Abstract
Political uncertainty, war, sanctions, and administrative
restrictions have been a traditional feature of the Palestinian economy for the
best part of the 20th and 21st centuries. Nowhere are the impacts of the
political uncertainty and sanctions felt more than that of the region’s credit
market. Credit access and financial inclusion in Palestine are among the lowest
for comparable, emerging economies worldwide. However, it is noteworthy that
amid the geopolitical uncertainties and constraints on Palestine’s economy, the
region’s microfinance sector continues to produce good financial results. The
Palestinian microfinance industry originated in the 1980s and eventually
developed into one of the essential foundations of the Palestinian economy
today. The sector provides a vital supporting framework for the region’s
private industry and the vast majority of mid- and smallsized enterprises.
Nevertheless, there is a dearth of literature that examines the dynamics
involved in the historical development of the industry. The extant study also
pays scant attention to the effect of sanctions and regulatory restrictions on
the success of Palestinian microfinance.
1. Introduction
The Disputed Palestinian Territories, also known the Palestine
Territories or simply Palestine, comprise of three territorial areas in the
Middle East region: East Jerusalem, the West Bank, and the Gaza Strip. The term
Palestine officially defines these three regions of the Middle East that have
been controlled by the Israeli government since the Six-Day War in 1967 (Karsh,
2020). After several dialogues between the Israeli state and the Palestine
Liberation Organization (PLO) at Oslo in 1993, the territories were given
minimal economic and political autonomy under the rule of the Palestine
National Authority (PNA) (Karsh, 2019). At the very same time, Israel continues
to retain full civil and military influence over more than 60 percent of the
West Bank region.
Since the signing of the Oslo Accords in 1993, Palestine has
undergone a protracted period of diplomatic volatility marked by a perpetuation
of military conflicts that have attracted thorough investigations by academics
in the academic world at large. Whereas the extant literature on Palestine
indicates in-depth investigations of the political and social backgrounds of Palestine,
it also shows that scholars have paid less attention to the complexities of the
Palestinian economy and its underlying market climate (Karsh, 2020). Notably,
the current literary material on Palestine generally neglects two crucial
thematic areas that are essential to a sufficient understanding of the
Palestinian economic context.
The first ignored topic region concerns the effect of prohibitions
and sanctions on the economy of the Palestinian territories. Since 1967 when
Israel first captured East Jerusalem, the Gaza Strip, and the West Bank, it has
pursued gradual military and economic steps that have been counterproductive
and inhibitive to different sectors of the Palestinian economy (Karsh, 2020). The
limited analytical data that is available suggests that Israel’s restrictive
policies have resulted in some negative economic effects for Palestine,
including economic disequilibria, underdevelopment, and permanent development
in some cases.
The second neglected scholarly subject in terms of the Palestinian
economy concerns the growth of the credit market, in particular the existence
and dynamics of the economic system microfinance and microcredit institutions (Karsh,
2015). The dearth of information regarding this second field of interest
prevents a wider view of the Palestinian economy, provided that there is a
substantial body of scholarly data demonstrating that the credit sector has a
crucial and active role in promoting macroeconomic performance (Karsh, 2018).
Specifically, developing nations like Palestine do not adhere to the loci used
in the vast majority of economic and financial studies, which usually
concentrate on the formal banking system and the stock market in their
discoveries of a given region’s credit sector. Rather, the operation of the
credit market in developed economies depends on the distinctive positions of
not-for profit organisations, including microcredit institutions (MCIs) (Karsh,
2015).
Scholarly participation in Palestine’s microfinance or microcredit
industries is bolstered more by the reality that microfinance is undeniably a
key source of funding for the wider Palestinian economy. Palestine’s informal
sector accounts for 40 percent of the economy and employs nearly one-third of
the region’s working population residing in the private sector.8 Additionally,
90 percent of the region’s private industry is dominated of small and medium
enterprises (SMEs). Palestine’s commercial banks are hardly involved in
financing these SMEs, especially those in the informal sector, thus placing
microfinance at the forefront of financial the mainstay of the Palestinian
economy. Furthermore, it is noteworthy that despite the geopolitical
uncertainties and the sanctions and constraints on the Palestine industry,
which cumulatively build a challenging market climate, the region’s
microfinance sector appears to achieve positive financial results (Karsh, 2017).
1.1 Research
Objectives
The following goals drive this pursuit of generating evidence-based
information on the evolution of Palestine’s microfinance industry:
• Explore the growth, progress, and performance of Palestine’s
microfinance sector
• Ascertain the influence of the microfinance sector in Palestine
• Assess the relationship between Palestine’s banking and
microfinance sectors
• Assess the relationship between the macroeconomic situation in
Palestine and the region’s microfinance sector
• Assess the effect of exogenous and endogenous influences on the
success of Palestine’s microfinance sector
2. Literature
Review
The 1993 Oslo Accords between some of the PLO and the State of
Israel allowed the inception of a banking system in the Palestinian Territories
for the first time in far more than three decades.57 The newly formed data
validation rapid growth over the ensuing decade, growing to 22 banks by
December 2004.58 This rapid growth was focused on the strategic approaches
adopted by banking institutions in earlier years to extend their branch
networks to small towns located outside of the region’s main cities under the
supervision of the PMA(Karsh, 2019). In 2006, for example, the PMA accepted
more than 15 new companies by leading banks in the banking sector (Karsh, 2005).
By December 2006, there was 22 banks in service in Palestine (Karsh,
2019). Of these, 12 were foreign organisations, 11 of which were based in the
Middle East and North Africa (MENA) region. More precisely, 10 banks were of
Jordanian descent and one was Egyptian, and their credit policies were decided
by their headquarters in Amman and Cairo, accordingly. There were individual
laws enforced in addition to the PMA policies and regulations (Karsh, 2020).
The remaining 11 consists of ten local Palestinian banks and one
multinational bank based in London (Karsh, 2016). The number of banks in the
region by December 2008 was representative of the sector’s stability. Between
2001 and 2008, the sector retained a constant number of banks. While the number
of banks remained steady over these seven years, the period was marked by
gradual growth in the number of branches from 124 to 190. Of these, 144 served
in the West Bank and 46 in Gaza (Karsh, 2016).
Nevertheless, Palestine’s banking sector also has undergone many
exits and new entries since 2008, but with a marginal effect on the sector’s
structure. According to the PMA, the total lot of banks in Palestine as at the
end of 2015 was 16, with 7 local banks and 9 international banks.65 Of the 16
banks, 14 were traditional banks that managed 90 percent of the region’s
financial assets, and two were Islamic banks that handled the remaining 10
percent .66 Moreover, the banking sector had 300 money changers and 13
specialist lending institutions by the middle of 2015 (Karsh, 2015).
Based on the 2017 projections by the PMA, the structure of
Palestine’s banking sector has undergone comparatively minor improvements since
2015. Seven local banks and eight international banks are currently operating
in the area, plus 392 individual and business money changers, and six
specialist lending institutions.68 Figure 8 below is a visual description of
the sector’s present structure, including names of existing banking
institutions, their years of establishment, and number of leaves that each
performs in the Palestinian territory (Karsh, 2017).
Palestine’s banking sector regulates the country financial system,
and it appears to have retained a relatively stable and sound performance.77
One statistic that suggests this is the collection of deposits, which grew
(although not linearly) between 2001 and 2008. However, the rise in deposits
was not balanced with a comparable development in the amount of loan provisions
by the financial institutions.
3. Methodology
The architecture of this analysis is a triangulation of qualitative
testing approaches featuring the combination of primary and secondary sources
of data. Qualitative analysis requires the empirical study of phenomena with
the goal of retrieving nonnumerical insights on the topic under observation
using the experimental method. The questions motivating the qualitative
research approach are the when, how, why, and when connected with a subject of
interest and not the quantifiable measurements of the phenomenon of interest.
That is the inverse of quantitative analysis, which is applied when one is
involved in the counts or measurements of a phenomenon. Nearly all scholarly
fields that concentrate on the individual dimensions of the social and natural
sciences use qualitative analysis methods. In the field of finance and
economics, the method has numerous uses including studying economies, industry,
and economic conditions for factors that could be more non-numerical in nature
such as ethics, customer behaviour, motivation, among other applications.
This study’s selection of the qualitative design is influenced by
the non-numerical nature of its subject, respectively, how the microfinance
sector in Palestine evolves and how MFIs in the area work. Most important, the
qualitative approach has the intrinsic advantage of having greater depth and
specificity about the subject matter of interest relative to the quantitative
alternative.
4. Discussion
The aim of thematic analysis is to detect and recognise various
trends within the available data, consequently creating emergent themes that
eventually become the classes for analysis.119 A thematic analysis performs a
close examination of data based on its characteristics with the goal of
uncovering themes pertinent to the phenomena under exploration. This analysis
uses the research goals detailed at the start of the paper as the collection of
predefined codes and thematic sections in which the observations from the
primary and secondary data are organised.
Based on the incorporation of data from primary and secondary
sources, it is obvious that the microfinance industry in Palestine has both
direct and indirect positive socioeconomic benefits for the country. The most
prominent among these is the beneficial effect that the company bears on SMEs
across different economic sectors. New survey data of the Palestinian economy
shows that more than 90 percent of the private sector is consisting of small
and medium-size enterprises. These companies similarly recruit about 92 percent
of the overall workers working in the area. The region’s economy, in turn,
relies on the private sector as its lifeline.
Additionally, the sector’s main effect on the Palestinian economy
stems from the role it plays in alleviating poverty and fostering financial
inclusion, equality, and individual/community autonomy (Karsh, 2019). In
particular, the positive impacts on equality and financial inclusion relate to
the women and youth who represent the bulk of MFI clients and borrowers. These
two communities are among the most disadvantaged and poor in Palestinian
society. Therefore, Palestinian MFIs have a positive effect on incentivizing
social equity and development, which results in enhanced standards of living
and reduced levels of poverty at the household level.
Second, the care of for-profit MFIs in Palestine is also a problem
faced by sectoral players. While the new regulatory framework requires MFIs to
file as for-profit companies, thus escaping the above legal issues associated
with not-for profit MFIs, the current climate positions for-profit MFIs at a
competitive disadvantage compared to other players in the credit industry. This
is particularly true because NGOs enjoy a tax-exempt status and loan loss
reserves for which their for-profit counterparts do not apply. For-profit MFIs
often do not apply for deductions that are frequently provided by approved
finance companies and banks (Karsh, 2020).
5. Conclusion
The literature review in the first and second chapters presented a
comprehensive account of the development of the microfinance sector in
Palestine in terms of the region’s predominant macroeconomic climate. While
documentation on the subject was sparse, the analysis herein offers a cogent and
consistent integration of the extant literary evidence from various fields of
disciplines and study methods, thus adding to the current body of information
on the Palestinian economy. The insights provided by the thematic analysis can
be grouped into three subject areas:
1. The Palestinian microfinance sector has substantial, optimistic
socioeconomic results in the region. Thus, it is in the best interests of all
involved parties to strategize on how to reproduce and optimise the positive
results yielded by the business.
2. The microfinance sector in Palestine reacts both positively and
negatively to two external variables, respectively, the macroeconomic climate,
especially the Israeli sanctions and restrictions on the Palestinian economy,
and the environment within the wider financial system, notably the sector’s
interactions with both the formal banking sector.
3. There are two endogenous factors that affect the microfinance
market, namely, the prevailing regulatory environment and the relevant monetary
policies and practises.
Overall, based on the information produced in this report; it is my
opinion that the implementation of the recommendations suggested herein will
promote further development and expansion of the Palestinian microfinance
market.
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