The Intifada and Its Impact on the Banking System in the State of Israel

Article excerpt

Introduction

The Intifada -- Arabic for uprising has had an impact on economic activities in the State of Israel.(1) Banking activities, as measured by both deposits as well as loans, have been effected in both the Israeli sector (as defined by the pre 1967 borders) as well as in the West Bank and Gaza Strip (WBGS). This paper discusses the effect of the Intifada to both sectors as seen from the perspective of the banking system. Conclusions are then drawn about mutual growth and integration of these two sectors in the pre Intifada period and their divergence during the Intifada period.

Banking In Israel

The banking system in the State of Israel is modern and well developed. Its banking laws are structurally and functionally similar to those of the Federal Reserve System.(2) Banking is fully integrated within the Israeli sector with a large proportion of routine transactions such as depositing of payroll check and routine paying of bills done electronically.

In the West Bank Gaza Strip (WBGS) area however, bank usage is different. Based upon conversations that this author has had with officials of the Bank of Israel, as well as his own personal observations, usage varies greatly among different groups. For those individuals who make up the majority of the population in this area, banks are used as a check cashing facility. Any savings done by this group is held as cash under the proverbial mattress. Little is bought on credit and hence little loan activities. A second group in the WBGS whose contact with banking is likewise limited are those wealthy residents of the area who tend to bank outside of Israel. The group which has the most contact with banks in the WBGS area comprise those middle class individuals whose incomes are high enough that holding savings in the form of cash is impractical, yet are not wealthy enough to bank overseas. It is these middle class individuals whom the author believes are the ones being analyzed as the WBGS depositors and borrowers in this study.

The Intifada and Its Impact on the Banking System of Israel

Deposits

During the pre Intifada period of first quarter 1983 until third quarter 1987 (Table 1), deposits in both the Israeli as well as WBGS areas grew. Average quarterly growth rates were 25.46% and 26.19% for the Israeli and WBGS sectors respectively.

Growth in deposits during the Intifada period, which begins in December(3) of 1987, show a slowdown in growth for the Israeli sector to 3.60% and a decline in the WBGS area to -2.59%.

TABLE 1
Percentage Quarterly Growth Rates for Deposits 1983-1988
Israeli Versus WBGS
                      Israeli        WBGS
Pre Intifada
1983-1987             25.46%         26.19%
Intifada               3.60%         -2.59%
Source: Annual Statistics of Israel's Banking System (various
issues).

A regression of quarterly pre Intifada WBGS total deposits versus Israeli deposits (Equation 3.1) indicate a positive and statistically significant relationship between deposits in both sectors.

TDWBGS = 2.05812 + .0002148 TDI (3.1)

(28.787)(*)

Adjusted R Square .98 F(1,17) = 828.7(*)

* Significant at the 1% level.

The number within the bracket is the T statistics

Where:

TDWBGS are total New Shekel deposits in the WBGS.

TDI are total New Shekel deposits in pre 1967 Israeli

borders.

Performing a regression on the percentage quarterly growth rates in the WBGS versus Israeli (Equaion 3.2), for the pre Intifada period, likewise shows a positive and statistically significant relationship between the two sectors.

PCCWBGS = .05528 + .82310 PCCIS (3.2)

(6.123)(*)

Adjusted R Square .68 F(1,16) = 37.49(*)

* Significant at the 1% level.

The number within the bracket is the T statistics

Where:

PCCWBGS is the percentage change in New Shekel deposits in the

        WBGS. …