In the absence of a political solution and the failure of the two-state project, the role of local government in the Palestinian context has effectively been reduced to the provision of basic services. This study seeks to answer two key questions: What are the main characteristics of the Palestinian local government system, and what are its most significant challenges? A qualitative approach was adopted, involving interviews with 17 Palestinian figures representing various institutions within the local government structure in both the West Bank and the Gaza Strip. The analysis reveals three primary characteristics. First, the structure of local government is essentially hybrid, combining elements of centralization and decentralization in a somewhat haphazard manner. Second, the local government framework is fragmented both horizontally and vertically. Finally, the system appears to mimic the institutional environment that provides financial support to Palestinian local authorities. The study also identifies three major challenges: the root cause—namely, the Israeli occupation and its practices, weak legal frameworks and practices, and internal Palestinian divisions along with their associated effects.