# The intifada and its impact on the banking system in the state of Israel.

Introduction

The Intifada -- Arabic for uprising has had an impact on economic activities in the State of Israel.(1) Banking activities, as measured by both deposits as well as loans, have been effected in both the Israeli sector (as defined by the pre 1967 borders) as well as in the West Bank and Gaza Strip (WBGS). This paper discusses the effect of the Intifada to both sectors as seen from the perspective of the banking system. Conclusions are then drawn about mutual growth and integration of these two sectors in the pre Intifada period and their divergence during the Intifada period.

Banking In Israel

The banking system in the State of Israel is modern and well developed. Its banking laws are structurally and functionally similar to those of the Federal Reserve System.(2) Banking is fully integrated within the Israeli sector with a large proportion of routine transactions such as depositing of payroll check and routine paying of bills done electronically.

In the West Bank Gaza Strip (WBGS) area however, bank usage is different. Based upon conversations that this author has had with officials of the Bank of Israel, as well as his own personal observations, usage varies greatly among different groups. For those individuals who make up the majority of the population in this area, banks are used as a check cashing facility. Any savings done by this group is held as cash under the proverbial mattress. Little is bought on credit and hence little loan activities. A second group in the WBGS whose contact with banking is likewise limited are those wealthy residents of the area who tend to bank outside of Israel. The group which has the most contact with banks in the WBGS area comprise those middle class individuals whose incomes are high enough that holding savings in the form of cash is impractical, yet are not wealthy enough to bank overseas. It is these middle class individuals whom the author believes are the ones being analyzed as the WBGS depositors and borrowers in this study.

The Intifada and Its Impact on the Banking System of Israel

Deposits

During the pre Intifada period of first quarter 1983 until third quarter 1987 (Table 1), deposits in both the Israeli as well as WBGS areas grew. Average quarterly growth rates were 25.46% and 26.19% for the Israeli and WBGS sectors respectively.

Growth in deposits during the Intifada period, which begins in December(3) of 1987, show a slowdown in growth for the Israeli sector to 3.60% and a decline in the WBGS area to -2.59%.

A regression of quarterly pre Intifada WBGS total deposits versus Israeli deposits (Equation 3.1) indicate a positive and statistically significant relationship between deposits in both sectors.

TDWBGS = 2.05812 + .0002148 TDI (3.1)

(28.787)(*)

Adjusted R Square .98 F(1,17) = 828.7(*)

* Significant at the 1% level.

The number within the bracket is the T statistics

Where:

TDWBGS are total New Shekel deposits in the WBGS.

TDI are total New Shekel deposits in pre 1967 Israeli

borders.

Performing a regression on the percentage quarterly growth rates in the WBGS versus Israeli (Equaion 3.2), for the pre Intifada period, likewise shows a positive and statistically significant relationship between the two sectors.

PCCWBGS = .05528 + .82310 PCCIS (3.2)

(6.123)(*)

Adjusted R Square .68 F(1,16) = 37.49(*)

* Significant at the 1% level.

The number within the bracket is the T statistics

Where:

PCCWBGS is the percentage change in New Shekel deposits in the

Both equation 3.1 and 3.2 indicate that deposits in the WBGS and the Israeli sector during the pre Intifada period were positively related to each other.

If one looks at both of these sectors during the actual Intifada itself (the first quarter 1988 until the fourth quarter 1988)(4) a different picture emerges. Equation 4.1, which regresses total Israeli deposits versus those in the WBGS and now show the two sectors diverging where growth of deposits in the Israeli sector is associated with declines in the WBGS.

Adjusted R Square .952 F(1, 3) = 81.2

* Significant at the 1% level.

Regressing percentage growth rates of deposits of the WBGS versus Israeli (Equation 4.2), presents further evidence of the divergence of both sectors.

Adjusted R Square .824 F(1, 2) = 15.04(**)

** Significant at a 6% level.

Loan Activity

A further indication of the impact of the Intifada on the banking system of Israel can be seen from loan activity. Average quarterly percentage growth in loans in the Israeli and WBGS areas appear in Table 2. In the pre Intifada period quarterly growth rates for loans increased by 26.56% and 35.21% per quarter for both the Israeli and WBGS areas respectively.

However during the Intifada period itself growth in loans for the Israeli sector slowed to 6.92% while growth in the WBGS area actually declined to -5.21%.

The regression of total loan activity for the pre Intifada period (Equation 5.1) shows a positive relationship between both sectors.

WBGSL = -5.34644 + .001755651 ISL.(*) (5.1)

(11.043)

F(1, 17) = 121.95691(*) Adjusted R Squared = .870;

Where:

WBGSL is the level of loans in New Shekel in the WBGS.

ISL is the level of loans in New Shekel in the pre-1967

Israeli

Borders.

However, looking at loan activity during the Intifada period itself, equation 5.2, we observe that no statistically significant relationship exists between these two sectors.

WBGSL = 108.23232 -.00116636 ISL (5.2)

(- 1.289)(***)

F(1, 2) = 1.66151(***) Adjusted R Squared = .18

*** Not significant at the 30% level.

Where:

WBGSL is the level of loans in New Shekel in the WBGS.

ISL is the level of loans in New Shekel in the pre-1967

Israeli

Borders.

Structural Tests of Equation Stability: Deposits

In order to see if there exists a structural change in the economic relationship of the models between the pre Intifada period and that of the Intifada, a Chow test was performed on the equations.

Following the procedures outlined in Johnston three models are derived: one for the pre Intifada period (model 1), another for the Intifada period (model 2) and the third for the combined data set.

The residual sum of squares and the degrees of freedom for deposits is presented in Table 3.

Three tests were then performed -- one a test for equality of intercept, the second for equality of slope and the third for equality of both the intercept as well as the slope. Their results are presented in Table 4.

The Chow test indicates that the two deposits models differ with regard to slope and overall structure for the pre Intifada period versus that of the Intifada at a 5% level of significance.

Structural Test of Equation Stability: Loans

Performing a similar analysis on loan activity (Tables 5 and 6) and comparing the pre Intifada versus the Intifada period we can conclude with a 5% level of significance that the slopes of those models are different.

Analysis and Conclusions

Civil unrest effects many parts of the economy including the banking system. The Intifada, like other examples of social unrest has effected deposit and loan activities in the region.

Model 3.1, 3.2 and 5.1 represent the interrelationship between the Israeli and WBGS sectors in the pre Intifada period. All three models show a statistically significant and positive relationship between these two sectors. These results can be interpreted as showing mutual integration of both areas where growth in one sector implies positive growth in the other. This positive relationship however has broken down during the Intifada period. Models 4.1 and 5.2 show a relationship that is either negative (with regard to deposits) or non-existent (with regard to loans). The Chow test confirms this shift in structure.

These two models show that from a banking perspective whatever economic integration occurred in the pre Intifada period no longer exists today. Of these two sectors being effected the WBGS segment is the one being hurt the most as compared to the Israeli sector.

The author's conclusion is that ignoring whatever political goals and/or achievements that may have occurred due to the Intifada, that from an economic perspective the Intifada has hurt the population of the WBGS in absolute terms and has been much more disruptive than to the Israeli sector.

Appendix A

Data Limitations and Further Evidence of Trend Continuity

A data problem associated with this study is that the Bank of Israel has stopped reporting loan and deposit activity for the WBGS after 1988. This limitation has effected the analysis of the Intifada period. Indirect evidence however, does exist of the continuation of the 1988 trend of slowing bank activity at least through 1989. The number of offices of ordinary banking corporations dropped for the year 1989 as compared to 1988 (Table A1). In the Israeli sector this drop was -.7% while in the WBGS area the drop was -4.8%.

These declines in the number of branches is indirect evidence of the continued negative impact of the Intifada on the banking system in the State of Israel and it having a stronger impact on the WBGS sector than on the Israeli sector.

Notes

1. Anecdotal reporting to this effect occurs frequently in the press and a partial list of sources are presented in the reference section.

2. See Heth, M. Banking Institutions in Israel, Second Edition for a more detailed analysis of the structure of the Israeli banking system.

3. Since the fourth quarter of 1987 does not fit either category it is not included in any of the analyses done within this paper.

4. Due to the small amount of data available for the Intifada one must be aware of the problems associated with small sample sizes. Appendix A introduces further evidence of the continuation of this trend beyond 1988.

References

Examiner of Banks: Annual Statistics of Israel's Banking System 1980-1984.

Examiner of Banks: Annual Statistics of Israel's Banking System 1981-1985.

Examiner of Banks: Annual Statistics of Israel's Banking System 1983-1987.

Examiner of Banks: Annual Statistics of Israel's Banking System 1984-1988

Floersheim, R. Financial Intermediaries in Israel 1950-54. Maurice Falk Institute for Economic Research in Israel. Jerusalem, 1962.

Heth, M. Banking Institutions in Israel Second Edition. Maurice Falk Institute for Economic Research in Israel. Jerusalem, 1966.

Johnston, J. Econometric Methods Third Edition McGraw-Hill, New York, 1982.

New York Times: January 3, 1988; June 1, 1989; November 5, 1989 and May 23, 1990. New York.

Norusis, M., SPSS/PC+ Manual (Chicago: SPSS Inc.)

Zakai, D., "Economic Development in Judea-Samaria and the Gaza District 1983-84." Bank of Israel Research Department.

Philip Levine Associate Professor of Finance, Yeshiva University.

The Intifada -- Arabic for uprising has had an impact on economic activities in the State of Israel.(1) Banking activities, as measured by both deposits as well as loans, have been effected in both the Israeli sector (as defined by the pre 1967 borders) as well as in the West Bank and Gaza Strip (WBGS). This paper discusses the effect of the Intifada to both sectors as seen from the perspective of the banking system. Conclusions are then drawn about mutual growth and integration of these two sectors in the pre Intifada period and their divergence during the Intifada period.

Banking In Israel

The banking system in the State of Israel is modern and well developed. Its banking laws are structurally and functionally similar to those of the Federal Reserve System.(2) Banking is fully integrated within the Israeli sector with a large proportion of routine transactions such as depositing of payroll check and routine paying of bills done electronically.

In the West Bank Gaza Strip (WBGS) area however, bank usage is different. Based upon conversations that this author has had with officials of the Bank of Israel, as well as his own personal observations, usage varies greatly among different groups. For those individuals who make up the majority of the population in this area, banks are used as a check cashing facility. Any savings done by this group is held as cash under the proverbial mattress. Little is bought on credit and hence little loan activities. A second group in the WBGS whose contact with banking is likewise limited are those wealthy residents of the area who tend to bank outside of Israel. The group which has the most contact with banks in the WBGS area comprise those middle class individuals whose incomes are high enough that holding savings in the form of cash is impractical, yet are not wealthy enough to bank overseas. It is these middle class individuals whom the author believes are the ones being analyzed as the WBGS depositors and borrowers in this study.

The Intifada and Its Impact on the Banking System of Israel

Deposits

During the pre Intifada period of first quarter 1983 until third quarter 1987 (Table 1), deposits in both the Israeli as well as WBGS areas grew. Average quarterly growth rates were 25.46% and 26.19% for the Israeli and WBGS sectors respectively.

Growth in deposits during the Intifada period, which begins in December(3) of 1987, show a slowdown in growth for the Israeli sector to 3.60% and a decline in the WBGS area to -2.59%.

TABLE 1 Percentage Quarterly Growth Rates for Deposits 1983-1988 Israeli Versus WBGS Israeli WBGS Pre Intifada 1983-1987 25.46% 26.19% Intifada 3.60% -2.59% Source: Annual Statistics of Israel's Banking System (various issues).

A regression of quarterly pre Intifada WBGS total deposits versus Israeli deposits (Equation 3.1) indicate a positive and statistically significant relationship between deposits in both sectors.

TDWBGS = 2.05812 + .0002148 TDI (3.1)

(28.787)(*)

Adjusted R Square .98 F(1,17) = 828.7(*)

* Significant at the 1% level.

The number within the bracket is the T statistics

Where:

TDWBGS are total New Shekel deposits in the WBGS.

TDI are total New Shekel deposits in pre 1967 Israeli

borders.

Performing a regression on the percentage quarterly growth rates in the WBGS versus Israeli (Equaion 3.2), for the pre Intifada period, likewise shows a positive and statistically significant relationship between the two sectors.

PCCWBGS = .05528 + .82310 PCCIS (3.2)

(6.123)(*)

Adjusted R Square .68 F(1,16) = 37.49(*)

* Significant at the 1% level.

The number within the bracket is the T statistics

Where:

PCCWBGS is the percentage change in New Shekel deposits in the

WBGS. PCCIS is the percentage change in New Shekel deposits in the pre-1967 Israeli Borders.

Both equation 3.1 and 3.2 indicate that deposits in the WBGS and the Israeli sector during the pre Intifada period were positively related to each other.

If one looks at both of these sectors during the actual Intifada itself (the first quarter 1988 until the fourth quarter 1988)(4) a different picture emerges. Equation 4.1, which regresses total Israeli deposits versus those in the WBGS and now show the two sectors diverging where growth of deposits in the Israeli sector is associated with declines in the WBGS.

TDWBGS = 226.23 -.00164135 TDI(*) (4.1) (-9.012)

Adjusted R Square .952 F(1, 3) = 81.2

* Significant at the 1% level.

Regressing percentage growth rates of deposits of the WBGS versus Israeli (Equation 4.2), presents further evidence of the divergence of both sectors.

PCCWBGS = -.01493 -.35395 PCCIS(**) (4.2) (-3.883)

Adjusted R Square .824 F(1, 2) = 15.04(**)

** Significant at a 6% level.

Loan Activity

A further indication of the impact of the Intifada on the banking system of Israel can be seen from loan activity. Average quarterly percentage growth in loans in the Israeli and WBGS areas appear in Table 2. In the pre Intifada period quarterly growth rates for loans increased by 26.56% and 35.21% per quarter for both the Israeli and WBGS areas respectively.

TABLE 2 Quarterly Growth Rates for Loans 1983-1988 Israeli Versus WBGS Loans Israeli WBGS Pre Intifada 1983-1987 26.56% 35.21% Intifada 6.92% -5.21% Source: Annual Statistics of Israel's Banking System (various issues).

However during the Intifada period itself growth in loans for the Israeli sector slowed to 6.92% while growth in the WBGS area actually declined to -5.21%.

The regression of total loan activity for the pre Intifada period (Equation 5.1) shows a positive relationship between both sectors.

WBGSL = -5.34644 + .001755651 ISL.(*) (5.1)

(11.043)

F(1, 17) = 121.95691(*) Adjusted R Squared = .870;

Where:

WBGSL is the level of loans in New Shekel in the WBGS.

ISL is the level of loans in New Shekel in the pre-1967

Israeli

Borders.

However, looking at loan activity during the Intifada period itself, equation 5.2, we observe that no statistically significant relationship exists between these two sectors.

WBGSL = 108.23232 -.00116636 ISL (5.2)

(- 1.289)(***)

F(1, 2) = 1.66151(***) Adjusted R Squared = .18

*** Not significant at the 30% level.

Where:

WBGSL is the level of loans in New Shekel in the WBGS.

ISL is the level of loans in New Shekel in the pre-1967

Israeli

Borders.

Structural Tests of Equation Stability: Deposits

In order to see if there exists a structural change in the economic relationship of the models between the pre Intifada period and that of the Intifada, a Chow test was performed on the equations.

Following the procedures outlined in Johnston three models are derived: one for the pre Intifada period (model 1), another for the Intifada period (model 2) and the third for the combined data set.

The residual sum of squares and the degrees of freedom for deposits is presented in Table 3.

TABLE 3 Chow Test For Deposits in the WBGS and Israeli Sectors Residual Sum Degrees of of Squares Freedom Model 1 1050.6580 21 Model 2 957.9649 20 Model 3 673.0134 19

Three tests were then performed -- one a test for equality of intercept, the second for equality of slope and the third for equality of both the intercept as well as the slope. Their results are presented in Table 4.

TABLE 4 Structural Change Test For Deposits in the WBGS and Israeli Sectors F Degrees of Test Statistic Freedom Critical(*) 1 1.9352 1,20 4.35/8.10 2 8.0445(*)(***) 1,19 4.38/8.18 3 5.3307(*)(***) 2,19 3.52/5.93 * Top (bottom) number is a significance level at the 5% (1%). *** Significant at the 5% level.

The Chow test indicates that the two deposits models differ with regard to slope and overall structure for the pre Intifada period versus that of the Intifada at a 5% level of significance.

Structural Test of Equation Stability: Loans

Performing a similar analysis on loan activity (Tables 5 and 6) and comparing the pre Intifada versus the Intifada period we can conclude with a 5% level of significance that the slopes of those models are different.

TABLE 5 Chow Test For Loan Activity in the WBGS and Israeli Sectors Model 1 1329.4833 21 Model 2 1328.7422 20 Model 3 1047.6067 19 TABLE 6 Structural Change Test For Loans in the WBGS and Israeli Sectors F Degrees of Test Statistic Freedom Critical(*) 1 0.0112 1,20 4.35/8.10 2 5.0988(*)(***) 1,19 4.38/8.18 3 2.5561 2,19 3.52/5.93 * Top number is a significance level of 5% bottom is 1%. *** Significant at the 5% level.

Analysis and Conclusions

Civil unrest effects many parts of the economy including the banking system. The Intifada, like other examples of social unrest has effected deposit and loan activities in the region.

Model 3.1, 3.2 and 5.1 represent the interrelationship between the Israeli and WBGS sectors in the pre Intifada period. All three models show a statistically significant and positive relationship between these two sectors. These results can be interpreted as showing mutual integration of both areas where growth in one sector implies positive growth in the other. This positive relationship however has broken down during the Intifada period. Models 4.1 and 5.2 show a relationship that is either negative (with regard to deposits) or non-existent (with regard to loans). The Chow test confirms this shift in structure.

These two models show that from a banking perspective whatever economic integration occurred in the pre Intifada period no longer exists today. Of these two sectors being effected the WBGS segment is the one being hurt the most as compared to the Israeli sector.

The author's conclusion is that ignoring whatever political goals and/or achievements that may have occurred due to the Intifada, that from an economic perspective the Intifada has hurt the population of the WBGS in absolute terms and has been much more disruptive than to the Israeli sector.

Appendix A

Data Limitations and Further Evidence of Trend Continuity

A data problem associated with this study is that the Bank of Israel has stopped reporting loan and deposit activity for the WBGS after 1988. This limitation has effected the analysis of the Intifada period. Indirect evidence however, does exist of the continuation of the 1988 trend of slowing bank activity at least through 1989. The number of offices of ordinary banking corporations dropped for the year 1989 as compared to 1988 (Table A1). In the Israeli sector this drop was -.7% while in the WBGS area the drop was -4.8%.

These declines in the number of branches is indirect evidence of the continued negative impact of the Intifada on the banking system in the State of Israel and it having a stronger impact on the WBGS sector than on the Israeli sector.

TABLE A1 Number of Offices of Ordinary Banking Corporations (end of year) Year 1986 1987 1988 1989 Israeli 1051 1019 1023 1016 WBGS 29 26 22 21 Source: Annual Statistics of Israel's Banking System 1986-1990.

Notes

1. Anecdotal reporting to this effect occurs frequently in the press and a partial list of sources are presented in the reference section.

2. See Heth, M. Banking Institutions in Israel, Second Edition for a more detailed analysis of the structure of the Israeli banking system.

3. Since the fourth quarter of 1987 does not fit either category it is not included in any of the analyses done within this paper.

4. Due to the small amount of data available for the Intifada one must be aware of the problems associated with small sample sizes. Appendix A introduces further evidence of the continuation of this trend beyond 1988.

References

Examiner of Banks: Annual Statistics of Israel's Banking System 1980-1984.

Examiner of Banks: Annual Statistics of Israel's Banking System 1981-1985.

Examiner of Banks: Annual Statistics of Israel's Banking System 1983-1987.

Examiner of Banks: Annual Statistics of Israel's Banking System 1984-1988

Floersheim, R. Financial Intermediaries in Israel 1950-54. Maurice Falk Institute for Economic Research in Israel. Jerusalem, 1962.

Heth, M. Banking Institutions in Israel Second Edition. Maurice Falk Institute for Economic Research in Israel. Jerusalem, 1966.

Johnston, J. Econometric Methods Third Edition McGraw-Hill, New York, 1982.

New York Times: January 3, 1988; June 1, 1989; November 5, 1989 and May 23, 1990. New York.

Norusis, M., SPSS/PC+ Manual (Chicago: SPSS Inc.)

Zakai, D., "Economic Development in Judea-Samaria and the Gaza District 1983-84." Bank of Israel Research Department.

Philip Levine Associate Professor of Finance, Yeshiva University.

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Author: | Levine, Philip |
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Publication: | American Economist |

Date: | Mar 22, 1993 |

Words: | 2110 |

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