Evaluating Mergers as a Tool to Strengthen and Modernize the Palestinian Banking System: An Analytical Study of Palestinian Local Banks 2010-2017

Introduction

The safety of the banking system, in general, and the avoidance of any banking shocks, in particular, may weaken trust and confidence if some institutions are left alone to meet and confront bankruptcy or liquidation. These strong motives urge the monetary authorities to persuade and, sometimes, force such institutions to merge because the safety of banking is a vital guarantee to support the national economy. Therefore, the main task of monetary authorities is to ensure and continuously validate the banking structure. Moreover, monetary authorities have to assess the banks in a way that gives the correct answer to whether there is a need to move toward merger as an important tool to strengthen the banking system or use other means of integration that may be more useful and more convenient in terms of application¹ (Abdelfattah, 1992).

There is no doubt that some of the banks operating in Palestine suffer mainly from weakness in their financial indicators and from the small size of their capital especially those which do not meet the requirements of the Palestine Monetary Authority regarding raising their capital to reach the minimum required capital. In 2003, the Palestine Monitory Authority planned carefully to promote the idea of a merger to build strong Palestinian banking entities capable of coping with the challenges facing the Palestinian economy. Consequently, mergers and/or acquisitions between banks operating in Palestine became necessary. This allows for the formation of large banking entities that are capable of absorbing and confronting the expected and unexpected risks, as well as, to meeting the requirements of the Palestinian economy. Before 2004, there were no mergers in the Palestinian banking sector. In 2005, the Palestine Monetary Authority (PMA) announced the signing of an agreement between the Islamic Bank of Palestine and branches of Cairo-Amman Islamic Bank to sell the net assets of all transactions to Palestine Islamic Bank in a process known as banking consolidation in the form of acquisition.

The demand for mergers has increased, especially for small banks, which have taken this approach as a necessity to increase their competitiveness and to establish the principle of presence and continuity in the banking sector due to two main variables² (Yasin and Matay, 2008):

• 1.

  The Agreement on Liberalization of Banking Services that comes within the framework of the World Trade Organization Agreement which would increase the competition in the global banking market.

• 2.

  The capital adequacy standard should be at least 12% of the value of the banking obligations towards any bank in addition to other variables such as technological progress, the development of informatics and the consolidation of the phenomenon of giant economic blocs.