Palestinian banks walk economic, security tightrope

RAMALLAH, West Bank, Oct 25 (Reuters) Bankers in the Palestinian territories worry less about boardroom battles and more about the daily fight to stay in business.

The threat of US sanctions has stopped banks dealing with the government. Disgruntled state workers, largely unpaid since March, have been vandalising automated teller machines and other bank property. And the economy is in freefall.

Some experts say the chaos threatens the long-term viability of the 11 Palestinian banks operating in the Gaza Strip and the occupied West Bank. A dozen Arab banks with branches here have also been badly hurt.

''Demand for credit is small because investment is shrinking and companies are either downsizing or closing,'' said independent Palestinian economist Samir Abdallah.

Fearful of being hit with US anti-terrorism sanctions and lawsuits, banks have refused to deal with the Hamas government since the militant Islamist movement took office in March.

Washington regards Hamas as a terrorist organisation and along with the European Union cut aid to the Palestinian Authority over the movement's refusal to recognise Israel.

At the same time, tighter credit requirements for government workers, who have not been paid full salaries for around seven months, and a dramatic contraction in economic growth this year, have shrunk other banking business.

The World Bank has estimated growth per capita in the Palestinian territories would fall by 27 per cent in 2006 because of the aid embargo and Israeli restrictions on movement.

''We are struggling to get our money back from those who have loans. Our big concern is to recover our debts and not to give credit,'' said a senior banker in the West Bank city of Jenin.

SOUND BASE Despite the crisis, financially banks are fairly sound, said the Palestine Monetary Authority, which acts as a central bank.

Its figures show total cash deposits of 4.1 billion dollar in August, compared to 4.2 billion dollar last December, the month before Hamas won elections.

While many customers, mainly government workers, have withdrawn their savings, remittances from Palestinians overseas have increased, bank officials say.

The officials say they are encouraging banks to increase their capital as a cushion against further shocks. Total bank capital has grown to 424 million dollar in the past 18 months from 316 million dollar they added.

But economic experts warned that the banks need to be able to build their loan books and earn fees from transactions.

There are few other ways to make money. Banks have invested only 100,000 dollars in the nascent Palestinian stock market, for example, the monetary authority said.

''Banks won't face a dire financial crisis and they won't go bust. What we are seeing is that banking activity has gone cold,'' said economist Naser Abdel-Karim.

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