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Palestinian Bank Assets Said to Rise to Nearly 6bn Dollars

Posted on: Friday, 14 October 2005, 15:00 CDT

Text of report by Ibrahim Abu-Kamish from Al-Birah, headlined "Palestinian bank assets reach 5.6bn dollars, expected to double by 2010", carried by Palestinian newspaper Al-Hayat al-Jadidah on 4 October

The Governor of the Monetary Authority, Dr George al-Abd, has disclosed that the value of the assets in the banking system operating in Palestine has reached 5.6 billion dollars with an annual increase estimated at 15 per cent. According to his expectations, the total value of banking system assets in 2010 will reach about 12 million dollars if the region remains peaceful and witnesses stability and progress in the peace process.

In an open meeting and conversation with the local press yesterday, Al-Abd said that for the first time in the history of the banking system, the percentage of local investments is reaching 51 per cent. They are higher than the foreign investments that have dropped from the highest level they reached in 2002 by 12 per cent to reach 49 per cent [of the total]. He confirmed the improvement of the banking system indicators with respect to a healthy increase in assets, high rates, and the stability of the deposits even during the days of the blockade and the incursions. He added: "Despite all of that, the assets only fell a little while currently there is a steady rise in the value of deposits that has reached 4.7 billion dollars. Of that, 4.2 billion dollars are from customer deposits."

He confirmed that all of the rates in the banking system will improve when the factors are achieved that will change the period of truce into a peace process and accomplishments are achieved on the road to peace. This is especially true in the area of removing the signs of the occupation like the roadblocks and closures and opening the borders to the movement of goods, workers, and capital. There must be broad openness between the West Bank and Gaza to the extent that the Palestinian economy's vitality will be restored.

He said: "If we take the facilities ratio of 42 per cent, then this will rise to 60 per cent of 12 billion dollars, according to the expectations for the year 2010. So we will have to have development loans of more than 8 billion dollars."

He renewed his assurance that, as long as we do not suffer setbacks or difficulty from the occupation or an intensification of it and its repressive measures, then we will move forward. This is especially true if the truce turns into a peace process and we are able to wrest more concessions from the occupation, especially the release of prisoners, the removal of the roadblocks, the opening of the borders with Jordan and Egypt, the creation of a safe passage between the West Bank and Gaza, and the establishment of a port in Gaza for trading with the other Mediterranean states. If we would be able to achieve that in the coming year, then the national economy and the banking system would both see a new and certain upsurge.

Banking system overcomes difficult phase

Dr Al-Abd explained that the banks operating in Palestine, both the foreign and domestic ones, had overcome the difficult phase to which they had been subjected during the 2000 to 2004 period. The banking system had gotten through this phase with less damage than the other sectors. He said: "If we were to look at the amount of the assets, not just the deposits, we would find that the year 2000 ended with total assets that were about 4.5 billion dollars. That includes all the debts, capital, and reserves at each bank. They fell to 4.2 billion dollars."

He said that 2002 was one of the most difficult years that the Palestinian areas had gone through due to the Israeli incursions. Then gradual resurgence and growth began until these assets rose at the end of August of this year to 5.6 billion dollars. He pointed out that this is a record number for the Palestinian banks since they achieved a rate of increase during the last eight months of ten per cent, i.e. an annual rate of 15-16 per cent in the increase of bank assets.

Reasons and factors for the foreign money streams

Dr Al-Abd explained that the value of bank assets is made up of foreign investments, facilities, credit, loans, and the bank's own investments compared with the value of its liabilities that are represented in the deposits of citizens, other banks, and the Palestinian [National] Authority, all of which total 5.6 billion dollars.

He said: "With that, growth has already been achieved because of the loosening of the political and economic situation since the end of the last year, the success of the presidential elections, and the continuation of the truce. This has given some relative reassurance to bank depositors outside of Palestine and encouraged them to return to do business with the banks in Palestine. The reduction in the military precautions had its effect on the status of the market, strengthening the confidence of businessmen, companies, and customers in the banks and reassuring them to increase the amount of their deposits.

"In addition, the banks have remedied the bad loan situation. The amount of these loans increased during the period of the intifadah. This has helped to change, rectify, or correct their financial positions. Aside from that, we have begun to have a monetary stream from abroad and that has helped to nourish the local banks' available resources. The foreign transfers are for a number of reasons. The most important of these are: the revitalization of the financial and real estate market and the construction sector; reform in the business place; and the revitalization of credit itself through credit advances, loans, and debit checking accounts."

He added: "As a result of the truce and the increase in liquidity in the Arab region and the Middle East, some of that has been manifested in monetary streams into Palestine in a very short period. We have seen a demand for real estate and the stock market has achieved monetary streams. So the annual increase in bank deposits will be 15-16 per cent."

At a time in which bank deposits have increased at almost the same rates, when the inter-bank deposits and the deposits of the Palestinian [National] Authority are excluded, the deposits of the citizens alone reached 4.2 billion dollars at the end of August of this year. Meanwhile, they were at their lowest levels in 2002: 3.4 billion dollars. That means that they have risen 800 million dollars in less than three years.

Lending resurgence

Returning to the problems through which the banking system has passed, especially during 2002, the overall credit or lending to deposit ratio had fallen to 28 per cent. This meant that only 28 per cent of all the deposits were spent to finance loans and facilities. He confirmed that the local banks have been lending out more of their funds than the foreign banks for the last ten years since their ratio of direct facilities to customer deposits has reached 61 per cent. That means that for every 100 dollars in the local banks, 61 dollars is loaned out. He pointed out that the ratio of direct facilities to customer deposits has currently risen to 42 per cent: 61 per cent for the local banks, 36 per cent for the Jordanian banks, and 37 per cent for the remaining banks. This means that for every 100 dollars, the banks have loaned out 42 dollars in various facilities, credits, and debit accounts.

He advised that total deposits with the Arab Bank are approximately 2.1 billion dollars of the original 4.7 billion dollars, i.e. 40 per cent of the total banking system deposits. The Arab Bank's direct facilities are about half of all those in all the banks operating in Palestine: 715 million dollars out of a total of 1.8 billion dollars.

Fallback in foreign investments

Dr Al-Abd confirmed that, after the measures adopted by the Monetary Authority, the banks undertook the rectification of their situations. During most of the years, except for 2002, the banking system allocated 62 per cent of available resources abroad at a time in which local loans were very limited. Deposits maintained their stability with a slight drop. When we began to have a surplus in depositing, the banks began investing it abroad while waiting for a loosening of the situation in order to bring those funds back for the sake of domestic investment.

In accordance with the directive disseminated to the banks by the Monetary Authority, it became necessary for them to invest the greatest possible amount of their deposits locally. In addition to the improvement of the banks' situation domestically, which increased their ability to find domestic lending opportunities, they improved their credit and lending capabilities. For these reasons collectively, the percentage of foreign investment dropped from 62 per cent to 49 per cent at the end of the month of August this year. It is the first time in the history of the banking system in Palestine that the percentage of foreign investment is less than the percentage of domestic investment.

Horizons of expansion in lending field

Dr Al-Abd confirmed that there is responsiveness towards investing in Palestine. In addition to the official funds that are expected from the donor states, he said that the former president of the World Bank, James Wolfenson, had called for securing three billion dollars annually: one billion to support the treasury, one billion for West Bank development, and one billion for development in Gaza. This is in addition to Palestinian capital abroad that appears ready to return to the homeland for investment or those who are ready to double their investments in it. Dr Al-Abd believes that there are huge official and non-governmental amounts that will be pumped in for investment in Palestine. He points to the existence of several projects including a loan guarantee project that the Americans are working on with the European Investment Bank, the Ministry of Finance, and the Aspen Institute in order to facilitate the lending process by establishing guarantees or insurances for 60 per cent of the risk. Both German and French foreign non- governmental organizations are endeavouring to expand the small and medium [business] lending sector.

He believes that there is extensive international, Palestinian, and regional interest towards investment in Palestine, something that will take shape and provide more opportunities to improve the Investment Commission with respect to laws, measures, and facilities that are provided to investors. In doing so, we will have a healthy upsurge in the area of investments and the banking system, which is trying to diversify the investment channels in phased projects that include long, medium, and short-term real estate, housing, and infrastructure mortgaging.

Failing banks... and the vision of developing the banking system

Dr Al-Abd disclosed the existence of failing banks whose positions are weak. It is difficult for them to fully engage in their banking activity because they have a scarcity of resources. There are banks that are not failing, but whose financial positions need strengthening. He said: "Therefore, we are inclined towards merging the Palestinian Commercial Bank with the Jordanian National Bank, just like we succeeded in merging the Islamic transactions of the Bank of Cairo -Amman with the Palestinian Islamic Bank. We have begun to have a busy Islamic bank with greater resources and a broader base of deposits." He explained that by merging the Palestinian Commercial Bank with the Jordanian National Bank by the end of the year, "we would have a single bank whose resources would be doubled that would be able to act forcefully in the area of credit and facilities so that it would be an effective element in the national domestic banking system."

Dr Al-Abd did not consider these two banks to be failing, but he did say: "We are following a strengthening and development plan so that their position will be stronger, especially since their financial position is weak and their size is small. Therefore, they are not able to take on various facilities and large projects. At the same time, we are interested in the national banks having sufficient size so that they are an effective element in the development of the national banking and economic system."

Dr Al-Abd revealed his vision for developing the banking system. He said that the Monetary Authority is relying on two phases for developing the banking system. The first is represented by a phase of recombination and rehabilitation. The second is represented by supporting and strengthening the banking system by dealing with the failing and weak banks.

He explained: "For two months we have been busily studying the International Bank of Palestine. We are on the verge of completing the financial study and the financial analysis of the bank's situation from 1997 until the present, a study of the oversight aspects since its inception, the measures of the Monetary Authority with respect to it, and the measures of the Monetary Authority to protect the depositors' money after taking control of it without exposing the banking system to risks originating from this bank's problems. This is in addition to the legal aspects of the actions of the bank itself."

He said: "All of these analyses have been completed and we will put them all together into a specific file. After that, in accordance with the law I will call for a general assembly to address the shareholders on the status of the bank as it is now." He confirmed that the bank does have losses and that its capital is exhausted since there is a thorough and precise analysis by international companies and international experts of the status of the whole bank and a setting of responsibilities.

He said that the alternatives for the failing bank are well known and set forth. As for its liquidation or restructuring, the pumping of new capital into it, the establishment of a working plan to reach the required oversight level, merging it with another bank to give it the ability to survive and develop through pumping in liquidity or capital, or helping them to install wise management, all of these are proposed alternatives. They will be discussed with the shareholders.

As for the Arab Real Estate Bank, he said that its operations are frozen but its funds are insured and there is absolutely no danger to them since the state of Egypt has pledged to cover any demand by any depositor in the bank for any of his money. He can access his funds immediately, without any delay. This is by guarantee of the "mother" Arab Real Estate Bank in Egypt.

He explained that the bank is suffering from exhaustion. It is not engaging in any lending activity or [credit] facilities because it does not have the funds available to do so because of the problems to which it was subjected in the late nineties. Agreement has been reached with the "mother" bank to take the necessary measures. He expressed his hope that the bank would resume its activities after it has been recapitalized and provided with the necessary amounts. He confirmed that Egypt intends to reactivate the bank.

As for the Islamic Al-Aqsa Bank, he confirmed that it has been targeted by the US authorities for unknown and unstated reasons. He said: "We are monitoring its status with the US authorities that have frozen its funds in Bahrain. They are insisting that the bank cease its activity while we do not have any evidence indicating the necessity of the bank ceasing its activity. There are no violations against it or problems. Therefore, we do not believe that there is any cause for the US allegations towards it." He said: "I will follow-up the bank's case with US officials during my coming visit to America. And if we do not succeed, we will merge it with another bank." He pointed out that except for the preceding, some other banks suffer from limited problems that can be overcome.

Investment Commission Weak; Inconsistency in Laws

According to Dr Al-Abd, the most important, decisive, and determining factors in the direction of money are the profit factor and the factor of the Investment Commission itself.

He said that the Palestinian Investment Commission suffers from extreme weakness not just because of the security situation and the failed loans, but also because of the banks that are refusing to lend in exchange for guarantees and collateral and because of courts that are not qualified and sometimes not independent. They are subjected to a lot of interference. The rights of the creditor are beset by stumbling blocks and the rights of the bank to collect are even somewhat less.

On the other hand, there is inconsistency in some of the laws that are in effect. "We are trying to fix them since within a month we will complete a review of 18 laws connected with the operation of the banks and the Monetary Authority. These include the laws for the Monetary Authority, the banks, bankruptcy, procedure, registration of companies, the financial securities market, and the Investment Encouragement Law.

"We are busily analysing them now, looking for inconsistencies in some of their articles and the weak points that they suffer from in order to remedy them." He said: "We have about 20-25 legal subjects that need to be fixed. We are also facing a situation that is aimed at dealing with the matter of money laundering through special legislation to fight it and fight illegal activities." He confirmed the existence of many places in the law that are in need of amendment and updating, especially the Procedure Law for implementing the provisions of the law and the rulings of the courts. "Without these steps, we will have some instability and ambiguity, something that does not encourage investment and lending." He confirmed the necessity of determining all the possible means for facilitating the work of the Monetary Authority and the banks and their operations and reforming the Investment Commission, the financing system, and the judicial system.

Factors of currency issue

With respect to the issuing of Palestinian currency, Dr Al-Abd said that linking the Palestinian currency to sovereignty is possible, but the former is not necessarily associated with the latter. The currency subject has many dimensions. The political dimension reverts back to the political leadership and it is necessary for the Monetary Authority to study the matter from the economic and financial aspects and their effect on the market. Then it must analyse the pros and cons of issuing the currency along with its timing, how it should be issued, and fixing its exchange rate.

He said that issuing the currency is one of the easiest things possible. The most difficult part of that is maintaining the currency's value against the values of the other traded currencies that have earned the confidence of the masses and the financial market.

In order to maintain the value of the currency, a number of conditions must be met. The most important of these is for the entity that is issuing the currency to gain the trust of the people and the market so that countries have a performance record in the management of public money and the economy.

As long as there is inflation in the governmental system and revenues are limited, despite the good performance of the tax system, then the tax pot is very weak due to the non-existence of economic growth. The size of the economy at present is actually less than it was in 2000 due to the decline that occurred because of the intifadah. The tax pot is tight and brittle and weak because of the blockade on the economy. Therefore, the first demand for the achievement of economic independence is the elimination of the occupation and granting Palestinian sovereignty so that it can be responsible for the Palestinian economy. "At that time we will be able to develop the economy with openness to the outside, attract investments, and create job opportunities. At that time, the size of the tax pot will be large. If we were to take 20 per cent of the taxes from it, it would be enough to cover the budget and more. Consequently, you would be able to manage financial affairs with wisdom and discipline and gain trust."

So economic independence must be achieved for the authority and growth must be achieved that is sufficient to cover the banks so that the fiscal policy is one that is reassuring to the market and the citizen. It is necessary for there to be fiscal stability so that the currency is not exposed to risk.

He explained that the Monetary Authority is adopting these conditions before rushing to issue the currency. He said: "We have begun to study these matters." He expressed his hope that during the next two years "we will be qualified to present the advice of the [Monetary] Authority with respect to the factors of economic and financial stability." He called for patience on this subject, pointing out that when the currency is issued [the Monetary Authority] will be responsible for monetary policy, setting interest and exchange rates, and controlling the balance of payments.

Seizure of authority funds in America

Dr Al-Abd confirmed that the Monetary Authority does not have any financial assets in America because it is subject to international agreements and laws that pertain to the clearing of the currencies that are circulated in Palestine. The daily settlements in Jordanian dinars proceed through the Jordanian Central Bank while those in shekels go through the Discount Bank and the Hapoalim Bank. Settlements in dollars must pass through a bank supervised by the US central bank.

He said that the daily settlements in dollars, as a result of transfers from inside Palestine abroad and vice versa, are all combined and sorted by debit and credit accounts with all the banks. These transfers go through a bank in New York that the International Bank of Palestine works with. These daily transfers are what have been suspended by the United States. The background for that is a case lodged against the Palestinian [National] Authority and the Palestine Liberation Organization because of the death of five persons, of whom three had US citizenship, near Ramallah. The effect of that was for lawyers in the United States to file suit against the Palestinian [National] Authority under the pretext that it caused their deaths.

He added: "It seems that the Palestinian [National] Authority did not have sufficient interest in the case. The basis of the PNA's defence is that the Palestinian [National] Authority has sovereignty and it cannot be tried in America. On this basis, the defence failed and the case was lost when the Rhode Island court issued a ruling and ruled against the PNA and the PLO and ruled for 116 million dollars as compensation [to the victims], fines, and lawyers' fees.

"In March 2005, attempts to appeal failed and the ruling became final. The lawyers followed up on the matter and they obtained a judgment from the judge in Rhode Island to collect these funds from any source connected to the Palestinian [National] Authority. So they issued a confiscation order and distributed it to all the banks in New York. So our transfers valued at 28 million dollars were seized.

"Inasmuch as we in the Monetary Authority are a central bank, we have relations with all the commercial banks and we filed a complaint against those who had caused the seizure. We completed all of the proceedings and we put our case before the judge in New York and we expect him to issue a ruling within days in our favour to lift the seizure and spare the Monetary Authority from any effect from the decision against the Palestinian [National] Authority and the Palestine Liberation Organization, considering that the Monetary Authority is an independent central bank. We submitted documents confirming that the Palestinian [National] Authority itself does not have any financial deposits with the Monetary Authority and we do not have any assets belonging to the PNA or the PLO. All of the assets in our balance sheet belong to the banks themselves through the necessary reserve and bank deposits. We even collected our capital through internal revenues. We proved our independence and we are not liable for the decision against the Palestinian [National] Authority. The American judiciary is now redacting the final decision by lifting the seizure on our sequestered funds." Dr Al- Abd confirmed that there still is a threat against the Palestinian [National] Authority and its property and funds with the Ministry of Finance, [Bakdar -as transliterated], the Palestinian Investment Fund, and the Pension Fund.

Dr Al-Abd explained that the Monetary Authority is presently inclined to open an account with the Bank for International Settlements in Basel, Switzerland so that all of its transactions will go through Basel in order to avoid these problems.

Source: BBC Monitoring Middle East

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