Box 1. Reforms by the Palestine Monetary Authority
The Palestine Monetary Authority (PMA) has continued institutional reforms, supported by IMF technical assistance. The PMA’s principal goal is to support a healthy banking system through rigorous supervision and prudential regulations in line with international practice. These regulations are applied to all Gaza and West Bank banks through regular on-site and off-site supervision. The PMA applies a broad range of prudential instruments, including required reserves ratios, minimum capital requirements, minimum liquidity ratios, and limits on credit concentration and currency exposure. Since 2008, it has been monitoring banks’ compliance with a corporate governance code in line with Basel II standards. The PMA’s medium-term objective is to become a full-fledged central bank, and over the past year it has made progress in several areas:
- The PMA has further strengthened the supervision and regulatory framework. It has advanced along its roadmap aimed at a full implementation of Basel II standards by end-2011. In May 2010, the PMA issued regulations governing the disclosure of information by financial institutions according to those standards. In January 2010, a unit was created at the PMA to enforce “Fair Lending Regulations” to standardize and improve the quality of information on banks’ credit policies and conditions applied to borrowers and guarantors. In August 2010, regulations governing the process of commercial banks’ mergers and acquisitions were adopted. These regulations are being applied to two recent bank mergers undertaken to strengthen the smaller banks’ capital base. The PMA has also been applying Basel standards and procedures in the liquidation of banks that cannot meet prudential standards, including the liquidation of the Principal Bank for Development and Agricultural Credit in 2009 and the Al-Aqsa Islamic Bank in April 2010.
- In July 2010, a modern credit scoring system became fully operational as part of the online-based credit registry, further enhancing the quality of information on borrowers’ creditworthiness and facilitating bank’s lending to new customers. The check-tracking system, in operation since end-2009, has contributed to the decline in bounced checks by an estimated 27 percent during the first half of 2010.
- The PMA is aiming at completing the installation of an electronic payment system by end-2010, including a Real Gross Time Settlement System (RGTS) and an Automated Clearance House. The system will raise bank payments’ efficiency and help reduce liquidity risk. User Acceptance Testing (UAT) of the system, in line with international practice, has started in July 2010, with a view to identifying potential problems before the start of operation scheduled for January 2011. The PMA will be holding workshops in the remainder of 2010 to train staff of commercial banks in the use of the system.
- A new Banking Law to strengthen the financial sector’s legal framework has been approved by the Cabinet in March 2010, and is expected to be signed by the President by October 2010. A new Central Bank Law, which guarantees the independence of the PMA, is currently being reviewed by the Cabinet. An Anti-Money Laundering (AML) law has been in force in line with international standards since October 2007, with technical assistance from the IMF and USAID.