Bank of Palestine: Banking against the odds

Twenty per cent year-on-year growth is a good result in anybody’s book. But when Bank of Palestine achieved it, in its half-year results announced in August, it looked at first glance unfathomable. Banking, and the corporate life that banking supports, faces unparalleled challenges in Palestine, not least the division of the country into two unconnected halves, limited freedom of movement either between them or within them, and continuing occupation by Israel, which deprives West Bank citizens of everything from sufficient water to 70% of their own land. 

Still, that bounce in profits shows that even those circumstances are a vast improvement on previous horrors; after all, the second half of 2014 included a vicious war that killed more than 2,000 people.

The experience of business in Palestine is of inconvenience piled on obstruction piled on disadvantage. 

“Many parts of the West Bank are completely off limits, and there are only one or two roads that act as lifelines between the north and the south,” says Bank of Palestine’s CEO, Hashim Shawa. “There are checkpoints at lots of the junctions on those lifelines, and often situations where the Israeli forces just close everything down. It interrupts traffic, movement of people and goods, daily lives, everything, and it puts off people from doing things and spending money. It all puts a massive constraint on the true potential of the Palestinian people and economy.

“It’s a layer of problems on problems on restrictions on restrictions on restrictions.”

And yet: 20% profit growth, an asset base that grew even in the full-year result that included a 50-day war, return on equity of 14.4% in that same war-torn year, and one of the lowest nonperforming loan ratios in the Middle East. 

The next question is: how?

"It’s a layer of problems on problems on restrictions on restrictions on restrictions." says Hashim Shawa, Bank of Palestine

In order to understand this, Euromoney spends two days pinballing around the West Bank, meeting a range of the bank’s clients, from SMEs to those that have gone multinational, from returning rich expatriates to kickstarted Gaza Strip one-woman-band incubators. By recent standards, progress on the roads is smooth and we are rarely stopped for any length of time at checkpoints, but then again, our car has yellow Israeli plates rather than green or white Palestinian ones; if we had Palestinian plates, we wouldn’t be able to use many roads even on the West Bank, as those are reserved either for Israeli settlers (of whom there are now 600,000 in neat and ordered hilltop towns on Palestinian land) or Israel’s security forces.

Indeed, the first thing that becomes clear on the ground is that if the West Bank looks small on the map, that’s nothing compared to how small it is in practical terms of availability. Land is zoned here: Area A is entirely Palestinian in its administration and security, Area B is a mix, with Palestinian commercial control but Israeli security, and Area C is completely controlled by Israel, totally off limits for Palestinian use or development. The problem is, Area C is 70% of the West Bank despite being on the Palestinian side of the so-called Green Line, the demarcation upon which peace talks for a two-state solution have always been based. The World Bank says this land contains most of the West Bank’s natural resources and open spaces, and that if Palestine could develop it, the state could halve its budget deficit and expand its economy by a third.

The distinctions between the three areas are not obvious. Asked to explain them, Odeh Awwad, head of sales and marketing at Amaar Group, the real estate arm of the sovereign Palestine Investment Fund, takes a short drive from the Al Reehan residential property development his company has built outside Ramallah. 

“Area A,” he says, driving along, before turning right onto an apparently identical road. “Area B,” he says, and drives for a further minute to a junction. “Area C.” 

Nothing marks the delineations; nothing explains their zoning. But they cause hellish problems if, for example, one wants to build a new town to ease the housing pressures that this zoning has created in the limited available land: even if you find a bit of Area A or B big and appealing enough to build on, if the roads go through Area C – and in particular if the water supply does – then it’s not going to work. That, in turn, makes housing unaffordable in the relatively few places one can build. 

Residents of Ramallah – which, with the best will in the world, is not one of the Middle East’s beauty spots – claim their apartments are getting up to London prices.

Leaving aside the sense of injustice this engenders, it also has practical consequences for banking. Any bank needs collateral, naturally. But under banking laws, nobody can pledge collateral in area C, since legally they don’t have control of it anyway, and even in the other areas registration of ownership is problematic (though new legislation, the Removable Assets Law, should help). “Area C is the biggest imposition,” says Shawa. “There is literally 70% of our economy off the grid.” He says access to it would allow the economy to “easily, easily double”; while that’s more than the World Bank predicts, the multilateral does say the potential hit of the loss of that land is worth $14 billion.

Amaar’s Odeh Awwad: prices of new residential developments such as this one near Ramallah are comparable to those in London

The scales are tilted so far against Palestinians in so many businesses it sometimes beggars belief; doubting the rhetoric, Euromoney frequently goes looking for independent sources and finds the preposterous claims to be entirely true. So, for example, the World Heath Organisation believes that people should have access to 100 litres of water per day. In fact, on average, in Palestine people get an average of 60 litres a day, yet the Jewish Settlements – also on the West Bank – get an average of at least 250 (sources differ), explaining the incongruous verdant lawns and swimming pools one can see there. 

Israel controls all principle water sources in the West Bank and determines how much Palestinians can use, affecting not only individuals but also industry and agriculture.

And yet, and yet… somehow, companies thrive. Two terms appear again and again: resilience, and the ability to find a way. Shawa, who is just back from holiday, recalls being stuck behind an accident on the M1 between London and the Midlands and calling on GPS repeatedly to find off-the-map alternative routes. “I think the Palestinians have this in-built GPS system that tells them: if this way is blocked, there’s an alternative route,” he says, with some pride. “It’s not just how they get from A to B. It’s their way of doing anything, from banking to manufacturing ice cream. We always think of plan B, and then plan C, D, E, F and G, because you constantly have to prepare yourself for contingency plans. I think that has made us more creative.”

In Jenin, in the north of the West Bank, one of Palestine’s commercial success stories is run by a cheerful man called Nasser Abufarha with a permanently anchored dark blue fedora hat. Living for a while in Madison, Wisconsin, Abufarha came to understand the Fair Trade system in coffee, and decided to apply it to the olive oil industry in Palestine. He set up two things: a fair trade association and Canaan Fair Trade as a commercial entity, which consolidates 2,500 families with small scale farms into one trading channel. 

“Just being from Palestine is a disadvantage. It’s perception. People look at Palestine from the outside as a war zone.”  Nasser Abufarha, Canaan Fair Trade

The company has since diversified into almonds, spreads, za’atar herbs and soap. Guaranteeing a sustainable wage to farmers puts the cost of the product out of reach of locals, but it reaches a willing export market in the USA and elsewhere, as well as specialist ethical investors.

Canaan is an example of dealing with adversity and finding a way. “Just being from Palestine is a disadvantage,” says Abufarha. “It’s perception. People look at Palestine from the outside as a war zone.” Handling imports is difficult, complicated and slow, but the biggest issue is around water. “If someone wants to plant almonds and goes to the bank for a loan, the bank will be cautious because what if they can’t secure their water source? What’s going to happen three, five years from now? This is a structure that is denying me business, denying the farmer business and denying the bank business.”

So what to do? Find a way. “We’re pushing the farmers for high-value crops that don’t require much water.” They run a research centre to increase yield. And it works, though it could be better. With sufficient water. “I’d be doubling my income from what we have, at least,” he says. A food company in Holland wants to work with him on organic vegetables, but without knowing the water source will be consistent, it’s too much risk.

An hour further south in the city of Nablus, Zahi Anabtawi is the third generation of his family to run the Al-Arz ice cream company. The lesson here is the way Palestinian businesses have been able to use adversity to prompt alternatives. During the second intifada, a violent period of several years that began in 2000, Nablus was under siege for large periods. “At one point to get a truck from Nablus to Ramallah took about 12 hours,” Anabtawi says; it’s a distance of 50 kilometres that takes Euromoney just over an hour on the way to the interview. Rather than just fold, the company instead invested in cold rooms, deep freezers and distribution centres in places that were less restricted, such as Bethlehem and Hebron, and today those distribution networks give it an edge. 

It also started exporting, because for a time it was easier to export to Jordan – through a system called back-to-back, where one truck goes from Nablus to the Allenby Bridge at the border, and another truck crosses over from the Jordanian side, with the goods then moved on special pallets from one truck to the other – than to move goods down the road domestically. To this day, the company exports not only to neighbouring Jordan but more distant Iraq and Kuwait. But not to Israel itself; it has sought the right licences to do so for many years but Anabtawi says the applications are always ignored. “They don’t say no. They simply don’t give you a certificate.”

Despite these burdens, Anabtawi is expanding production from 2 million litres of ice cream a year to 8 million, which demonstrates great faith not only in exports but the potential of the Palestinian consumer. “I wouldn’t have invested in that capacity if I didn’t see any potential here,” he says.

When business has been built in tough circumstances, banking relationships tend to be very strong. Touring the West Bank takes a while, and not just because there’s no GPS. The branch manager for Nablus and the north stops the car frequently upon spotting a client so they can embrace and talk. He seems to know everyone.

This becomes clear on Mount Gerizim, the home of the vast majority of the world’s 775-strong remaining population of Samaritans. This is an important holy place for them, their equivalent of Temple Mount, the land they believe to be the first ever created on Earth. It also turns out to be the home of the world’s most magnificent tahina, the paste made from sesame seeds, produced in a factory here run by the Samaritans.

Here, as his father the High Priest of the Samaritans looks on, the factory’s general manager Yacop Abdulla Cohen recalls an incident in the second intifada when he desperately needed money but all banks below the mountain in Nablus were closed and the city under siege. Someone in the Bank of Palestine’s Gaza operations was able, by a circuitous route, to get him $400,000, which kept the company alive. He has never forgotten it. 

“I will never leave that bank. I will not look at how much commission they get from me, because they stood with me when I needed them,” says Cohen. The High Priest, in robes and red headdress, agrees firmly: a moment of bank loyalty about a decade ago is now strongly remembered by at least two generations of a family business that will probably still be here on the mountain in another couple of centuries. 

It’s clear that local knowledge, trust and reputation go a long way in the credit assessment process in Palestine. There is a credit bureau here, and it’s not as if the bank is blind to risk, but the sense of knowing your client is intensely personal and clearly relevant in any lending decision. This might seem quaint or even reckless were it not for the exceptionally low level of NPLs (2.2% at the end of 2014): these borrowers, no matter how difficult to pledge their collateral, no matter how badly hit their earnings streams by conflict or displacement, seem to pay back reliably.

“It’s still an Arab culture to sit and have a coffee with a bank manager and talk,” says Shawa. “It would be a huge mistake, and wishful thinking, to think that a whole society will just migrate from the way it has always done banking.” 

This is one reason that, at the same time as it has invested heavily in mobile banking technologies, electronic banking and the PalPay e-payment system, it has also consistently expanded its number of branches and intends to keep doing so. “Don’t forget that, in order to get money into the system, it has to go physically from under the floor or the mattress or the pillow and into a bank. So you need a branch and a branch manager to do the due diligence.”“It’s still an Arab culture to sit and have a coffee with a bank manager and talk,” says Shawa. “It would be a huge mistake, and wishful thinking, to think that a whole society will just migrate from the way it has always done banking.” 

Shawa also believes that Palestinians are good customers for a bank. “They don’t over-borrow, they have their own contingency planning cash buffers and their own network of family and friends,” he says. “This is still very much a society that is like the old days in Europe, where you help a neighbour or a farmer who has a problem with his crop one year. There is a degree of social responsibility here which unfortunately is slowly dying away in developed countries. And the result of that is in times of default the bank very, very rarely ends up having to foreclose or take the collateral. Almost zero.”

Another reason is that “customers all know each other, the branch manager knows his customers inside out, and there’s this thing of keeping your name clean in a village. You don’t want to default on a loan because everyone will know.”

“Customers all know each other, the branch manager knows his customers inside out, and there’s this thing of keeping your name clean in a village. You don’t want to default on a loan because everyone will know”

Perhaps this helps us to understand why Bank of Palestine has thrived by backing small to medium-sized enterprises; through a long-standing policy of empowering women, both within the bank and in the broader private sector; and has launched a $10 million early-stage incubator called Ibitkar, designed to accelerate technology ventures in Palestine and keep those founders who might otherwise be poached elsewhere. 

Backing the little guy, the early mover, the entrepreneur, fits with the sense of close relationships and knowing the client on the ground. For Shawa, this stuff elicits far more passionate responses than a question about the prospects for investment banking (it has a subsidiary called Al-Wasata Securities). 

“I don’t think we’ve reached anywhere near our potential in the basics of SME lending. Even on mortgages and credit cards we’re at the tip of the iceberg.” That’s little surprise: to get the credit cards business going the bank first had to get Visa and MasterCard to even acknowledge Palestine was a place, worthy of its own country codes. “Before moving to investment banking we still have a lot to do on the basics,” says Shawa.

If challenges are extreme in the West Bank, they are magnified in Gaza, where almost 2 million people live in a strip 25 miles long and three to seven miles wide. This, in recent times, is where conflict has come; this, with Hamas the de facto leader, is the place that seems furthest from any viable peace. 

Yet here, too, the most exacting of pressures can lead to innovation and growth. Iliana Montauk is an effervescent American who moved to the Gaza Strip three years ago and set up Gaza Sky Geeks, an incubator fund that raised its initial $267,000 of capital through a crowdfunding campaign. It focuses on the online and the virtual, which makes a lot of sense, when you think about it; after all, you can’t go anywhere, you can’t import anything without a considerable headache, and exporting is just as bad, so a business that can exist in thin air is the natural way to go.

She sees Gaza’s privations as a spur to the workforce. “I was just talking to someone who was launching a start-up accelerator in Kuwait, and in a way it’s harder to do it there than in Gaza, because to launch a successful business you need entrepreneurs who are hungry to launch a business and willing to work incredibly hard to make that happen,” she says. “In a place where people have guaranteed jobs you might not see as much thirst for that. In Gaza you can see a really strong pool of very eager, optimistic talent.” 

She says they’re the most productive people she’s ever met because nobody ever takes any annual leave. Why would they? They’re not allowed to go anywhere and there’s pretty much nothing to do. The people who work in the hub she’s created keep asking her to keep it open until midnight so they can get more work done.

Shawa is a Gazan, and Bank of Palestine was founded in Gaza, so he speaks of Gazan resilience with clear pride. “It proves the theory that the more pressure we are under, and the more constraints, the more creative we get as a people. Gaza has been under siege or closed for decades. Just over a year ago that horrible war killed at least 2,500 innocent people.” Among them were the pregnant wife, two children, mother and sister of one of the bank’s staff, when the apartment they had fled to received a direct hit from a helicopter rocket. 

“Almost 20% of the housing stock was completely obliterated. 120,000 people were made homeless. Gaza is completely cordoned off for trade and transport and movement and access, much more so than here. And despite that you have these extraordinary people,” says Shawa. When Bank of Palestine set up a mini-MBA programme, within two days applications from Gaza were outstripping the West Bank and Jerusalem combined by two to one. 

The bank does its best to be part of this innovation; since four hours of electricity is a typical daily reality in Gaza, and seven a very good day, it powers its ATMs through solar energy. Its clients routinely invent things. 

“You find so many people have built solar gadgets to recharge their phone and keep the lights on. We’ve had people running cars on cooking oil.” 

“Challenges are always there in business. It doesn’t mean you give up,” says Farouk Shami.

But the bank is as restricted by things as everyone else: Raya Sbitany, the bank’s head of investor relations and a dynamo in communicating its proposition to the world, has been to Gaza precisely once in her life and would find it very hard to enter despite it accounting for half of the (theoretical) country and a considerable chunk of the bank. Even Shawa is rarely there, though this is not the problem it once would have been. “We can go with difficulty, it’s not impossible, but these days we have daily video-conferencing contact with our executives down there.” He doesn’t see it as that different to his days at HSBC and Citi, when some staff would be in Canary Wharf and some in Lewisham or Hammersmith and they never physically met (though of course they could, which is not the case in Palestine). “It is a challenge, but not a show stopper.”

Palestine’s full potential can only be reached with peace and independence, and they look no closer today than they ever have.

“You will never have sustainable growth with occupation,” says Bassim Khoury, CEO of Pharmacare, which produces pharmaceuticals and is linked with a German partner. “You will have years that are up, years that are down, but you cannot change the fundamentals with occupation in place. You will only have islands of success that manage to do it despite everything.”

But it’s remarkable how sustainable a banking business can be built on just those isolated islands, despite it all.