The Palestinian financial system expanded substantially in the last three years. This expansion was particularly large in the banking sector, which increased its deposits by almost 700% in this period. Some expansion has also taken place in the equity market. In contrast, lending NGO’s which accounted for most lending in the WBGS before 1994, saw a decline in their relative weight in the financial system. Pension funds and insurance companies, which account for a significant share of investable funds in many countries, do not presently play important roles in the WBGS financial system and their roles are not expected to increase significantly in the near future.
The sudden and rapid increase in banking activity over the previous three years is significant. At the end of 1993, only two Arab banks with 13 branches were operating in the WBGS. By the end of 1996, there were 16 banks and 71 branches. Of total branches operating in the WBGS at the end of 1996, 49 were in the West Bank and 22 were in the Gaza Strip.
The WBGS banking system is dominated by foreign branches. Most of the foreign banks operating in the WBGS are owned, at least partially, by Palestinians in the Diaspora, and one, the Arab Bank, actually started its operations in Jerusalem. However, these banks report to foreign monetary authorities and their operations in the WBGS are subject to the approval of these authorities, thus limiting Palestinian regulatory control over them. In this sense, they are branches of foreign banks and are referred to as such in this chapter. Of the 16 banks operating in the WBGS at the end of 1996, only four were locally chartered. Of the 71 branches, locally chartered banks accounted for only 20. The dominance of foreign branches is particularly strong in the West Bank, where they accounted for 39 of the 49 in operation at the end of 1996. In comparison, foreign branches accounted for 12 of the 22 branches in the Gaza Strip.( Additional Information on Banks are available somewhere else on this page.)
At the end of 1996, the number of persons per branch (NPPB) for the WBGS was 35,699. Separate figures for the West Bank and the Gaza Strip were 32,741 and 43,774, respectively. Compared to other countries in the Middle East, the NPPB for the WBGS is lower than Egypt (47,831), Yemen (135,657) and Syria (155,194). lt. is however, substantially higher than Israel (3,464), the UAE (11,260), Lebanon(11,924), Jordan (13,024), and Saudi Arabia (19,755).
Based on a survey conducted at the end of June 1996,15% of individuals over 18 years old in the WBGS have deposit bank accounts
This ratio, referred to from now on as the bank account ratio (BAR), is higher among men (17.5%) than women (12.4%). The BAR is highest among urban residents (1 7.8%), followed by residents of the rural areas (1 4.1 %)and refugee camps (11.5%). It varies considerably between occupations: it is 38.5% for professionals, such as doctors and engineers, and 48.3% for businessmen. In comparison, the BAR for laborers, farmers, students and housewives is 10%, 9.1%, 7.4% and 8.9 %, respectively.
Regionally, the BAR is substantially lower in the Gaza Strip (6.4%) than the West Bank (20.2%). Within the West Bank, it is highest in the middle districts (23.8%), followed by the northern districts (20.5%) and then tsouthern districts (17.6 Within the Gaza Strip, it is higher in Gaza City (7.4%) than the rest of the Gaza Strip (5.9%).
Based on branch and number of accounts data, a recent study (Hamed, 1996) concluded that the Palestinian banking system still has some room to grow. However, the study calls for a slow down of bank expansion to give bank regulators the chance to build the necessary supervisory capacity.
While banks began operating in 1981 in the Gaza Strip and in 1986 in the West Bank, the combined bank deposits in the WBGS at the end of 1993 was only $219 million. By the end of 1996, these deposits reached $1,711 million, which represents an increase of almost 700% in 3 years. However, the growth rate of deposits seems to be slowing down. Of total deposits at the end of 1996, $462 million were in the Gaza Strip and $1,249 million were in the West Bank. In percentages, the respective shares of the West Bank and the Gaza Strip were 73% and 27%. The share of the Gaza Strip in the WBGS total is significantly lower than its share of total population, which is estimated at 38% (PCBS, 1996c). Despite recent expansion, the WBGS still has a relatively low deposit-GDP ratio. At the end of 1996, this ratio was around 57.5. Comparable ratios for Jordan, Kuwait, Israel, and Egypt were 82.5%, 77.1%, 73.4%, and 72.8%, respectively. If this ratio is to become equal to Jordan’s, total bank deposits in the WBGS can potentially reach $2,455 million. This is, however, not expected to take place before a successful conclusion of final status negotiations, because political uncertainties may force many WBGS residents to maintain bank accounts abroad.
WBGS bank deposits are denominated in three main currencies: the Jordanian dinar), the New Israeli Shekel (NIS), and the US dollar. The relative shares of the three currencies in the Gaza Strip were more or less stable in 1996 . The share of the NIS in the West Bank was also stable. The shares of the JD and the dollar in the West Bank, on the other hand, changed significantly in 1996, with the dollar gaining at the expense of the JD . At the end of 1996, the shares of the NIS, JD and the dollar in total deposits in the West Bank were 20.5%, 45.3%, and 33.2%, respectively. Comparable figures for the Gaza Strip were 17.9%, 17.2%, and 64.3%, respectively.
At the end of 1996, the share of checking accounts in total customer deposits in the WBGS was 34.4% Comparable figures for the West Bank and the Gaza Strip were 35.2% and 32.4%, respectively. While these shares have declined substantially in the last few months, they are still relatively high. In contrast the shares of current accounts in total deposits in Jordan and Israel are 19.3% and 5.5%, respectively.
Domestic lending by the WBGS banking system is still quite limited.
At the end of 1996, bank loans accounted for less than 19% of total assets in the WBGS. Other uses of funds at the time were deposits with the head offices outside the WBGS (44.8%), deposits with other banks outside the WBGS (17.6%), and deposits with other banks in the WBGS (2.4%). As a percentage of deposits, total loans at the end of the same month represented 23.9%. In comparison, the loan deposit ratios for Jordan and Israel are around 0.95 and 0.80, respectively.
The loan-deposit ratio in the WBGS varies considerably between currencies. At the end of 1996, it was 0.354 for the NIS, 0.37 for the JD and 0.148 for the dollar. The low dollar loan-deposit ratio can be attributed, at least partially, to the fact that most local bankers are the product of the Jordanian banking system where, until a few months ago, dollar lending was discouraged in order to reduce pressure on the national currency. Hence, despite the absence of a national currency, it is going to take a change in the local banking culture for dollar lending in the WBGS to increase significantly.
A relatively high share of loans extended by banks operating in the WBGS is in the form of overdraft facilities. Despite a significant decrease in the last few months of 1996, the share of overdraft facilities in total bank lending in the WBGS at the end of that year was still 64.3% . On a currency basis, such shares were 94.9% for the NIS, 57.4% for the JD and 36.9% for the dollar.