Smotrich moves to halt key banking protection for Palestinian economy

Finance minister cancels Israeli indemnity for Palestinian banks following Western sanctions, risking financial fallout in Judea and Samaria.

By David Brummer, World Israel News

Israeli Finance Minister Bezalel Smotrich has ordered the cancellation of a crucial financial safeguard that enables the Palestinian banking system to function, following sanctions imposed on him by five Western nations, according to the UK newspaper The Times on Wednesday.

The move could significantly disrupt the Palestinian economy, which relies heavily on its financial ties to Israel.

In a statement on Tuesday, Smotrich instructed the Accountant General of the Finance Ministry, Yali Rothenberg, to cancel the state indemnity granted to Israeli banks that handle transactions with Palestinian banks in Judea, Samaria, and Gaza.

The indemnity protects Israeli banks from legal liability when dealing with Palestinian financial institutions, a safeguard seen as essential for the continuation of monetary exchanges in shekels.

Smotrich justified the move as a response to what he called a “delegitimization campaign” being waged by the Palestinian Authority (PA) against Israel on the international stage.

His office said the PA’s actions had made continued financial cooperation untenable.

The decision follows the announcement earlier on Tuesday by the United Kingdom, Canada, Australia, New Zealand, and Norway to impose travel bans and asset freezes on Smotrich and National Security Minister Itamar Ben-Gvir, citing their rhetoric and actions concerning Palestinians in Judea and Samaria.

While Ramallah was not involved in the sanctions decision, Smotrich reportedly told associates he intended to “collapse the PA,” a longstanding position he has held due to the PA’s involvement in anti-Israel efforts at global forums such as the International Court of Justice and the United Nations.

Palestinian banks processed more than NIS 53 billion (roughly $14 billion) in 2023, almost all of it in shekels.

Without a central bank or sovereign currency, the Palestinian economy is reliant on its relationship with Israeli financial institutions to remain solvent.

Removing the indemnity could deter Israeli banks from continuing these interactions, potentially pushing the region toward a “cash economy” that Israeli security officials warn would benefit terrorist groups and undermine oversight.

In November, Smotrich agreed — under pressure from the Biden administration and Israel’s own defense establishment — to extend the indemnity for one year. That agreement now appears in jeopardy.

Western nations argued the sanctions were a response to inflammatory statements and what they termed “settler violence” in Judea and Samaria.

Smotrich and Ben-Gvir have long advocated for stronger Jewish presence and sovereignty in the region.

British Foreign Secretary David Lammy said the ministers “incited violence against Palestinians” and encouraged human rights abuses.

A joint statement from the sanctioning countries accused them of opposing a two-state solution and promoting rhetoric that leads to unrest.

Israel’s Foreign Minister Gideon Sa’ar condemned the sanctions as “outrageous,” while Downing Street emphasized that the measures targeted the individuals, not their government offices.

The Israeli government is expected to discuss its response next week.