IV. Developments in Money and Banking

Milan Zavadjil
Published Date:
February 1997
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A. The Banking System

The banking system has expanded sharply in the WBGS in parallel with the gradual expansion of the PA’s responsibility for this area. Earlier, during the Intifada in the late 1980s and early 1990s, banking activity in the WBGS had been limited. There were only two Israeli banks (operating almost exclusively in Israeli settlements), one Jordanian bank (the Cairo-Amman Bank) and one local bank (Bank of Palestine), operating alongside a relatively efficient system of moneychangers. These banks offered a limited range of services and had very low levels of domestic lending. Banking sector activity started to increase vigorously in late-1993, with the opening of new Jordanian bank offices throughout the WBGS. Between December 1993 and February 1996, the number of non-Israeli banks increased from 4 to 15, while the number of bank offices increased from 13 to 58. The expansion in 1995 and 1996 was achieved to an important extent through the increase in the number of branches of the three largest banks (the Arab Bank, the Cairo-Amman Bank, and the Jordan Bank). These banks accounted for 80 percent of deposits in early 1996, while the largest locally incorporated bank, the Bank of Palestine, accounted for another 10 percent.

As the Jordanian dinar, Israeli shekel, and the U.S. dollar are the currencies used in the WBGS, the scope for monetary policy is very limited. The supervision of banks is therefore currently the primary function of the PMA. Supervision is performed largely off-site, through the examination of the balance sheets of banks, which since January 1996 have been submitted to the PMA on a monthly basis. While the supervision capability of the PMA has been improving gradually, there is still ample scope for further strengthening it, especially through the recruitment of qualified staff and systematic on-site supervision.

Reflecting the rapidly evolving political situation, responsibility for overseeing the operations of banks in the WBGS has shifted in the past decade. Before 1993, the Bank of Israel (BOI) supervised all banks, with the supervision of the Cairo-Amman Bank done jointly with the Central Bank of Jordan (CBJ). Between end-1993 and December 1995, banks in Gaza and Jericho came under the jurisdiction of the PMA, while those in the rest of the West Bank remained under the jurisdiction of the BOI. Since December 1995, the PMA has been responsible for the supervision, regulation, licensing and the setting of reserve requirements for all banks in the WBGS. While the PMA law has not yet been approved, the Governor of the PMA exercises supervisory functions under existing laws in his separate capacity as supervisor of banks. The CBJ and the BOI maintain home supervisory responsibilities over branches of Jordanian and Israeli banks, respectively.

The PMA licenses banks, and sets minimum capital requirements and reserve requirements.9 The PMA in large part redeposits bank reserves with banks in the WBGS (with the exception of U.S. dollar reserves), thus having little effect on aggregate bank liquidity in the WBGS. Reserve ratios for JDs and NIS deposits are set at the same rate as in neighboring countries in order not to stimulate capital flow between the WBGS and those countries. PMA policies on capital adequacy, the liquidity ratio, and large exposure for a single customer and currency risk are expected to be approved in the coming months. While the PMA has already relicensed all banks in Gaza and Jericho, it is currently in the process of relicensing banks in the rest of the West Bank. A clearance and settlement system for checks and transfers denominated in JDs and U.S. dollars has been established.

Despite the strong and rapid expansion of the commercial banking sector described above, the level of development of the financial sector as a whole remains below that in other countries in the region. The range of financial institutions is still limited to commercial banks and a few insurance companies; there are no significant markets for long-term debt, equity capital or government securities; there are few instruments and options for risk management; and the range of collateral available to banks to securitize loans is limited.

B. Monetary Developments in 1995 and 1996

Monetary developments have been characterized by the continuing redistribution of the public’s assets from cash in hand to deposits and by stagnant bank lending due to political and institutional constraints. The consequent increase in net foreign assets—mainly claims by branches in the WBGS against their parent banks in Jordan—has resulted in a political dissatisfaction in the role that banks have been performing in the WBGS.

Deposits grew at an average rate of 7–8 percent per month in 1994–95 owing mainly to the transformation by the public of currency holdings into bank deposits, resulting from increased confidence following the PA’s assumption of power, coupled with the widening of the geographical area covered by banks (Table 7 and Chart 5). However, the rate of deposit growth dropped sharply from an average of about 7 percent in December 1994 to December 1995 to 1 percent in February 1996 owing to the impact of the border closures, possibly reflecting an increase in the precautionary demand for cash by the public (i.e., to minimize the risk of illiquidity) in conditions where such disturbances are seen as likely to restrict the movement of depositors, as well as of bank employees and other resources needed to conduct normal operations. The rate of growth has gradually recovered to an average of about 3 percent per month since April 1996, reflecting the easing of the closures.

Table 7.West Bank and Gaza Strip: Consolidated Accounts of the Deposit Money Banks, 1994–96 1/(In millions of U.S. dollars, unless otherwise indicated)
Reserves (with the PMA)120.4130.0156.4163.1195.2
Foreign assets1,112.01,038.61,190.01,287.41,285.9
Domestic loans and other claims96.6178.9273.7316.9343.6367.5395.4
Claims on government 2/3.1--------
Claims on nonfinancial public enterprises19.
Claims on private sector250.7309.1340.5360.0349.0
Unclassified assets208.8254.1–156.4195.0182.1
Fixed assets35.430.
Intrabank claims81.68.8215.828.727.7
Interbank claims48.462.2106.6112.598.8
Accrued interest receivable2.
Other assets41.4148.
Total deposits522.8803.61,211.01,264.31,522.91,569.21563.7
Demand deposits306.1375.6492.7463.3555.0540.4486.9
Time and savings deposits216.7428.0718.3801.0967.91,028.81,076.7
Foreign liabilities99.671.668.267.335.2
Government deposits 2/37.956.09.629.665.7
PMA deposits28.014.8101.8107.992.4
Capital accounts87.199.7108.5101.6137.3
Unclassified liabilities251.3233.2247.4137.4164.5
Intrabank liabilities84.110.6165.919.117.9
Interbank liabilities93.937.646.054.3117.8
Accrued interest payable3.
Other liabilities69.5180.030.457.521.0
Memorandum items:
Net foreign assets434.7668.21,012.4967.01,121.81,220.11,250.7
Demand deposits as a percentage of total deposits58.646.740.736.636.434.431.1
Rate of growth of deposits (monthly)–0.4
Domestic loans as a percentage of total assets16.017.816.018.216.718.319.2
Sources: For 1996, figures are from the PMA. For 1994 and 1995, figures were compiled by the Palestinian Economic Policy Research Institute (MAS).

Data for end–December 1995 are not available

Data from the Bank of Palestine may be incomplete.

Sources: For 1996, figures are from the PMA. For 1994 and 1995, figures were compiled by the Palestinian Economic Policy Research Institute (MAS).

Data for end–December 1995 are not available

Data from the Bank of Palestine may be incomplete.

Chart 5West Bank and Gaza Strip: Monetary Indicators, December 1994-October 1996

(In millions of U.S. dollars)

Sources: Palestinian and Israeli authorities; and IMF staff estimates.

The composition of deposits between demand deposits and time and savings deposits has shifted markedly since end-1994, with the proportion of time and savings deposits in total deposits rising steadily from 41 percent at end-1994 to 69 percent at end-October 1996. This has reflected the increasing attractiveness of placing savings in banks as a result of the increased competition between banks, in line with the expansion of the banking system, as well as the general shift in the holdings of savings from cash to deposits.

In addition to the shift toward time and savings deposits, there has been a shift in demand toward deposits held in U.S. dollars and other hard currencies, and away from Jordanian dinars, with the proportion of deposits in U.S. dollars increasing from 30 percent at end-September 1995 to 34 percent at end-January 1996 and 42 percent at end-October10 (Table 8). This trend reflects regional uncertainties, as well as institutional factors such as the fact that the PMA only renumerates U.S. dollar reserves and the removal of the restrictions imposed by the BOI on deposits held in U.S. dollars and other hard currencies following the transfer of jurisdiction from the BOI to the PMA toward the end of 1995.

Table 8.West Bank and Gaza Strip: Composition of Deposits by Currency, 1995–96
(In percent of total deposits)
Total deposits100.0100.0100.0100.0100.0100.0
In NIS22.819.918.719.819.518.0
In JDs46.244.544.840.838.939.1
In U.S. dollars30.434.335.437.340.341.8
In other currency0.
(In millions of U.S. dollars)
Total deposits1,012.51,211.01,264.41,522.71,569.21,564.3
In NIS230.9241.3236.7301.9305.4281.7
In JDs467.3539.0566.0621.9610.2611.0
In U.S. dollars307.4415.0447.9568.2632.1653.2
In other currency7.015.713.830.721.518.3
Source: Palestinian Monetary Authority.
Source: Palestinian Monetary Authority.

Domestic private lending has continued, since end-1994, to represent only a small part of total assets, with the loan-asset ratio stagnating in the 16–19 percent range.11 This low ratio is a reflection of the depressed local demand for capital by investors and the high risks of lending in the WBGS associated largely with the absence of a stable economic environment and political setting, as well as some institutional weaknesses. The latter include the absence of developed credit information and asset registration systems, which confines the collateral base for securitizing loans to land and personal guarantors, as well as the absence of a strong and stable legal framework. The authorities are working with the World Bank to develop a legal framework that would facilitate the pledging of assets as collateral.

Reflecting the constraints to domestic lending outlined above, banks have kept their assets largely outside the WBGS (primarily in Jordan), with the share of foreign assets in total assets remaining broadly in the 60–65 percent range. Holdings of foreign assets fell as a result of the closure in February-March but resumed their steady rise thereafter.

9The PMA has imposed a ratio of required reserves to deposits of 14 percent for deposits in Jordanian dinars (JDs), and 8 percent for those in New Israeli Shekels (NIS), while the ratio for the U.S. dollar is 10 percent. The required reserves are transferred by the banks on a monthly basis. Only the required reserves in U.S. dollars are remunerated.
10During the same period, JD deposits declined from 46 percent of total bank deposits to 39 percent, and NIS deposits declined from 23 percent of bank deposits to 18 percent.

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