Banking in Palestine, despite the country's declining economy and political instability, continues to grow and expand. But while customer deposits are increasing, bankers are concerned by the lack of real investment and lending opportunities. In a recent report by the Ramallah-based Palestine Monetary Authority (PMA), the banking sector appears to be relatively sound as the total assets of the 20 local and foreign banks in operation grew by 7.2% to reach $7.9bn at the end of September 2009, compared with $7.4bn at the end of 2008.
The sector also remains well capitalised and profitable. As at the end of September 2009, banks operating in Palestine had a capital adequacy ratio of 22.55% - only 12% is required by the PMA - and efforts by the PMA to increase capital have seen banks' paid-up capital double to $704m, compared with $316m at the beginning of 2006. The PMA has also increased the minimum capital requirement of banks to $50m for 2010 and aggregate capital is expected to rise to $900m by the end of this year.
Meanwhile, net income after tax significantly increased in the first three quarters of 2009 to reach $70.4m, an 11.3% increase on figures at the end of 2008, emphasising the system's ability to withstand political and economic stress. Also, return on average equity reached 13.2% at September 2009, compared with 14.9% at December 2008.
Customers at the core
The core of the sector, customer deposits, remained remarkably successful, with total deposits (94.3% customer deposits) rising by 7.6% to $6.8bn as of September 2009 from $6.3bn in December 2008.
Despite the positive indicators, the banking system faces severe challenges, including economic and risk issues as a result of the conflict with Israel and the lack of a separate currency.
While the PMA acknowledges that the impact of the global financial crisis on Palestinian banking has been minimal for many reasons, including the economy's limited external financial relations, it also acknowledges that banks are "following conservative processes in granting loans and do take more than enough collateral due to the exceptional situation in Palestine".
Lending matters
Lending, or lack of it, represents a key issue for banks in Palestine. While direct lending rose 23.7% in the first three quarters of 2009 to reach $2.26bn, lending remains weak because bankers are not seeing the opportunities to lend and, showing traditional caution, are not willing to throw their money away.
As one Jordanian banker explained: "Out of Jd100 [$140.8] in deposits, only 25% is being lent. With banks 75% liquid, this is not a good yield, but more opportunities are needed. If the political situation is bad, such as in Gaza, there is no lending, no credit and so no economy."
Creating viable lending opportunities is critical and the PMA is trying to encourage consolidation and stronger local banks. PMA governor Jihad Al-Wazir was recently quoted as expressing concerns over tampering with Gaza banks by Hamas, the Palestinian political leadership in Gaza. He is also quoted as being interested in a Palestinian plan to resurrect the pound from a six-decade hiatus (it was the currency of the British Mandate of Palestine between 1927 and 1948) if it can manage to build a new state, securing its value with a dollar or multi-currency peg.
For now, the PMA, founded in 1995, is in the second year of a three-year plan to create a fully fledged central bank. Restoring the pound is a long-term goal - at present Gaza and the West Bank mainly use the Israeli shekel as a currency for daily exchanges along with the US dollar, the Jordanian dinar and the euro for savings and commercial exchanges.
The banks operating in Palestine are made up of 10 local banks, led by the Bank of Palestine, along with 10 foreign banks made up of eight Jordanian banks, led by Amman-based Arab Bank, and HSBC Bank Middle East. As at September 2009, together the banks had a network of 209 branches and offices in the West Bank and Gaza, comprising 104 local banks and 105 foreign banks. The banks operate 270 ATMs across Palestine, with foreign banks accounting for almost two-thirds of assets, deposits and lending.
The eight Jordanian banks account for 61 branches and 14 offices and the majority of banking activities in Palestine, with more than 50% of assets, deposits and lending. Arab Bank, Jordan's biggest bank, established in Jerusalem in 1930, is by far the largest banking player in Palestine, dominating all aspects of banking with 25 branches and 63 ATMs and accounting for about one-third of all assets, deposits and lending at the end of 2008. Arab Bank is more-than double the size of its nearest competitor, the Ramallah-based Bank of Palestine, which has 32 branches and is by far the largest local bank, almost three times larger in asset terms than Arab Islamic Bank.
As the table above shows, the leading Jordanian banks - Arab Bank, Cairo Amman Bank, Bank of Jordan and Housing Bank for Trade and Finance - dominate the listing and are followed by a large number of small local banks, including three Islamic banks.
