JERUSALEM: Two Israeli banks will halt working with their Palestinian counterparts in the coming months citing risks of associating with “possible terrorism financing and money laundering”, Israeli officials said, fuelling concerns of a Palestinian economic crisis.

Israeli officials and the head of the Palestinian central bank said that Israel Discount Bank will stop its association with Palestinian banks on Sept 1 and Bank Hapoalim will follow suit on Oct 1. Both banks work with several Palestinian lenders. The move comes against the backdrop of the Gaza conflict and deepening friction between Israel’s right-wing government and the PA.

Israeli Finance Minister Bezalel Smotrich, who oversees the waiver mechanism enabling cooperation between Israeli and West Bank lenders, has repeatedly withheld a portion of tax revenues Israel collects on the Palestinian Authority’s behalf and publicly questioned the PA’s legitimacy, straining an already fragile financial relationship.

Yahya Shunnar, governor of the Palestinian Monetary Authority, warned of regional economic instability should the Israeli banks sever their ties with Palestinian banks.

“These channels are a cornerstone of the infrastructure that underpins our trade, our commerce, our government operations, and the livelihoods of millions. Their disruption would have profound consequences not only for Palestinians but for Israelis (and) for regional stability,” he told diplomats in a meeting in Ramallah on Thursday.

Israel’s finance ministry said the correspondent banking relationship is important and discontinuation “could have negative implications for economic stability in the region and could also lead to increased risks of money laundering and terrorist financing due to a shift to unregulated, cash-based alternative financial channels.” Yet, it said, the Palestinian Authority’s activities in “financing terrorism through various means have created a severe risk environment for the Israeli banks that maintain financial interfaces with it.”

The PMA’s Shunnar, however, 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.” The US Treasury has previously urged the Israelis to maintain banking ties with the West Bank to avert an economic crisis there that could also affect Israel’s security.

Shunnar said Discount and Hapoalim process 51 billion shekels ($16.6 billion) a year in transactions for the PA while 90pc of Palestinian trade such as food, fuel and medicines passes through Israel. Trade and the supply chain would be at risk of collapse, he added. Shunnar also noted that billions of shekels in cash remain frozen in Palestinian banks.

Published in Dawn, July 24th, 2026