A leading rights group says Israeli banks are contributing to the expansion of Jewish settlements in the West Bank by providing loans and mortgages for construction there.

A report by Human Rights Watch (HRW) released on Wednesday says no Israeli law requires the banks to provide such services for the settlements. It says the banks have continued to do so regardless of their human rights obligations.

"Israeli banks are financing settlement construction and facilitating settlement expansion as a matter of choice, not because they are somehow required to do so under domestic law," said Sari Bashi, Israel and Palestine advocacy director at Human Rights Watch.

The group is calling on the banks to extricate themselves from the settlements or face the risk of action from shareholders.

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Furthermore, HRW said that institutional investors should ensure that their business relationships are free from settlement-related products or investments.

The report mentioned the example of some previous international investors, such as the United Methodist Church pension fund and the Dutch pension fund PGGM, who have divested from Israel's five largest banks after citing the banks' involvement in settlements as being inconsistent with their human rights policies.

Israel's banks lend money to home buyers, settlement councils or companies carrying out construction in the West Bank. Most also have branches in settlements.

Israeli law requires banks to accept settlers as customers, meaning they cannot refuse to open accounts for them. But a legal analysis of Israeli banking laws by Human Rights Watch concluded that banks are not obligated to provide financial backing for construction in the West Bank.

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While an anti-discrimination law prohibits refusal of service based on place of residence, the report said banks could cite other reasons for declining to provide loans, such as the construction's implications for Palestinians' human rights.

The law also allows companies to decline to serve certain areas so long as they provide advance notice to customers.

Under international law, settlements are considered illegal, and much of the wider international community considers them an obstacle to the two state solution.

Israel captured the West Bank, along with the Gaza Strip and East Jerusalem, in the 1967 war.

Up to 400,000 people now live in West Bank settlements, and about 200,000 Jewish Israelis live in occupied East Jerusalem.