WEST BANK/GAZA BANKERS AND MONETARY AUTHORITY HEAD

C O N F I D E N T I A L JERUSALEM 002404

SIPDIS

SIPDIS

NEA FOR FRONT OFFICE; NEA/IPA FOR
WILLIAMS/GREENE/WATERS/WAECHTER; NSC FOR
ABRAMS/DORAN/LOGERFO; TREASURY FOR NUGENT/ADKINS

E.O. 12958: DECL: 06/08/2016
TAGS: EFIN ECON KWBG
SUBJECT: WEST BANK/GAZA BANKERS AND MONETARY AUTHORITY HEAD
WARN OF BANKING SECTOR PROBLEMS

REF: JERUSALEM 2245

Classified By: Consul General Jake Walles, Reasons 1.4 (b) and (d).


1. (C) Summary: Senior representatives of banks operating
in the West Bank and Gaza Strip warned June 7 that they will
cease extending credit in three months as a result of
non-payment of Palestinian Authority (PA) employee salaries.
Rising indebtedness of PA employees will soon require banks
to dramatically restrict available credit. Arab Bank, Bank
of Jordan, and Cairo-Amman Bank have already stopped lending
to PA employees. Although Palestinian Monetary Authority
(PMA) Governor George Abed announced publicly that the
banking sector remains fundamentally sound, in large part due
to PMA oversight, he said the situation may deteriorate
significantly after two months. Abed also noted that
Palestinian Authority debt to local commercial banks had
declined by USD 50 million, as of April 30, 2006, which he
attributed to local banks' application of domestic revenues
collected on behalf of the PA to overdrafts they held on
other PA accounts. End Summary.

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No Salaries/No More Loans
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2. (C) Arab Bank Regional Manager Mazen Abu Hamdan told
USAIDOffs and EconOffs June 7 that, with the exception of the
Bank of Palestine (BoP),banks operating in the West Bank and
Gaza have refused to pay PA employee salaries (reftel).
Because the banks have refused to accept any transfer of PA
funds and have not accumulated sufficient sums of domestic
revenue in the PA accounts that they still hold, they do not
have the means to pay salaries. He said that, since March,
banks have been providing advances and loans to PA employees
based on anticipated salary payments. PMA Governor Abed
affirmed to EconChief and USAID Deputy Director June 8 that
the PMA had encouraged banks to employ the greatest possible
degree of flexibility in dealing with their customers and
with the extension of credit facilities to PA employees for
three months, beginning in March.


3. (C) Abu Hamdan noted that banking regulations governing
delinquent loans will soon restrict available capital so
severely that by September 1 most banks will be virtually
closed for business. He explained that after three months of
non-payment on a loan, banks are obligated to set aside 20
percent of the loan's value. After six months, 50 percent of
the loan's value must be "classified." As a consequence, the
amount of capital available for loans is declining rapidly
and, if loans continued not to be serviced for six-months,
available capital will be so limited as to prohibit any
additional lending in September. In fact, citing their
obligations to shareholders and customers, Abu Hamdan,
Cairo-Amman Bank Regional Manager Joseph Nesnas, and Bank of
Jordan Regional Manager Mahmoud Takruri confirmed that three
banks had recently decided to cease providing such advances
and loans to PA employees due to a reluctance to take on any
additional risk.

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Banks Can Cope, For Now
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4. (C) Abed said that PA employee debt had amounted to
around USD 282 million in February 2006 but, due to
additional loans and credit facilities provided in response
to the non-payment of salaries, had grown to USD 370 million
by the end of April 2006. Abed confirmed that the PMA's
provisioning requirements for non-performing loans will
ultimately require banks in the West Bank and Gaza to
drastically restrict the availability of credit in as little
as two months. However, he noted that the banks, at the
PMA's request, had capitalized a significant portion of their
record 2005 profits, which totaled USD 113 million, thereby
increasing shareholders' equity of banks operating in the
West Bank and Gaza to USD 572 million, with capital of USD
316 million. He noted, however, that if loans to PA
employees are fully classified after 12 months of
non-performance, those loans would exceed banks' capital.


5. (C) Abed also described how banking system assets had
continued to grow at nine percent until the fourth quarter of
2005, reaching a peak of USD 5.6 billion. In late 2005 and
the first quarter of 2006, there was a 3.5 percent decline

due to lower overall economic activity and an increase in
lending, so banking system assets stood at USD 5.4 billion in
March 2006. (Note: Abed cited the loan to deposit ratio as
at 46 percent, lower than elsewhere, given the local economic
conditions. Abed said there were no dangerous signals yet
from private sector loans. He noted that most are highly
collateralized and banks are undertaking some rescheduling in
order to avoid classifying them as non-performing. End note.)

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PA Debt Declines
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6. (C) Abed said the PA's debt to local commercial banks had
dropped from USD 610 million at the end of 2005 to USD 560
million as of April 30, 2006. He attributed this decline to
banks' application of domestic revenues collected on behalf
of the PA to overdrafts they held on other PA accounts. Abed
noted that the Arab Bank held the largest amount of PA debt
but that all of those loans were now collateralized. He also
felt that BoP had sufficient coverage. Smaller banks are
slightly more exposed, he said, but the amounts are small.
Abed asserted that classifying PA loans, generally considered
as sovereign debt, as non-performing would be highly unusual.
WALLES