The Central Bank of Israel reduced the key interest rate to 4.5% last January as growth slowed (Getty)

Israeli banks were forced to pay additional taxes amounting to 2.5 billion shekels ($700 million) over the next two years as part of legislators’ efforts to find new ways to strengthen the public treasury depleted by the expenses of the aggression against the Gaza Strip.

Under a tax amendment approved by the Knesset Finance Committee (Parliament), the banks, which will begin announcing fourth-quarter results this week, will pay an additional 6% of the profits resulting from their activities in Israel in the years 2024 and 2025.

The Ministry of Finance initially sought to raise the total value-added tax rate on bank profits to 26% from 17%, especially after bank profits rose in the past two years, due to the sharp rise in interest rates, but the banks pressured not to go ahead with the matter.

Finance Committee Chairman Moshe Gaffney said, "This is a big step, because banks are not sacred cows, and money can be collected from them."

Gaffney repeatedly criticized the Central Bank of Israel for raising the key interest rate to 4.75% from 0.1% over the course of a year, which pushed interest rates on mortgages and other loans to rise sharply.


Gaffney also criticized banks for being slow to apply these higher rates to consumers' bank accounts.

The financial cost of the Gaza war on Israel exceeds $40 billion in the period 2023-2024 (Getty) 

Slow growth

With inflation declining and economic growth slowing, the Central Bank of Israel reduced the key interest rate to 4.5% last January, and kept the same rate unchanged at last week’s meeting.

Together, the largest Israeli banks are expected to pay an additional NIS 1.2 billion this year and NIS 1.3 billion in 2025. The four largest banks declined to comment on the new tax.

The Tel Aviv index of the five largest banks fell 1.2% in afternoon trading yesterday, Monday, while the broader market stabilized.

To prevent banks from passing the additional tax on to customers, the Israel Banking Supervision Authority will report twice a year on the credit and deposit interest rates and fees charged to customers.


Israeli banks also agreed to establish a fund worth 100 million shekels to support loans provided to reserve soldiers and small business owners.

This month, the Knesset is expected to give final approval to a revised budget for 2024, which increases allocations for defense spending and compensation for families and companies affected by the war by tens of billions.

The budget deficit target rose to 6.6% of GDP from 2.25%.

Last January, the Israeli authorities estimated that the war on Gaza, which began on October 7, would lead to a decline in economic growth for the current year by 1.1 percentage points, after expected losses of 1.4 percentage points last year.

The financial impact of the war is estimated at about 150 billion shekels ($40.25 billion) in the period 2023-2024, assuming the war ends in the first quarter of the year.

Source: Al Jazeera + Reuters