Why Palestinians put money in banks instead of investing

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RAMALLAH, West Bank — Instability plaguing Palestinian political and economic conditions appears to be dissuading Palestinians from investing their savings, given the high risks that investments entail there. However, people’s preference for the safety of banks has created impressive growth in deposits.

Palestinian Monetary Authority (PMA) Gov. Azzam Shawwa said during an Oct. 2 workshop in the northern West Bank city of Nablus that individual customer deposits in Palestinian banks amounted to around $12 billion as of the end of August, which is a high figure in light of the deteriorating economic situation in the Palestinian territories.

In an exclusive interview with Al-Monitor, Shawwa said total bank deposits amounted to about $13.3 billion at the end of August. About 92% of that amount, or $12.2 billion, was deposited by individuals, while the rest came from local institutions and companies.

“In 2018, bank deposits grew by 6.7% year over year,” he noted. “Customer deposits grew at an annual rate of 8.5% over the last decade, reflecting customer confidence in the Palestinian banking industry.”

Customer deposits include current and call accounts ($4.6 billion, accounting for 37.8% of the total customer deposits), savings accounts ($4.1 billion accounting for 33.5%) and term deposit accounts ($3.5 billion accounting for 28.7%), he said.

The lion’s share of these deposits were made in the West Bank, while the Gaza Strip took in only $1.2 billion.

“The steady growth in customer deposits enabled banks to invest this money in credits extended to the public. This deepened the banks’ role as a financial intermediary between depositors and borrowers, as exemplified by the increase in lending facilities, which accounted for 69.4% of the total customer deposits at the end of August, compared to only 31.3% at the end of 2008,” he added. The growth “constitutes a source of strength and funding for banks, and the absence of a Palestinian currency is offset by a safe and effective banking environment in Palestine.”

The PMA established the Palestine Deposit Insurance Corporation in 2014. The corporation seeks to protect small depositors, enhance the stability and integrity of the banking sector, contribute to sustainable economic development, strengthen customers’ confidence in the banking system and raise the level of public awareness of the deposit insurance system.

Under the political and economic conditions plaguing Palestinians, this amount of deposits in Palestinian banks is deemed huge.

Asked why Palestinians are depositing their money at banks instead of venturing into investment projects, Tareq al-Haj, an economics professor at An-Najah National University in Nablus, told Al-Monitor, “I don’t think the Palestinian deposits have actually amounted to [around] $12 billion. This figure is blown out of proportion.”

Haj said there are several reasons that lead him to think so. “The economic situation prevents [most] Palestinians from owning such amounts of money,” especially because of the high unemployment and poverty rates. “Add to this that there has not been any clarification regarding the identity of the holders of such deposits. There is only a specific and small ‘rich’ category in Palestine,” he added, implying much of the money could have come from the rich.

The value of bank deposits is indeed shocking considering the unemployment and wages in Palestine. According to statistics published in July by the Palestinian Central Bureau of Statistics, unemployment in Palestine amounted to 32.4%, while 32.8% of the private sector employees in both Gaza and the West Bank are paid less than the monthly minimum wage of 1,450 Israeli shekels ($398).

According to a World Bank report published Sept. 25, “The economy in Gaza is collapsing, suffering from a decade-long blockade and a recent drying up of liquidity.”

It continued, “Gaza’s economy marked minus 6% growth in the first quarter of 2018. While the West Bank situation is not as dire currently, past consumption-driven growth is faltering, and the economy is expected to slow considerably in the coming period.”

Asked why Palestinians don’t venture into investments instead of keeping their money in banks, Haj said the high risks that investments entail in Palestine dissuade citizens from opting for such a scenario.

“There are a lot of factors and variables beyond our control, namely the Israeli occupation and restrictions on Palestinian installations and factories, and the Israeli control of resources and restrictions when it comes to investment requirements. These include production materials and the transfer of funds,” he explained, adding that all of these factors prompt Palestinian investors to refrain from investing their money in any projects, even if the deposit interest rate is low.

There is no unified interest rate on deposits, as each bank specifies its own rates based on its banking policies and financial strength.

Raja Khalidi, a research coordinator at the Palestine Economic Policy Research Institute – MAS, told Al-Monitor that $12.2 billion in customer deposits is a huge amount that shows that the banking sector has been developing over the past 20 years, which led to the accumulation of Palestinian capital in banks. This has allowed banks to expand their lending operations.

He said that Palestinian real estate investments are growing, in part because of the volume of deposits banks use to provide long-term, investment or consumer loans.

Khalidi further pointed out that Palestinian banks focus on consumer loans, followed by mortgage loans and then agriculture, industry and production loans. He stressed the need for investment policies to turn customer deposits into a source of growth.