![\"\"](\"https:\/\/www.gtreview.com\/wp-content\/uploads\/2026\/10\/AdobeStock_258206247-scaled.jpeg\")
<\/a> A surplus of Israeli shekels has been building up in Palestinian bank vaults as local lenders are restricted by a cap on correspondent bank transfers.<\/p>\nShekel transfer cap<\/p>\n
Compounding the issue is growing constraints on the repatriation of Israeli shekels, a major source of financing for crucial trades, both the PMA and UNCTAD said.<\/p>\n
Palestinian banks must use the shekel because they have no currency of their own. For the past six years, the Israeli government has capped transfers of shekels from Palestinian to Israeli banks at NIS18bn per year \u2013 transferred in four quarterly shipments of around NIS4.5bn (US$1.5bn) \u2013 which has consistently fallen short of the physical cash taken in by Palestinian banks each year.<\/p>\n
The Bank of Israel has in the past approved exceptional transfers above the ceiling to ease the build-up of cash in Palestinian banks, but no such exceptions have been granted over the last two years, according to a source familiar with the matter.<\/p>\n
As a result, billions in banknotes have now accumulated in local vaults, according to the Report on UNCTAD assistance to the Palestinian people. The UN body found NIS16bn worth of \u201cunusable\u201d physical shekels were sitting idle in West Bank vaults at end-2025.<\/p>\n
The PMA said the surplus stock of cash has since continued to increase, \u201creaching approximately NIS18bn (US$6bn) by mid-2026\u201d.<\/p>\n
A move by the Israeli government last month to bring forward the fourth-quarter quota has helped alleviate the shekel-surplus crisis, Shunnar said. However, with this year\u2019s quota already fully drawn and no further shipments expected until it is renewed next year, the surplus is projected to rise to around NIS20bn in the coming months, he added.<\/p>\n
Israeli restrictions on the repatriation of the currency \u201cdeprive Palestinian banks of these indispensable digital balances\u201d needed to pay for imports and cross-border transactions \u201cat a time when the need is most acute\u201d, UNCTAD warned.<\/p>\n
Before the escalation of conflict in October 2023, Palestinian banks financed approximately NIS51bn in trade with Israel per year, according to PMA estimates. This volume has since declined to around NIS40bn.<\/p>\n
\u201cContinued uncertainty regarding correspondent banking arrangements, the accumulation of excess shekel liquidity, the withholding of clearance revenues and restrictions on Palestinian labour are placing pressure on both the banking sector and the wider economy,\u201d Shunnar said.<\/p>\n
He warned of broader economic risks including reduced trade, higher prices and shortages of essential goods such as food, fuel, electricity, water and medicines, suggesting a \u201cfull crisis\u201d could arrive by the end of the year.<\/p>\n
Talks are currently underway between the Israeli government and Israel Discount Bank and Bank Hapoalim, but the PMA claims it has not been involved.<\/p>\n
The regulator\u2019s stance \u201cremains clear\u201d, the governor said. \u201cCorrespondent relationships should be long-term, sustainable, and free from political bias. Relying on temporary short-term extensions that are heavily politicised is not a solution.\u201d<\/p>\n
The PMA is also in discussions with international correspondent banks, but argues those relationships ultimately cannot replace the shekel channel.<\/p>\n
The Bank of Israel, Israel Discount Bank and Bank Hapoalim did not respond to requests for comment from GTR.<\/p>\n
Trade slump<\/p>\n
The Palestinian banking sector now faces a real risk of collapse, UNCTAD\u2019s report also noted, and lenders may soon be unable to sustain essential trade flows, which have significantly shrunk since the start of the war three years ago.<\/p>\n
The Palestinian trade deficit intensified in 2025, according to UNCTAD. Exports of goods and services fell 9% to about US$2.65bn while imports held at US$6.57bn, leaving a trade deficit of about US$3.9bn.<\/p>\n