Banking on West Bank prosperity

Ramallah, Occupied West Bank – Hani Daqqa says he is under no illusions that the Palestinian economy is in a volatile state. But that did not stop him from taking out two loans over the past three years to buy an apartment in the West Bank city of Ramallah.

For many Palestinians such as Daqqa, this has become the norm: taking out hefty sums from the bank to either finance a mortgage or buy a car, furniture or electrical appliances.

For Daqqa, who works in the HR department of a Palestinian investment company, the choice was either to dish out a monthly sum on rent, or take the plunge into debt and become the owner of a three-bedroom flat. The result was taking out two loans – the first of which comprised 52 percent of his monthly income.

“I was either going to spend $600 every month on renting a place or spend $1,200 over the next 10 years,” Daqqa said. “Yes, I knew it would be tough, but I also knew I’d own my apartment by the end of that period.”

Between Daqqa’s steady work and his wife’s occasional contractual jobs, the family says it has adapted to its financial situation, even though some experts would argue this kind of debt is beyond what’s manageable. “I know the country is in a precarious position,” Daqqa said. “But as long as I’m able to work, then I figure I should be fine.”

Twenty-years ago, when the Oslo Accords were inked between the Palestine Liberation Organization (PLO) and Israel, it was practically unheard of for Palestinians to take out mortgages, let alone personal loans for household appliances or luxury vehicles. Bank regulations were stringent and included, among many other prerequisites, securing several co-signers to ensure the loan was paid off.

Debt mostly consisted of personal loans given out among friends and family members, or included opening a “tab” at the local supermarket. “There was no trend to take out loans back then,” Daqqa said. “No one was even buying houses that much.”

But today some West Bank cities are overrun with flashy new cars and middle-class Palestinians are up to their ears in personal debt, courtesy of easy-to-receive mortgages and consumer loans made available in recent years.

According to the Palestine Monetary Fund, which effectively serves as the Palestinian central bank, individual loans shot up to about a billion dollars in 2013 – up from about US$494 million in 2009.

This reality is especially jarring in Ramallah, the West Bank city wrapped in relative privilege compared to other Palestinian area, especially the Gaza Strip. The international donor community has pumped vast amounts of money into this city, effectively creating an economic bubble – complete with an American-style lending system alien to Palestinian culture – which many fear could burst, taking the entire Palestinian economy down with it.

Prosperity and peace

Economists attribute this new culture of debt dependency to an increase in consumer credit and the pouring in of donor cash. For months, US Secretary of State John Kerry has talked about the development of the West Bank as key to bringing about peace between Palestinians and Israelis. During a trip to the Dead Sea in May, Kerry unveiled a $4 billion economic development proposal in the hopes that money being injected into this volatile area would boost the chance of reaching a settlement between the parties involved.

The idea of aid-for-peace is not new. Since the Oslo Accords were signed two decades ago, Palestinians have been given $4 billion worth of assistance by the US government, in addition to hand-outs from Europe, Gulf countries, Japan and others, making them “among the world’s largest per capita recipients of international foreign aid”.

The Palestinian Authority (PA) has backed this relatively new loan system by supporting banks with much more lax lending requirements, and with that, many Palestinians are now turning to banks for loans that can be paid off in monthly instalments for up to up 25 years.

Daqqa, apprehensive about the high interest rate, plans to pay off his mortgage in about 10 years. “I don’t want to wait for two decades and pay an exorbitant amount of money just in interest,” he said. “It doesn’t make sense economically, so I’ll have to live with this kind of financial responsibility for now.”

Risk-averse banks also have started targeting Palestinians because, loathe to provide loans for agricultural or industrial purposes, they prefer to dish them out to individuals. But whatever the risk factor, the Palestinian economy remains volatile, working within the confines of Israeli military rule that controls movement, border points and resources. Unemployment in the occupied territories is 23.9 percent, and the PA’s deficit stands at 607 million NIS ($170mn) this year, compared with 490 million NIS ($115mn) in the same period last year.

In 2006, international donors suspended aid when talk of a unified government including Hamas surfaced. Last year, after the PA’s successful bid to gain non-member observer state status at the UN General Assembly, Israel retaliated by withdrawing tax funds it normally collects on behalf of the Palestinians, causing a crisis that led to mass protests across the territories.

As part of the Oslo agreement, Israel and the Palestinians signed what’s known as the Paris protocol, which outlined the economic relationship between the two and included an understanding that Israel would collect taxes (on goods and people traveling through Israeli-controlled borders) and transfer them to the PA.

Bank crash?

If a suspension of foreign aid was to happen again, banks that give out mortgage loans are particularly vulnerable.

A Palestinian woman walks the separation wall [Getty Images]

“This is because there is no mechanism in place to ensure that the financial institutions can foreclose on property when homebuyers cannot meet their mortgage payments,” said Basem Makhoul, an economist. “There has never been one case of a foreclosure in Palestine; it’s practically unheard of. These particular loans also have very limited benefits. Their ability to boost job creation is low and even the production inputs [the materials used for building] are imported, so their benefits are minimal at best.”

Some say aid has transformed Palestinian society so drastically that it now promotes inequality and conflict among people.

“People begin to live beyond their means,” said Nora Lester Murad, a founder of Dalia Association, a Palestinian community foundation.

“Debt disables the most educated, most competent sector from being active critical members of their own society, because they are indebted to a system that is not in their own interest,” Murad said. “An elite class is created, one that no longer works collectively on a national level, but starts to work individually on an economic level.”

Makhoul said he believes this increase in personal loans – heralded by the abundance of aid – reflects a kind of consumerism not seen before in the territories.

“Consumerism has taken over the West Bank, which is something that doesn’t go with the low income levels here,” Makhoul said.

“This consumerism falsely suggests that we live in a rich country and creates a facade of normality. It’s like that saying: ‘We have the salaries of Somalia but we spend like we live in France.’ This has been happening in the last 20 years, and obviously it’s the donor money that has precipitated this phenomenon.”

Follow Dalia Hatuqa on Twitter: @daliahatuqa