As beer-making businesses go, the Taybeh brewery faces an unusual raft of challenges. It is the only brewery in the Palestinian territories, where the population is predominantly teetotal Muslims. It operates in bleak economic conditions, with high unemployment and the extra costs and challenges of dealing with the checkpoints and delays that make up Israel's military occupation. And, on top of that, they have to market their Palestinian beer to Israeli customers.

Yet, the Taybeh brewery brews on, producing thousands of bottles of lager every month. This weekend the village, in the hills of the West Bank just east of Jerusalem, will hold its fifth annual Oktoberfest and expects to attract up to 10,000 visitors – not just tourists, but also inquisitive Palestinians and Israelis.

The Taybeh brewery was born in the years of optimism that followed the Oslo peace accords in the mid-1990s, a time when Palestinians and Israelis hoped an end to their conflict was in sight. Nadim Khoury, now 50, had left the village years before and was living in Boston in the US, where he had taught himself to brew beer at home. His family encouraged him to return to the West Bank.

No bank or aid agency would fund a project as unlikely as a Palestinian brewery, so the family put up the $1.2m themselves and in 1994 set up the brewery on their village land. "The banks and NGOs thought we were crazy to build a brewery in a Muslim country," says Khoury. "But now I think we were lucky we didn't take their money."

Business virtually ground to a halt in the years of the second intifada – the Palestinian uprising that began in late 2000. Many of the brewery's workers were laid off but, since the business had no mortgage or other debts, it survived. "I know so many friends who lost their businesses because the banks took over," Khoury says.

Now that the violence has receded – in the West Bank at least – the brewery is fully functioning again. Workers produce three different lagers – in varying strengths from light to dark – and this summer launched a new product, Taybeh Halal, a malty, non-alcoholic beer which is being heavily marketed at a young Palestinian demographic. In part, this is an effort to enter a new market, in part it is an insurance policy. "Just in case something happens and there is a change in the environment and political situation," Khoury says.

The brewery dominates the village of Taybeh, which is largely Christian – Khoury himself is Greek Orthodox. His brother, David, is the mayor.

However, the Christian population is in decline. Khoury has seen so many Palestinian Christians leaving for a life abroad that he says there are now more of his fellow villagers living in Michigan than in Taybeh itself.

Taybeh beer is surprisingly popular in Japan and is also brewed under licence in Germany. Closer to home, Khoury sells his beer to restaurants in the more liberal Palestinian cities, such as Ramallah and Bethlehem, but many of the deliveries go into Jerusalem and further into Israel, to Tel Aviv, Haifa and Nazareth.

That brings its own complications, because of the occupation. Although Taybeh village is only a few minutes drive from Jerusalem, the beer deliveries must go through a checkpoint at Tarqumiya, near Hebron, which is about two hours by road. There, the trucks are rigorously searched and the beer transferred to Israeli trucks in a process that can take several hours and leave the beer exposed to the sunlight. Since they use no preservatives in the brewing process, this unwieldy transit process can be particularly problematic, Khoury says. "My beer is delicate. I cannot afford to have it sit in the sunlight," he says.

Khoury himself has a US passport, but because he also has an Israeli-issued West Bank identity card he must apply for a permit to enter Jerusalem. His permit allows him to enter only through one specified checkpoint, at Qalandiya, and only by foot. He cannot stay the night and must renew the permit every six months.

He has faced severe delays importing bottles from Europe through Israel, so much so that he now buys Israeli-made bottles. And he would like to export more Taybeh to the Arab world, but that brings its own complications: the Jordanians impose prohibitively high import duties to protect their own foreign-run beer industry. If there were freer trade in the Arab world, his non-alcoholic beer would have a larger market.

Nonetheless, there are signs of an improvement in the West Bank economy this year, albeit from a low base. "Demand has rapidly increased," says Khoury. "If there is peace and prosperity, people celebrate more." His daughter, Madees, 24, is now playing a more important role in the brewery and is one day likely to take over from her father.

As well as running a successful business, they hope to change attitudes. "People don't believe that we have a product like Taybeh beer brewed in Palestine," he says. "On the news they see only violence, bombing and uprisings. Now we are trying to change this and to show the world we can live in peace with our neighbours. We are human beings. We have a right to enjoy life. Enough is enough with the fighting."