major role in accelerating economic activity and alleviating the suffering of citizens in Gaza.”

On the role of the PMA, he said, “Given its powers, the PMA must issue instructions to the banks to provide the maximum possible facilities and follow the policy of financial inclusion that it advocates. The PMA must allow all segments of Palestinian society to take full advantage of all banking services.”

Rajab stressed the benefits that banks may reap from applying an expansionary policy, adding, “The PMA must find quick solutions and simplify banking procedures to meet the demands of banks and their clients.” He suggested a reduction of the credit amount given to customers and the ensuing financial liabilities and interests as a solution that would benefit banks and their clients.

Mazen al-Ajala, economic expert and researcher at the Palestinian Planning Center, believes the decline in the volume of facilities, whether for businessmen or individuals, is due to the decrease in economic activity in Gaza and the subsequent decline in sales and purchasing power affecting citizens’ ability to repay their debts to banks.

He told Al-Monitor, “This has caused the increase in bounced checks, which prompted banks to reduce their credit facilities in Gaza and limit their allocation to specific segments [of society] only.”

Ajala said that bank facilities contribute significantly to economic growth, as they are granted for investments to create jobs and increase production, or for consumption, which in turn will improve economic turnover and increase market demand. The economy in the Gaza Strip registered a negative growth of 6% and the unemployment rate exceeded 50% in 2018, according to the Palestinian Central Bureau of Statistics.

He pointed out that the continued deflation is a serious risk to the economic situation, especially in the absence of a political solution, and that the fundamental solution that would lead to the recovery of the economy is to end the Palestinian internal division. “Temporary solutions are not efficient,” he said. “How can the PMA persuade a bank to grant facilities while it remains unable to provide sufficient guarantees that these facilities would be repaid?”

Amen Abu Aisheh, economics lecturer at Israa University in Gaza, told Al-Monitor, “Banks operating in Gaza are not registering losses but they are not achieving the expected financial return either. They are trying to compensate for this by expanding their activity outside Palestine.”

He warned, “Banking activity is part of the economic sector and its decline would hinder the capital turnover.” He added that the loss of domestic investment weakens local production and increases consumption. Abu Aisheh called on the PMA to encourage banks to keep providing credit facilities to small and medium-sized enterprises, which can lead to economic development.

“It is all the more necessary to find a political solution soon to bring about a state of economic stability to the Gaza Strip,” he concluded.

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