Palestinian banks in the West Bank are overwhelmed by a surplus of Israeli shekels due to Israel's cap on cash returns, leading to a liquidity crisis that hampers daily transactions, business operations, and essential service payments.
At a currency exchange bureau in the West Bank city of Bethlehem, an employee meticulously counts stacks of Israeli shekels, a scene that has become all too familiar across the Palestinian territories.
The same image repeats: customers withdrawing cash from ATMs, businesses depositing receipts, and banks grappling with an unprecedented surplus of physical currency. This surplus is not a sign of prosperity but a symptom of a deepening financial crisis that is gumming up the machinery of daily life. The Palestinian banking system is drowning in shekels, with more cash flowing in than can be effectively managed, stored, or redistributed.
What was once a practical arrangement for a cash-based economy has turned into a logistical and economic quagmire, undermining the ability of banks, businesses, and households to conduct ordinary transactions. The roots of this problem lie in a conflict between the Bank of Israel and the Palestinian Monetary Authority (PMA), the body that oversees Palestinian banks.
Israel imposes a cap on the amount of physical currency it will accept back from the West Bank, a limit that has not kept pace with economic growth. With fewer channels to return shekels to their point of origin, Palestinian banks are accumulating cash at an alarming rate. They cannot convert these physical notes into electronic balances that can be used to pay suppliers, process transfers, or extend loans.
The result is a severe contraction in liquidity, even as vaults overflow with useless paper money.
"The banks have been shackled" in their ability to deal with the crisis, said Mohammad Manasra, deputy governor of the PMA, who described the situation as "economic warfare. " Unlike most central banks, which routinely take back cash from commercial banks and credit them electronically to settle payments, the Bank of Israel refuses to absorb more than a fixed amount. This policy has been in place for years, but the imbalance has worsened dramatically.
The Palestinian economy runs almost exclusively on physical shekels, and more cash enters from Israel than can exit. Employers in Israel and its settlements pay Palestinian laborers in cash, and Palestinian citizens of Israel often spend shekels in the West Bank on goods like cigarettes and fuel. This continuous inflow creates a massive surplus that sits idle in bank vaults, neither earning interest nor being recycled into the economy through loans and investments.
Israel's official cash transfer limit from the West Bank's banking system is 18 billion shekels ($5.9 billion) per year. However, banks now accumulate an estimated 30 billion shekels annually, according to Moayad Afaneh, an economist who has advised the Palestinian Authority. The excess cash is trapped, creating a cascade of problems. Banks must pay for extra storage and insurance for vaults bursting with shekels, and they are forced to limit the amount of cash they accept from businesses and households.
That pushes ordinary Palestinians and companies to seek alternative, often insecure, ways to store their money, further eroding confidence in the formal financial system. The crisis has been exacerbated by the war in Gaza and its spillover effects. Since the conflict began in October 2023, fewer Palestinians have been permitted to work in Israel, reducing a major source of income and, paradoxically, the flow of new shekels into the economy.
At the same time, Israel has withheld tax and customs revenues collected on behalf of the Palestinian Authority, leaving it unable to fully pay public sector workers for over a year. Finance Minister Bezalel Smotrich has openly threatened to use "economic strangulation" as a tool to prevent the creation of a Palestinian state. The excess shekel problem is therefore not merely a technical banking issue but a direct attack on the economic infrastructure of the West Bank.
"It is directly affecting the government's ability and the private sector's capacity to continue providing services to major industrial sectors and the Palestinian people," Manasra warned. He noted that most of the West Bank's fuel and electricity is imported from Israel or purchased from Israeli utilities. With banks unable to process payments efficiently, these essential services face disruption.
The crisis illustrates how monetary policy can be weaponized in an occupied territory, turning a practical inconvenience into an existential threat for a society that depends on fluid cash circulation
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