Palestinian Banks Are Better Than Israeli Banks

Palestinian Monetary Authority governor voices complaints about the relationship between Israeli and Palestinian banks.

Jihad al-Wazir, governor of the Palestinian Monetary Authority, was 25 years old when his father, Khalil al-Wazir - better known as Abu Jihad - was assassinated. It happened in their Tunis home in April 1988.

Foreign press reports accused Israel of his assassination. At the time of the strike, Abu Jihad's wife and their two young children, Nidal and Hanan, were in the home. Jihad himself, the eldest son of five children, was studying in the United States at the time.

Abu Jihad was Yasser Arafat's deputy and the head of the Palestine Liberation Organization's military operations at the time, and was responsible for several murderous attacks in the 1970s.

"I heard about the assassination on BBC Radio. I came home right away and began to make the arrangements for the funeral in Damascus," he says, in his first interview with Israeli media.

Asked about his family history and their fate, he said dryly, "I'm a pragmatic person. My interest is that the Palestinians realize their hope for the establishment of an independent state."

We first met Wazir at the International Monetary Fund conference last month in Washington, D.C., when he spoke with former Bank of Israel governor Jacob Frenkel. Wazir took advantage of the assembly to rub shoulders with Israeli bankers and to voice complaints about the relationship between Israeli and Palestinian banks.

He is an open, educated, friendly man with a sense of humor, say his interlocutors. Wazir doesn't rush to disclose his heritage - either in conversation or in the resume that appears on the Web site of the Palestine Monetary Authority. Among Palestinians, he is well-known by virtue of his parents. But he is paving the way to his own identity as the governor of the central bank.

Nor is that the apex of his ambition. Wazir sees the governorship of the bank as a stepping stone to the Palestinian political leadership, on condition that Fatah, not Hamas, is in control.

The interview with Wazir took place at the American Colony Hotel in Jerusalem, which is a meeting place for many senior Palestinian Authority officials with their Israeli counterparts.

He arrived 50 minutes late.

"It's because of the line at the checkpoints," he apologized.

Wazir feels comfortable in the hotel. As a graduate of Western academic institutions, he speaks perfect English and it is apparent that he enjoys the position that enables him to be part of the international financial community.

Three years ago he served as deputy to Palestinian Finance Minister Salam Fayyad. The two, Wazir and Fayyad, are a dream for the Israelis who negotiate with them: practical, intellectual, reliable and pragmatic. In the case of Wazir, practicality is of particular significance, him being the son of the notorious Abu Jihad.

In early 2008, Wazir, 45, was appointed the head of the Palestinian Monetary Authority, which operates as a type of central bank in the Palestinian Authority territories, though with different rules. The Palestinians do not have a local currency, and therefore the monetary authority does not determine the interest rate and is not responsible for price stability - two main functions of central banks in other nations.

The currencies most commonly used in the territories are the dollar, the shekel and the Jordanian dinar, in that order. The sole task of the monetary authority is to preserve the stability of the banking system in the PA territories. There are 21 banks in the PA, all of them privately owned.

"We're lucky that all the banks are private," said Wazir.

According to Wazir, the Palestinian banking system is very stable, has strong financial ties and in many parameters operates as an advanced central bank. The PA purchased a risk management system from the accounting firm of PricewaterhouseCoopers, and it operates a system for rating the credit of private consumers.

All the banks in the territories are connected to this system and it enables the approval of a loan within a half hour. At a time when a low credit-to-deposits ratio is considered a point of strength in commercial banks worldwide, it is interesting to examine this ratio in the Palestinian banks.

Their total credit to the public is $1.8 billion, and their total deposits are NIS 7.4 billion. This is a system with a high level of security in international terms, although it is tiny and unimportant regionally.

In terms of assets, the Palestinian banking system is about the size of Union Bank - Israel's sixth largest bank. There are 180 bank branches in the territories, for a ratio of 20,000 people per branch, whereas in Israel, the ratio is 5,000 people per branch.

Wazir was born in Gaza but grew up in Jordan and Lebanon, a result of his father's - and other PLO heads' - flight from Israel.

"If you want to know where I grew up and where I was during each period, look at the stations in the life of Abu Jihad," he said with a smile.

When the PLO leaders were forced to leave Beirut and move to Tunis after the first Lebanon war, he moved to the U.S. and registered to study electrical engineering at Marquette University in Milwaukee, Wisconsin ("where Golda Meir grew up"). In 2001, he completed his doctorate in business administration at Loughborough University in England.

After the signing of the Oslo Accords, he moved to Ramallah and joined the public sector in the nascent PA. After serving as Fayyad's deputy, he was appointed the deputy of Palestinian Monetary Authority governor George Abed, and took his place at the beginning of 2008.

Wazir lives in Ramallah and is married to Suraya, 37, a judge in a Ramallah court, and the only Palestinian woman to graduate from Yale Law School. They have two children.

The global financial crisis, which has affected almost all world banks, has skipped over the banks that operate in the PA territories (two-thirds of them Jordanian and one-third owned by Palestinians). These are banks that are dealing mainly with a weak Palestinian economy, acute financial distress and security restrictions imposed by Israel on the transfer of money to the Hamas government.

The financial distress in the territories has already led to violent angry outbursts by residents at the directors of the bank branches. After Hamas came to power in 2006 the banks were put under pressure and had difficulty paying PA employees their salaries. One day, Wazir received a phone call from a director who had hidden in the bathroom after a client had threatened him with a gun to get his money.

"I have to deal with that too," Wazir said.

One problem in Palestinian banking is a backward legal system, he says. Loans being granted without get investigation of borrowers, and banks wind up financing political goals. "That is why regulation is needed," he said.

When it comes to the financial sphere itself, said Wazir, there is strict regulation that prevents the banks from investing in derivatives and in sophisticated financial devices.

"We operate under very difficult circumstances, and nevertheless our banks are in good shape," he said. "They are not allowed to deal in derivatives, and we have no exposure to hedge funds, to [collateralized debt obligations] and to subprime. My approach is that what I don't understand, I don't approve. If I don't know with which foreign bank our banks are working, I don't grant approval."

Wazir said the Palestinian banking system enjoys great public trust.

"The Palestinian public trusts our banks even though Hamas came to power and even though there are documented cases in which the Israeli army destroyed bank branches," he said. "The trust stems from the fact that the banks are well run and implement international regulations such as Basel II [regulations on risk management]."

In 2006 the PA began to implement a three-year reform in the Palestinian banking system, during which a reorganization was carried out in the PA itself. The number of employees was reduced from 318 to 240, international standards were introduced and the capital demands of the banks were increased. In the past, the minimum capital required to receive a permit to establish a bank in the PA was $25 million. It has since been raised to $35 million.

"Within three years we will raise the minimum capital requirements to $100 million," said Wazir.

"The adequacy of capital in the banks here is greater than in the Israeli banks, but the risks here are also greater," he said in response to a question about the capital and loan ratio. "Our system is not perfect, but we are working to improve it. In some areas our banks are in better shape than yours."

PA banking activity is very minor in regional terms, and is carried out with Israeli banks (to the tune of NIS 20 billion annually), banks in Arab countries and European and American banks.

The main problem, aside from the underdeveloped legal environment, is the boycott imposed by Israel and the U.S. against the Hamas government, Wazir said. The Israeli defense establishment sees the Palestinian banks as a pipeline for channeling money to Hamas and for funding terrorist activity, and therefore they are under heavy restrictions, mainly in Gaza.

Wazir claims that there is total separation, or as he puts it, "firewalls" between the Hamas government in Gaza and the banks that operate there.

"We have a very cautious policy that guarantees that there will be no exploitation of the banking system in Gaza by Hamas for its own purposes," he said. "There have been cases when suitcases with cash arrived in Gaza from Iran and from the Gulf states and we refused to accept them in the Palestinian banks. We are in a Catch-22. On the one hand we make sure there is a firewall between the banks and what is happening in Gaza, and on the other hand we are dealing with problems of liquidity in Gaza and are unable to transfer liquidity there from the West Bank."

He says that Hamas does not harm the banks.

"They understand that if they pressure us too hard that will cause paralysis of the banks and lead to acute crisis in the economy. There will be no money to pay salaries, or in effect, to pay for anything," he said.

One could have read about this trap in an August article in The Wall Street Journal, where a Hamas MP was quoted as saying, "Jihad [Wazir] is a weak person and his personal interests aren't with the Palestinian interests."

"Because of the boycott against the Hamas government and the battle being waged by Israel in order to bring back Gilad Shalit, the banks in Gaza are suffering from a problem of liquidity," Wazir shot back. "A large percentage of business activity in Gaza is done in cash and on the black market. In my opinion, Israel is actually reinforcing the strength of Hamas. Because if Mohammed from Gaza wants to sell merchandise to Shlomo he comes to the Kerem Shalom checkpoint and receives cash from him on the spot.

"Hamas members standing at the checkpoints demand a commission from the transaction, and in that way more money flows to Hamas and a black market develops. If this money would pass via the Palestinian banks it wouldn't happen - because our system is very tightly supervised, and it is primarily a Palestinian interest to ensure that the banks do not transfer money to Hamas.

"After all, we work with banks all over the world, like Citibank, Deutsche Bank and Morgan Stanley. They won't work with us if we don't meet international legal requirements against money laundering or the practice of 'know your client' (a procedure that requires banks to know who their client is and where his money comes from)."

During the interview, Wazir received a phone call from Stanley Fischer, the governor of the Bank of Israel.

"He is very supportive and tries to help us," said Wazir.

Fischer's help relates mainly to transferring money between Israeli and Palestinian banks and with international institutions such as the International Monetary Fund.

"We have received compliments about the administration of the banking system and even Stanley said that we are doing good work," Wazir said proudly.

As part of the cooperative drive between the two central bank governors, a few months ago it was agreed that Israel would replace about NIS 40 million in worn-out bills used in the territories with newer ones.

"There are no ATMs in Gaza, and everything is transferred in cash, so the bills become more worn out," said Wazir.

At this stage, only half the bills have been replaced, by means of a Brink's armored truck that came to the Erez checkpoint, but that was enough to make Fischer the target of condemnations by right-wing activists.

For now, Wazir seems to have chosen a career of senior public administration rather than politics, although he does not reject the possibility in the future.

"I'm not planning to go into politics now. My goal is to build a modern and solid central bank that will build up the Palestinian banking system in such a way that it will be prepared for crises," he said. "When Israel damaged the electricity supply to Gaza we were the only public system that continued to function. That is because we require our banks to have generators so that they continue to function even under disaster conditions. In our entire preparation for disaster scenarios I used the methodology of the Israel Defense Forces about which I once read at some conference."

In an interview with The Wall Street Journal, Wazir said that he will not meet with Defense Minister Ehud Barak who, according to the foreign press, supervised the assassination of his father from a ship in the Mediterranean.

When asked about it he acted uneasy.

"It's not personal," he said and immediately went back to talking about the Palestinian banks. "The Israeli defense establishment must treat the banks as humanitarian institutions. Banks have always been outside the political game and were not exploited in wartime either."

"The window of opportunity is gradually closing," he said about the chances of reaching peace with Israel. "If this time too we miss the opportunity to renew the process and to reach an agreement, we will see another escalation in the conflict. To return to square one after being so close to an agreement - that's unacceptable."