The Economy of Hamas and How Israel Should Deal with it

For nearly two decades, Israel has faced an unprecedented strategic contradiction: its own financial infrastructure has enabled the very organization it seeks to combat. Hamas operates a billion-dollar economy that exists largely because of Israel’s direct participation in Gaza’s monetary system, creating what experts across the intelligence and policy communities describe as a self-defeating arrangement that transforms Israel from adversary into inadvertent sponsor.¹

This economic interdependence represents more than mere irony – it reveals fundamental flaws in Israel’s approach to containing Hamas while maintaining control over Palestinian territories. The roots of Israel’s involvement in the Palestinian monetary system trace back to the Declaration of Principles on Interim Self-Government Arrangements of September 13, 1993, Article VII(4), which established that “In order to enable the Council to promote economic growth, upon its inauguration, the Council will establish, among other things, a Palestinian Electricity Authority, a Gaza Sea Port Authority, a Palestinian Development Bank, a Palestinian Export Promotion Board, a Palestinian Environmental Authority, a Palestinian Land Authority and a Palestinian Water Administration Authority, and any other Authorities agreed upon, in accordance with the Interim Agreement that will specify their powers and responsibilities.”² The subsequent Israeli-Palestinian Interim Agreement’s annexes – particularly Annex IV (Protocol on Israeli-Palestinian Cooperation Concerning Regional Development Programs), Annex V (Protocol on Economic Relations), and Annex VI (Protocol Concerning Israeli-Palestinian Cooperation Programs, Article V on Sectors of Economic Cooperation) – established the framework for industrial cooperation and monetary arrangements that created today’s paradoxical situation.³

The key findings from expert analysis include:

• Hamas operates a $1 billion annual economy that depends almost entirely on Israeli financial infrastructure, making it one of the world’s most well-funded non-state actors⁴
• Israel’s central Bank directly facilitated Hamas operations by exchanging worn Israeli banknotes for fresh currency until October 2023, enabling Hamas’s taxation-based revenue model⁵
• Multiple intelligence experts recognize the strategic contradiction, affirming that Israel has been contributing to Hamas’s strengthening⁶
• Hamas extracts $620 million annually through taxation in Israeli Shekels, representing 62% of its budget, while operating entirely within Israel’s monetary system⁷
• Expert proposals for financial warfare face institutional resistance, with the Bank of Israel rejecting currency invalidation strategies despite their technical feasibility⁸
• The current arrangement serves Hamas better than Israeli interests, creating what experts describe as a self-defeating policy that transforms Israel from adversary into inadvertent sponsor.

Yet this wealth flows almost entirely through Israeli-controlled financial channels, denominated in Israeli currency, and facilitated by Israeli banking infrastructure. The result is a unique and ironic form of economic warfare where the target state provides the weapons used against it.

The Architecture of Dependency

Hamas’s economic success stems from its complete integration into Israel’s monetary sphere through the New Israeli Shekel (NIS). Gaza lacks sovereign currency and operates as a cash economy where 90-95% of all transactions occur in Israeli Shekels.⁹ This dependency emerged from the 1994 Paris Agreements following the Oslo Accords, which established the Shekel as the official currency in the Palestinian territories.¹⁰ What began as an economic arrangement designed to facilitate cooperation has evolved into Hamas’s greatest strategic asset.

The scale of this dependency is staggering. Approximately NIS 10 billion circulates within Gaza, primarily in high-denomination NIS 200 notes.¹¹ These bills entered Gaza through direct transfers from Israel to local bank branches over many years, creating what Palestinian economic researcher Eyal Ofer describes as a comprehensive paper trail that Israeli authorities could theoretically exploit.¹² Instead, this currency became the foundation for Hamas’s taxation-based revenue model, enabling the organization to extract approximately $620 million annually from Gaza’s population – representing 62% of Hamas’s total budget.¹³

The taxation system Hamas has constructed operates with systematic efficiency that many legitimate governments would envy. According to Daniel Roth, research director at United Against Nuclear Iran, Hamas receives as much as $450 million per year through various taxation and extortion mechanisms.¹⁴ The organization collects dozens of different taxes ranging from border crossing fees ($500 million annually) to customs revenue ($14 million monthly through a single gate), business licensing, currency exchange, construction permits, and even hotel stays.¹⁵ According to international research institutes, these taxes amount to approximately half of residents’ and businesses’ income.¹⁶ This extraction occurs entirely in Israeli currency, which Hamas then converts to dollars for weapons purchases and international operations.

The Willing Facilitator

Israel’s role extends far beyond passive acceptance of this arrangement. Until October 7, 2023, the Bank of Israel actively exchanged worn Israeli banknotes for new ones for banks operating in Gaza.¹⁷ This service enabled Hamas to maintain the currency liquidity necessary for its operations. As documented by investigative reporting, banks, including the Bank of Palestine, Cairo-Amman Bank, and Islamic Bank of Palestine, regularly exchanged deteriorated shekels at the Bank of Israel, ensuring fresh currency flow into Gaza’s economy.¹⁸

The mechanics of this system reveal Israel’s deep involvement in sustaining Hamas’s financial capabilities. Gaza residents received wages through bank transfers and withdrew them at local ATMs loaded with Israeli currency. International aid recipients exchanged foreign currency for Shekels through money changers who worked directly with these banks.¹⁹ Hamas then collected these Shekels through taxation and used them to purchase dollars from Qatar and UNRWA, effectively converting Israeli currency into foreign exchange for weapons and international operations.²⁰

A Bank of Israel source confirmed these exchanges occurred “in accordance with the instructions of the political echelon and in coordination with the Coordinator of Government Activities in the Territories.”²¹ This admission demonstrates that supporting Gaza’s currency system represented deliberate policy rather than bureaucratic oversight. Israeli officials calculated that maintaining Gaza’s economic functionality through currency support would provide greater control and prevent regional destabilization.

Brig.-Gen. (res.) Yossi Kuperwasser, former chief of the research division in IDF Military Intelligence, a former senior fellow at the Jerusalem Center for Security and Foreign Affairs, and presently heading the Jerusalem Institute for Strategy and Security, explained the strategic rationale behind this approach. In 2015, Kuperwasser stated regarding Qatari support facilitated through Israeli territory: “We believe that better conditions in Gaza would lessen the incentive of Hamas and the population to go again to war. So in a way, it is helping the deterrence.”²²

The Bank of Israel’s official justification reflects this strategic thinking: “The Bank of Israel operates in accordance with government policy, which is formulated from time to time in accordance with existing security, political, and economic circumstances.”²³ This policy created the fundamental contradiction in the Israeli approach – designating Hamas as a terrorist organization while simultaneously providing the financial infrastructure that enabled both its governmental and militant operations.

Expert Recognition of the Policy Paradox

Intelligence and policy experts have increasingly recognized the problematic nature of Israel’s inadvertent support for Hamas, stating that Israel’s leadership has been contributing to Hamas’s strengthening.²⁴

Professor Avner Cohen, a former Israeli religious affairs official, publicly acknowledged that “Hamas, to my great regret, is Israel’s creation” and that Israel had “encouraged them as a counterweight to the Palestine Liberation Organization.”²⁵ David Hacham, who worked in Gaza as an Arab affairs expert in the Israeli military during the late 1980s and early 1990s, reflected: “When I look back at the chain of events, I think we made a mistake. But at the time, nobody thought about the possible results.”²⁶

These assessments gained renewed urgency following the October 7, 2023, attacks. Jonathan Schanzer, senior vice president for research at the Foundation for Defense of Democracies and former terrorism finance analyst at the U.S. Treasury Department, has been particularly vocal about the need for policy revision. “There will need to be a policy review,” Schanzer stated, referring to the need for the United States and European allies to “get serious about these jurisdictions that have been treated as allies” but have failed to act against Hamas financiers.²⁷

An Israeli financial investigative team called “Task Force Harpoon” discovered in 2015 a network of businesses and investments owned and controlled by Hamas. The terrorism finance task force briefed the government, but no actions were taken in either Israel or Washington until seven years later.²⁸ This delay exemplifies the institutional inertia that has characterized responses to Hamas’s financial networks despite clear intelligence about their scope and operations.

The Diversified Revenue Model

Hamas has leveraged Israel’s financial infrastructure to build a sophisticated revenue portfolio that extends far beyond taxation. According to expert assessments, the organization’s funding sources demonstrate remarkable diversification and resilience against international pressure.

Qatari financial support represents the second-largest funding source at $180 million annually (18% of total revenue).²⁹ Beginning in 2018, Qatar initiated monthly cash payments delivered through Israeli-approved channels, ostensibly for humanitarian purposes but effectively subsidizing Hamas’s governmental operations.³⁰ As Kuperwasser noted, Israeli officials viewed this arrangement as potentially beneficial for deterrence through improved living conditions.³¹

Iranian support provides another $100 million annually (10% of total revenue), channeled through the Islamic Revolutionary Guard Corps’ Quds Force, primarily to Hamas’s military wing.³² According to State Department estimates, Iran has been a consistent financial and military patron of Hamas since the 1990s, with funding gradually increasing to current levels.³³ Hamas leaders have publicly acknowledged this support, with senior Hamas official Ali Baraka stating that “First and foremost, it is Iran that is giving us money and weapons.”³⁴

Palestinian Authority transfers add an estimated $85 million yearly through skimmed portions of the $1.7 billion the PA allocated to Gaza in 2021 alone.³⁵ Smuggling operations generate $12-15 million monthly through taxation of contraband goods entering via tunnel networks along the Gaza-Egypt border.³⁶ According to Roth’s analysis, Hamas spends roughly $1.6 billion on government operations in Gaza, indicating the scale of resources the organization controls.³⁷

Currency Usage and Strategic Dependencies

Hamas’s economy demonstrates complete dependence on the New Israeli Shekel, which represents approximately 90-95% of all currency usage in Gaza. The Israeli Shekel serves as the major currency of trade in the Gaza Strip and is used for virtually all commercial transactions.³⁸ This dependency stems from Gaza’s lack of sovereign currency – since there is no State of Palestine, Gaza is forced to use other currencies for trade, chief among them the Israeli Shekel.³⁹

Within the NIS-dominated economy, currency usage follows specific patterns that experts have identified as creating strategic vulnerabilities. Small denominations (NIS 20 & 50) are used for daily retail transactions in markets and by street vendors, while large denominations (NIS 100 & 200) constitute the significant cash reserves estimated at about NIS 10 billion held primarily in high-denomination bills.⁴⁰

Gaza operates as a cash economy, with physical currency dominating over digital payments for local transactions.⁴¹ This cash-dependent structure reflects limited banking infrastructure and security concerns, but also creates specific vulnerabilities that Israeli policymakers have increasingly discussed as potential pressure points.

Secondary currency usage includes cryptocurrency (3-5%), which Hamas has increasingly utilized for fundraising. According to Treasury Department analysis, Hamas received $41 million between August 2021 and June 2023 through small-dollar donations.⁴² Combined with Palestinian Islamic Jihad, the organizations raised over $130 million in cryptocurrency during this period.⁴³ As of early 2024, Hamas may have received as much as $10 million monthly through digital currency donations.⁴⁴

Strategic Proposals for Financial Disruption

The recognition of Hamas’s currency dependency has generated various strategic proposals from experts across the policy community. While Palestinian economic researcher Eyal Ofer has become the most vocal advocate for currency invalidation strategies, other experts have proposed alternative approaches to exploiting Hamas’s financial vulnerabilities.

Ofer’s currency tracking theory represents the most specific technical proposal. He argues that “The Bank of Israel knows exactly which serial number series of banknotes were transferred into Gaza. Since the Strip functions as a ‘closed economy,’ most of these notes remained inside and are now largely in the hands of Hamas, major merchants, and money changers.”⁴⁵ Ofer estimates that Hamas has accumulated around NIS 4 billion in cash holdings and proposes the selective invalidation of currency series transferred to Gaza.⁴⁶

His proposal involves “canceling the legal circulation of these notes in Israel – or at least in the first and immediate stage, canceling the series of NIS 200 notes that were transferred to Gaza in previous years – to dramatically harm Hamas’s economic capacity.”⁴⁷ The strategy would begin with pilot programs targeting small numbers of serial-number series, expanding progressively to collapse Hamas’s accumulated wealth.⁴⁸

However, other experts have proposed broader approaches to financial disruption. Schanzer has advocated for comprehensive sanctions targeting Hamas’s international financial networks, arguing that disrupting the organization’s global fundraising capabilities would prove more effective than currency manipulation.⁴⁹ His analysis emphasizes the need to pressure allied governments that have failed to act against Hamas financiers operating within their borders.⁵⁰

Kuperwasser has approached the issue from a strategic deterrence perspective, analyzing how economic pressure might complement military action. His work at the Jerusalem Center for Security and Foreign Affairs has explored how Hamas’s financing network, “made up of organizations that raise and transfer funds, often doubling up as charities,” could be systematically disrupted through coordinated international action.⁵¹

Institutional Resistance and Implementation Challenges

Despite expert advocacy for various forms of financial warfare against Hamas, institutional resistance has limited the implementation of proposed strategies. The Bank of Israel has firmly rejected currency invalidation proposals, stating: “Cancellation of the bill is not on the agenda. The authority to cancel banknotes according to law belongs to the Governor of the Bank of Israel. Despite raising the issue, no sufficiently established professional justification has been presented to the Governor for canceling this or that bill.”⁵²

This institutional resistance reflects complex considerations beyond technical feasibility. Currency invalidation would require coordination across numerous government bodies, including the Prime Minister’s Office, the Ministry of Finance, the Coordinator of Government Activities in the Territories, and the Israel Defense Forces. When questioned about decision-making authority for Gaza currency policies, relevant agencies declined to specify who held responsibility for past decisions.⁵³

The complexity increases when considering international obligations. The Bank of Israel’s reference to “international obligations” suggests that currency policies must account for Oslo Accord requirements, international humanitarian law, economic cooperation agreements, and coordination with Qatar, Egypt, and international organizations.⁵⁴ These constraints may limit Israel’s freedom to implement dramatic currency policies regardless of technical capability.

Legal and practical challenges compound institutional resistance. Distinguishing between Hamas-controlled and civilian-held currency presents significant difficulties in a cash-based economy where banknotes circulate freely. Currency invalidation could violate international economic agreements and create humanitarian crises if implemented broadly. The risk of unintended consequences may explain institutional caution despite the strategic appeal of financial warfare.

Schanzer has criticized this institutional inertia, arguing that the October 7 attacks should serve as “a wake-up call for the U.S. to start to get serious about these jurisdictions that have been treated as allies.”⁵⁵ His analysis suggests that political will, rather than technical capability, represents the primary obstacle to effective financial action against Hamas.

Current Control Measures and Their Limitations

Israel’s post-October 7 financial restrictions demonstrate both the potential and limitations of economic warfare against Hamas. Since the attacks, Israel has blocked new currency entry into Gaza, creating severe cash shortages that have disrupted both civilian life and Hamas operations.⁵⁶ Banking operations have ceased, and residents face exorbitant exchange rates from money changers who exploit the artificial scarcity.⁵⁷

These measures reveal Israel’s substantial leverage over Gaza’s economy through currency control while highlighting precision targeting challenges. Cash shortages affect ordinary Gazans’ ability to purchase available supplies, creating humanitarian complications for international aid organizations.⁵⁸ An informal industry of cleaning and repairing worn banknotes has emerged, demonstrating economic adaptation to artificial constraints.⁵⁹

Hamas has shown remarkable resilience despite these restrictions. According to expert analysis, the organization accumulated additional wealth during the war by collecting protection payments from merchants and UN agencies, charging tens of thousands of Shekels per secured aid truck.⁶⁰ Hamas maintained control over fuel markets, selling millions of liters at prices ranging from NIS 16-64 per liter.⁶¹ Money changer networks have expanded Hamas influence, with at least half of active exchangers operating using Hamas-controlled cash.⁶²

These developments vindicate expert warnings about Hamas’s adaptability. As Roth has noted, the organization’s billion-dollar government operations budget provides substantial resources for weathering financial pressure.⁶³ Even comprehensive sanctions targeting Hamas’s international networks might not eliminate the organization’s core revenue streams derived from taxation and local economic control.

Strategic Implications and Policy Alternatives

The Hamas economy presents a case study in the complexities of economic interdependence during asymmetric conflict. Hamas’s billion-dollar budget depends fundamentally on Israeli financial infrastructure, yet this dependency has not translated into effective Israeli control. Multiple experts have characterized this relationship as strategically counterproductive for Israel’s security objectives.

The persistence of Gaza’s special economic status reflects institutional momentum and strategic assumptions that experts increasingly question. As Ofer notes, Israel has not treated Hamas-ruled Gaza as an independent enemy state, instead providing essential services “with the illusion that this will lead to control that will prevent attacks.”⁶⁴ This approach contrasts sharply with Israeli policy toward other adversaries like Hezbollah in Lebanon, suggesting alternative frameworks exist for managing hostile relationships.⁶⁵

Expert analysis has identified several alternative approaches deserving consideration. Complete economic separation would eliminate Israeli infrastructure dependence by establishing independent currency systems for Gaza, though this would require international cooperation and risk creating entirely uncontrolled economic space. Enhanced monitoring systems could track financial flows while maintaining basic economic functionality, though this would require sophisticated surveillance capabilities and international coordination.

Targeted financial warfare represents another option – precise disruption of Hamas financial networks while preserving civilian economic access. This approach would require the kind of detailed currency tracking that Ofer advocates, combined with technological infrastructure for rapid implementation. Schanzer has emphasized the need for international coordination to create alternative banking systems that exclude Hamas control while serving legitimate civilian needs.⁶⁶

Each alternative involves significant trade-offs between effectiveness, humanitarian impact, and international obligations. The complexity of these choices may explain why Israeli policymakers have maintained the status quo despite its strategic contradictions. However, expert consensus suggests that current policies serve Israeli adversaries better than Israeli interests.

Conclusion

The Hamas economy reveals the limitations of partial solutions to complex strategic challenges. Expert analysis across the intelligence and policy communities demonstrates that Israel’s attempt to maintain control over the Palestinian territories through economic integration has created unintended consequences that may outweigh intended benefits. Hamas has successfully exploited Israeli financial infrastructure to build substantial capabilities while maintaining the political narrative of resistance against occupation.

The proposals advanced by experts like Ofer, Schanzer, and Kuperwasser represent recognition that current policies require fundamental revision. Ofer’s detailed analysis of Hamas’s financial vulnerabilities offers potential pathways for exploiting the economic dependency Israel has inadvertently created. Schanzer’s emphasis on international coordination provides a framework for comprehensive financial pressure. Kuperwasser’s strategic analysis illuminates the deterrence calculations that have guided Israeli policy.

However, implementing expert recommendations requires overcoming institutional resistance, international constraints, and humanitarian concerns that have prevented action to date. The Task Force Harpoon case demonstrates that intelligence identification of Hamas financial networks does not automatically translate into policy action. Seven years elapsed between discovery and implementation of targeted measures, suggesting that political will rather than technical capability represents the primary obstacle.

The broader strategic question extends beyond technical feasibility to fundamental policy choices about Israel’s relationship with the Palestinian territories. Maintaining the current economic arrangement perpetuates Israeli responsibility for Gaza while enabling Hamas to extract resources that fund hostile activities. Alternative arrangements may involve greater risks but could eliminate the paradox of Israel sustaining its adversary’s economy.

The Hamas case demonstrates how non-state actors can exploit established economic systems to build substantial capabilities that challenge traditional approaches to conflict management. Hamas’s success in generating billion-dollar budgets through taxation, international support, and economic integration suggests that conventional counterterrorism financing methods may require fundamental reconsideration when applied to quasi-governmental organizations operating within established economic frameworks.

Expert consensus indicates that resolving this paradox requires Israeli policymakers to choose between maintaining control through economic integration and accepting the risks of economic separation. The current arrangement provides neither effective control nor strategic advantage, instead creating vulnerabilities that sophisticated adversaries like Hamas have learned to exploit. Whether Israel possesses the political will to implement the comprehensive financial warfare that multiple experts advocate remains an open question – but the strategic logic for such action becomes more compelling with expert analysis demonstrating Hamas’s continued economic success at Israel’s expense.

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Notes