Reports have revealed that Palestinian banks are likely to be isolated from the Israeli banking system as of next week.

This comes after the Israeli Finance Minister’s decision to halt dealings between the two financial institutions, according to a report published by the Israeli newspaper Haaretz.

Israeli Prime Minister Benjamin Netanyahu has scheduled a cabinet meeting to discuss the ramifications of Finance Minister Tzachi Hanegbi’s plans to isolate Palestinian banks from both the Israeli and international banking systems.

The Palestinian economy relies on the Israeli currency, the Shekel, making it dependent on relations with Israel. Additionally, its financial transactions with the rest of the world must pass through the Bank of Israel and Israeli banks.

Threats to the Palestinian Authority’s economy

Earlier this month, far-right Israeli Minister Smotrich threatened to cripple the Palestinian Authority’s economy in response to the United States imposing sanctions on four extremist settlers in the West Bank accused of committing violence against Palestinians.

Israeli banks complied with the sanctions despite Smotrich’s calls not to adhere to them.

Two Israeli banks, Discount Bank and Hapoalim Bank, currently maintain relationships with Palestinian banks within the Israeli and global banking systems.

To protect them from lawsuits filed against the Palestinian Authority for “transferring funds to terrorist groups,” the Israeli government has issued annual waivers for the banks, signed by the Finance Minister.

Smotrich now refuses to renew the arrangement that has been in place for years.

Without this protection, the Palestinian Authority will be stripped of immunity, and Israeli banks will be susceptible to lawsuits, with expectations that they will sever ties with Palestinian banks.

What does the severance mean?

The repercussions of isolating the Palestinian Authority from the financial world and the Israeli economy will significantly cripple the Palestinian economy.

Haaretz mentioned that any Israeli company with business ties to the Palestinian Authority will no longer be able to deposit Palestinian checks or receive payments from Palestinian banks.

Even Palestinian workers, who were supposed to receive their wages only through bank deposits under a 2022 agreement between Palestinian and Israeli authorities, will not be able to continue receiving their wages in Israel unless they are paid in cash.

Other areas affected by Smotrich’s move include Palestinian export and import operations, which pass through Israeli ports, and Palestinian tax revenues collected by Israel.