In 2020, few economies in the Middle East suffered more than that of Palestine. As with its neighbours, economic activity ground to a halt across several sectors as a result of the coronavirus pandemic. While Israel’s vaccination programme is the fastest in the world, vaccines only began to reach Gaza and the West Bank in February 2021, at the same time as a resurgence in infections that lead to a tightened lockdown.
Compounding the economic woes was a dispute between the Palestinian National Authority (PNA) and the government of Israel over a potential Israeli annexation of West Bank territory, which saw PNA president Mahmoud Abbas refuse to accept transfers of tax revenue — accounting for 60% of the PNA budget — between June and November.
Bank of Palestine (BoP), the territory’s largest lender, announced the appointment of Mahmoud Shawa as its new chief executive in January, coinciding with the bank’s 60th anniversary. Mr Shawa, who previously served as the bank’s chief risk officer and chief financial officer, shared his predictions for the banking sector in 2021 with The Banker.
Q: What is the outlook for Palestine’s economy in 2021?
A: Palestine and the World Bank estimate that gross domestic product fell by 8% in 2020. However, with the gradual lifting of the lockdown and resumption of coordination between the governments of Palestine and Israel since November, pressure on public sector employees shall ease, pumping cash into the market after several months of stalemate. Additionally, the exposure of the banking sector to the government will be reduced, providing extra liquidity to lend to the small and medium-sized enterprise (SME) sector.
As a bank, we remain committed to local SMEs, which are responsible for 85% of economic activity in Palestine. We are working with multilateral development banks like the European Bank for Reconstruction and Development, the European Investment Bank and other regional funds to obtain new liquidity, with guarantees and technical assistance in order to sustain lending to the SME sector
As a bank, we remain committed to local SMEs, which are responsible for 85% of economic activity in Palestine
What is needed in order to push the recovery cycle is an infusion of additional liquidity by donors with reduced cost, with half of that liquidity as guarantees with discounted fees. These loan programmes will provide affordable liquidity with a host of guarantees and assistance to help in risk mitigation.
We are also expecting the resumption of aid from the US Agency for International Development, with the resumption of diplomatic ties between the PNA and the new US administration. This will result in new development projects and economic activity. As such, our outlook remains cautious, but hopeful.
Q: How has the pandemic impacted BoP’s operational performance?
A: The impact of Covid 19 has been universal throughout the economy, with some sectors — including tourism and entertainment — coming to a total halt.
Like our peers in the industry, in Palestine and elsewhere, we have taken an extra conservative position on the future outlook. We’ve increased provisions for 2020 in the midst of compounded market conditions, caused by the ongoing pandemic and a fiscal crisis caused by the political standoff.
We experienced a 41% drop in net profit for the 2020 financial year. Any recovery caused by the easing of political issues at the end of the year will not be felt immediately, but we remain hopeful that the impact will be felt by the end of 2021.
Despite the extra pressure on provisions and non-performing loans, the bank has seen an increase in deposits by 17%, with increased client confidence in the bank and its product lines. Credit facilities have also increased by 10% as a result of the bank’s credit and business teams working together to help clients adjust their business needs in light of a double slowdown as a result of a pandemic and a political financial crisis.
We have stood by our clients by working with them on restructuring and refinancing their loans. We have intensified the collection process and follow up as such. It is only natural that in the midst of these externalities, we have taken more provisions to cushion against an uncertain outlook.
We have also continued to enhance our operational performance, and increased digitisation to capture opportunities resulting from efficiencies and business alignment. We have seen an upside in the use of our digital channels during the pandemic by 400%. As such we will continue to invest in them with enhanced e-channels, mobile and internet banking for retail and corporates.
Our fintech company PalPay has recently launched the first e-wallet in Palestine, targeting the unbanked. All these developments are serious investments in our digital capabilities as a bank and as a group.
Q: Palestine is considered a high-risk area, how are banks able to mitigate risk and remain in compliance with international AML/CTF standards?
A: Palestine has a rigorous regulatory environment that follows international standards in compliance to anti-money laundering/combating the financing of terrorism (AML/CTF) requirements. The Palestine Monetary Authority is disciplined and well managed, especially when it comes to matters of compliance to AML/CTF standards. As a bank we have our own compliance department and our own AML officer reporting directly to the board’s risk and compliance committee, with strict review of all UN, European and international lists.
We have upgraded our AML function with reviews by international, third-party industry experts, and invest in new systems to continuously flag risks. We realise that in today’s risk environment — and especially in a region like ours — our compliance to the highest international standards is a guarantee for the soundness of our own operations, and also an important requisite for the multitude of international banks and agencies that we deal with throughout the globe.
Q: What are the implications of BoP's new HR structure, and what impact will it have on your operations in 2021 and beyond?
A: We are happy that we began the year 2021 with implementing the new direction and HR structure, producing value for our shareholders and stakeholders, as we move towards digitisation, segmentation and intimate customer service. The premise of the new HR structure is to empower our staff and inspire their innovative skills through working with them to explore growth and career paths, based on their leadership and innovative skills.
We are creating an innovation hub internally for this purpose and a talent management department to grow the talent and nurture it. We believe in our staff, their versatility and experience in a difficult market like ours — their resilience and their loyalty. We aim to reward the exceptional leaders and provide inspiration to the rest of the staff. The new HR system is designed to invest in young leaders by providing them with a fast-track career path ensuring productivity and efficiency. We will be equipping our human capital with direction plus new digital tools to help them engage better with our customers in order to grow the business with confidence and sustainability.
This HR strategy will correlate with the business strategy of segmenting the bank branches and operations to support corporate, SMEs and retail. From the rising stars among our staff will come regional hub managers who will be mandated to develop business, plus relationship managers for corporate and SME clients. This segmentation strategy is important especially in a post-Covid-19 era as customers require more attention and more engagement in order to work out their financial situation, as we maintain the health of our portfolio.
While human interface remains key for corporate customers, for retail customers, in addition to the premier services they will get, we will invest more in our digital channels and communications tools to ensure we provide speedy and efficient services to the growing retail segment, and especially the younger generation of customers. This reinvigorated approach of investing in our staff and investing in our customers will bear fruit in 2021 and beyond. We are projecting growth in operational profits by 10% in the years ahead as a conservative estimate.
