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DOMINICAN REPUBLIC

OFFSHORE BANKING & INVESTMENTS

 

GENERAL OVERVIEW

DOMINICAN REPUBLIC

BANKING & FINANCING SERVICES

 

 

A diversified and dynamic Dominican financial system began to develop in the post Trujillo era, when the private sector gained greater access to credit and new domestic institutions were created to meet growing credit demands. It was then that formally regulated financial institutions rose from 7 in 1960 to 78 in 1985. A poor macroeconomic climate plunged the financial sector into a crisis early in the 1980's, however, increased government regulation -as part of a 1985 stabilization program- eased some of the system's problems. And despite high inflation and unusually high interest rates, by the second half of the 1980's there were more than 400 financial enterprises representing seven percent of the GDP in 1988.

The system, made up of 17 different types of institutions, included the Dominican Central Bank (BCRD, its acronym in Spanish); commercial banks, savings and loan institutions, private development financing companies, mortgage banks, state banks, and others. These institutions totaled 263 branch offices. Much of this growth involved consumer finance companies and larger financiers (the term in Spanish for these financial institutions), which underwrote medium-term and long-term loans for priority economic sectors.

Twenty-four commercial banks made up the core of the private financial system in 1989. Commercial banks controlled about 64 percent of the financial system's total assets, and over 40 percent of commercial bank funds were deposited in one bank, the Reserve Bank (Banco de Reservas de la República Dominicana). Although it served as the main government fiscal agent, the Reserve Bank also operated as a commercial bank. Banks were largely Dominican-owned, especially after several foreign banks sold most of their portfolios to local banks in 1984 and 1985 because of the unfavorable economic climate. Nonetheless, Chase Manhattan and Citibank, from the United States, and the Bank of Nova Scotia, from Canada, maintained local operations in the late 1980s. All of the banks provided a full range of services, and offered checking accounts. The Superintendence of Banks, under the Secretariat of State for Finance, regulated the banks in conjunction with the Central Bank.

34 percent of the loans to the productive sectors favored manufacturing in 1987; followed by agriculture, 19 percent; services, 8 percent; and construction, 6 percent. The remaining loans were oriented to finance exports, imports, and consumer purchases.

Increases in the private-sector share of total domestic credit from 1984 were due to the growth of investments in the priority areas of assembly manufacturing and tourism despite tight credit conditions. The access to bank credit was generally dominated by large corporations, often irrespective of their credit worthiness or need for credit, mainly because of their superior "connections." In addition to their assets in the domestic banking system, Dominicans held an estimated US$1 billion in accounts overseas, mainly in the United States.

The main sources of household finance in 1989 were 17 savings and loan associations and mortgage banks. Established since 1962, they represented 19 percent of the system's financial assets and catered mostly to middle-income homebuyers, although they offered passbook savings, certificates of deposit, and collateralized loans as well. The National Housing Bank (Banco Nacional de la Vivienda--BNV) regulated the savings and loan institutions by imposing per-family lending ceilings. Fourteen mortgage banks, holding about ten percent of the system's assets, served mostly upper income homeowners. The most prominent of these institutions was Banco Hipotecario Dominicano - BHD). Unlike the savings and loans associations, mortgage banks also financed the short-term needs of builders and medium-term and long-term commercial construction. Mortgage banks are regulated by both the Central Bank and BNV, but regulations imposed are less stringent than those applied to the savings and loan associations. Lower-income homebuyers obtain credit through Instituto Nacional de la Vivienda (National Housing Institute) and real estate finance companies (sociedades inmobiliarias).

The equivalents of private development finance companies -the financiers- controlled six percent of the national assets, and were instrumental in the financing of medium-term and long-term investment in priority sectors. Established in 1966, the number of financiers had grown from eight in 1970 to twenty-five by 1989. They issued stocks and funded bonds, guaranteed by government financial institutions, to mobilize capital in major development projects in agribusiness, industry, transportation, and tourism. In addition, they provided technical assistance to borrowers, and guaranteed the liabilities of others. Increased government regulation of the small financieras, especially in the area of currency speculation, forced many to close in the late 1980s.

The following played a relatively minor role in the financial system: BNV, providing some housing-related finance; Corporación Financiera Industrial, playing a smaller role than its name suggested, and Banco Agrícola (Agricultural Bank of the Dominican Republic or Bagricola by its acronym), which was an important creditor. Through its thirty branch offices, Bagricola covered small countryside farmers. The bank's importance, however, declined early in the 1980s due to high unsettled debts, but it rebounded in the late 1980s through greater autonomy, and by mobilizing capital for the first time through savings accounts.

Other financial services were offered in the country through organizations that served the large informal sector. To of these were the Dominican Development Foundation and the Association for Micro enterprise Development that provided loans to micro businesses and unincorporated businesses. Rural borrowers and savers were also served by long-standing And there were many money lenders. When the monetary authorities initiated its foreign exchange reform in 1988, however, some seventy exchange banks were forced to close. Fifty insurance companies, half of which were locally owned, underwrote policies in the late 1980s, under the supervision of the Superintendence of Insurance.

DOMINICAN MONEY & CURRENCY
The Official Currency of the Dominican Republic is the Peso, which fluctuates freely against the US Dollar and other foreign currencies. Paper currency is printed in denominations of 5, 10, 20, 50, 100, 500, 1000 and 2000 Peso notes. Coins are circulated in 1 and 5 Peso denominations (currently both coins and paper are circulated to represent 5 pesos). Coins of lesser denominations are currently minted and in circulation, but are generally not welcomed by businesses or informal vendors due to their low value. Most supermarkets and other business establishments either price their goods at an even number or round off the bill at the cash register.

Although some tourist establishments or street vendors accept US Dollars or other currencies, these are not legal tender in the country. Shops, supermarkets and other types of retail establishments do not accept any other currency than the Peso.

Most banks or private exchange houses offer currency exchange services. Though exchange posts or banks are accessible for purposes of foreign currency exchange, keep in mind that the exchange rate may often be higher with some of the private concerns, such as Vimenca.

The following foreign currencies are commonly to or from the Dominican Peso: Canadian Dollars, Dutch Gilders, English Pounds, French Francs, German Marks, Spanish Pesetas, Swiss Francs and US Dollars. Most other currencies will be difficult to convert and may require a visit to the Banco de Reservas or Central Bank.

The US Dollar exchange rate current since early 2001 has been approximately in the order of 16.70 to 16.90 pesos per US $1 range.

The Central Bank is responsible for printing and issuing currency, as well as regulating the nation's banking and monetary system.

The country's monetary board, supervised by the Governor of the Central Bank, directly determines monetary and foreign exchange policies. Nonetheless, there is a dual system of foreign exchange consisting of both private exchange and the Central Bank's official exchange.

 WHY CHOSING DOMINICAN REPUBLIC
FOR BANKING & INVESTMENTS
Many of our clients have chosen the Dominican Republic for their own banking or investment needs. US Dollar savings accounts, bank certificates of deposit (90-day or longer) or commercial paper investments (90-day or longer) are both locally tax-free and also offer the opportunity for higher rates of interest than what may be found elsewhere. As an example of the rates available for a 90-day time deposit (minimum US$ 10,000), one can expect 5% or more for a bank CD and up to 9% for a commercial paper investment (90 Days). All interest for such deposits is paid monthly, and may be direct deposited to your bank savings account.

Should it be appropriate for you, investing in time deposits denominated in the local currency, the Dominican Peso, could offer yields up to 20% for a bank CD or up to 25% for commercial paper.  Again, such interest is also locally tax-free, and the minimum term is 90 days.  You may deposit funds or make withdrawals via bank wire transfer, or any personal or other kind of check drawn on any banking institution regardless if a US bank or not.  This is of course assuming the funds are in US dollars (which you may send directly to the bank for deposit).  In addition, you of course may conduct your business in person as well or utilize the debit card / secured credit facilities as explained below.

Many of the local banks we work with offer US Dollar savings accounts, US Dollar Certificates of Deposit, ATM debit card facilities and a secured VISA & MasterCard program..  In addition, US Dollar checking accounts are now available as well.

If you would like to have some sort of investment or bank time deposit providing the maximum tax-free monthly interest that is possible.  It is also understandable that you would like to have some convenient way to access your interest as well.  You may of course consider commercial paper over a Bank Certificate of Deposit, but since it is not a direct investment with the bank it can be somewhat more cumbersome to work with regards to transfers and so forth.

One idea then is to establish a US Dollar savings account (US$500 minimum at most banks) and establish a US dollar bank certificate of deposit for US$10,000.  Interest rates are tiered in the Dominican Republic, so the rate of interest will be structured according to the amount of the CD.  For a US $10,000 deposit, at the moment you can expect 5% or so depending upon the bank, as the fixed rate of return.  My suggestion would be to take a 90-day CD, with the option to re-new at whatever the current rates are at that time.

Using the interest bearing $ 10,000 Certificate of Deposit, apply for a secured VISA or MasterCard.  Line of credit granted is 80% of the deposit, which in this case is US $ 8,000.  Please note that this is a regular VISA or MasterCard, which can be used at any establishment worldwide that accepts such credit card and also at ATM teller machines, as well.  If a credit card issued from a Dominican Bank is used outside of the Dominican Republic then the charges, regardless of the country the card is used in, will usually be billed in US Dollars.  If used inside of the Dominican Republic, then of course the statement or card charges will be billed in the local currency, which is the Dominican Peso.

When the card is used outside of the Dominican Republic, all charges are automatically billed in US Dollars.  When used inside of the Dominican Republic, all charges are billed in Pesos (the local currency of the Dominican Republic).  Since I am going to assume that you will be using this card exclusively outside of the DR, then your bill will always be in US Dollars.  When establishing the card, you have the option of requesting that your monthly charges be paid in full from your US dollar savings account.  You also have the option of having your statement held by the bank and faxed to you on demand.  Your account officer would then obtain your monthly credit card statement and hold it in your file pending your instructions (if you wanted it faxed to you, etc.).  Unless you instructed otherwise, the bank would also then pay off your card charges in full each month from funds available in your US Dollar savings account. 

The interest from your certificate of deposit is tax-free and can be direct deposited to your US Dollar savings account each month (to be applied towards your card charges accordingly).  In addition, your account officer can arrange wire transfer or US Dollar Bank Administrative check should you wish this as well.

In this scenario, all of your CD certificates account balances and card charges will also remain in US Dollars.  There is no currency conversion to Pesos required in this example.

NOTE:  US dollar checking accounts are available through many of the bank’s offshore subsidiaries.  This is of course a separate application form, but you may handle this all through your account officer as well.  The minimum required opening balance for the checking account is normally US $3,000.

With regards to using an ATM debit card, another option is to establish a US Dollar savings account plus a Dominican Peso savings account.  The minimum for a US Dollar savings account is $500, and the minimum for Peso savings account is the equivalent of US $100 (or less).

Request an ATM DEBIT card, which would be connected to your Peso savings account.  The ATM card may be used to access funds at any ATM machine worldwide, which was a member of the associated card network.  Some banks now also offer a Debit Card that works directly the US Dollar Savings Account as well (ask your bank as not all currently offer it).

You may of course establish a Bank Certificate of Deposit in which currency you prefer.  If you prefer to establish a Peso CD, rates are of course higher than interest rates in US Dollars.  Regardless, since the ATM debit card can often only be used in conjunction with your Peso Savings account, any and all interest payment credited from your certificates or deposit would have to end up in your Peso savings account accordingly.

If you have a Certificate of Deposit or investment in Pesos, then this can be direct deposited to the Peso savings account accordingly.  If you have investments in US Dollars, then of course a currency conversation would have to be done accordingly for the interest to be credited to the Peso savings account.

What is the plus or minus to this?  The one benefit is that the interest rates are higher in Pesos and you would have the opportunity to earn a higher rate of return in Pesos than in Dollars.  The "downside" to this is the fact that you would be subject to any currency exchange rate changes as they occur.

In my opinion, if you will not be spending the bulk of you time in the Dominican Republic, keeping your accounts strictly in US Dollars (as outlined in Option A would be the best way to go).  This is so you have no “exchange rate” issues when converting pesos back to dollars in the future.

QUESTIONS AND ANSWERS
ABOUT DOMINICAN REPUBLIC
Why Would Someone Want to Bank in the Dominican Republic?
First and foremost, one must understand the idea of a FREE MARKET and what that means. A free market means, among other things, that capital will seek out the highest return or benefit. That is to say, investors will send their money where it suits them best, for the maximum return. It also means, whether you realize it or not, countries are in competition with one another for foreign investment money. In the case of the Dominican Republic, the central bank very much would like to see the US Dollar cash reserves of the country to increase for a variety of very positive reasons (as does any other small country that trades with the US, Europe or Asia). How does one country make a bank account investment more attractive than the idea of a bank account in another? In other words, why invest in the Dominican Republic? 

In order to attract investment and foreign capital, smaller countries try to compete with the only weapon they have, namely local legislation offering some sort of tax incentives.  Many countries exist, which are not formally called “Tax Havens”, but they certainly have local legislation in place that permits a number of similar types of incentives.  Such incentives might include tax-free bank account interest, zero tax on company profits if a business relocates, (which spurs the economy by offering new jobs the local citizens, namely the concept behind Free Zones).  So, there may be a number of places to consider to do your banking, if you are interested in earning higher interest, and or benefit from zero local taxation.  In addition, perhaps benefit from the fact that your personal banking information or interest is not proactively disclosed (the Dominican Republic being just one choice of many).

Many of our clients open bank accounts and invest in the Dominican Republic because US Dollar interest rates are higher than other countries, and also because the interest on such investments is 100% exempt from local taxation.  In addition, the fact that such interest is in fact private, or not reported for local tax purposes, is also a very positive motivating factor as well (for many, possible the most important of all).

Is Banking Safe, or in the least Insured, in the Dominican Republic?
Many Americans, Canadians, and other nationalities mistakenly believe the stereotype that the Dominican Republic is a tin-pot third world banana republic.  They believe there are no regulations, extreme poverty everywhere and complete government mismanagement.  I do not agree with this opinion, but this is the stereotype that many other nationalities still have.

The most common question we see from readers involves the safety of bank deposits in the Dominican Republic.  Americans especially point to the US government run FDIC insurance program as a benchmark to compare the rest of the world to.  My advice is to understand what you are trying to compare or ask.  FDIC was broke during the early 1990’s due to bank failures in the late 1980’s (which by the way was a point in time most people would deem to be decent or positive economically speaking).  The link to this information is below.

The point is, FDIC is one of the most miserably run insurance programs and if it were a private insurance company, would have been out of business due to insolvency a very recent 10 years ago.  Considering that the late 1980’s were not a time many would term a severe economic depression, and less than 20% of US banks folded up causing FDIC to become insolvent, what might the case be for a real bad US economic crisis?  If the system goes broke with less than 20%, what will happen if 30% go belly-up?  Americans probably sleep better seeing that little FDIC sign on the bank door, but the reality is truly something very different than the hype or promotion.  You are correct if you say, It is better than nothing.  However, one should compare apples to apples when looking at foreign banks and how much is kept on reserve to cover failed banking institutions.  In many countries, the Central Bank of the country is charged (as is the case in the Dominican Republic) with this responsibility and the reserve requirement is often as high as 5% or more of each bank’s deposits.  In other words, which number is greater, 5% or 1.38%?  (See the FDIC information below, whereby in reality only 1.38% is in reserve for the entire insured number of banking deposits as of 1998 figures).

What about FDIC, with it’s US$ 29 Billion Dollars (1998 figures) in the bank insurance fund account?  Well, according to FDIC statistics, there are 77 commercial banks with US$ 10 Billion Dollars or more on deposit.  This means it only takes 3 out of these 77 very large banks to fail, and the FDIC insurance fund is wiped out once again (See 1991 & 1992 statistics regarding the insolvency of FDIC).  How many Americans knew that the FDIC Bank Insurance Fund (BIF) was broke in 1991, to the tune of negative US$7 Billion Dollars and also broke in 1992 to the tune of US$ 100 Million Dollars?  Not only was the bank insurance fund insolvent in these years, it was in debt!  And this was not so long ago.

A quote from the 1998 FDIC Report to Congress:

The BIF (Bank Insurance Fund) has grown steadily from a negative fund balance of $7 billion at year-end 1991 to $29.6 billion at year-end 1998.   Here is the Link, so you can read for yourself:

http://www.fdic.gov/about/strategic/report/98Annual/cond.html

Also, as of 1998, for each US$ 100 Americans have on deposit with US banks, the FDIC can only cover US$ 1.38 if all US banks (covered by FDIC) go under.  Now how comforted are you, knowing your account is covered by FDIC insurance?  See the FDIC’s own statistics here:

http://www.fdic.gov/about/strategic/report/98Annual/122.html

The following has been taken directly from the FDIC web site (http://www.fdic.gov/).  Some changes to FDIC coverage were made in 1992 & 1993 and it would seem most US investors are not even aware of these changes (Is it so ironic that they reduced coverage right after they were broke?):

Governments (and people) in other parts of the world are no less concerned about having a safe and solvent banking system, and do have certain regulations or systems in place (although they may be different than the US operated FDIC program).  For example, the Central Bank in the Dominican Republic is charged with the regulation, licensing and solvency of the local banking community.  If you want to compare this to the US, we can say that the equivalent to the US Federal Reserve (with regards to the Central Bank in the Dominican Republic) has the responsibility of the FDIC and the Federal Reserve rolled into one, or under one roof and not two.  The Central Bank of the Dominican Republic does audit all banking institutions regularly, and requires a reserve deposit depending upon the type of deposits and loans the bank may have which is far in excess of what the US government has on deposit or requires of its banking institutions.

When we discuss the topic of banking, another important point to consider is the lending and business practices of banks in a particular market.  Many people view banking in Latin America as unstable or risky, yet banks in the Dominican Republic are far stricter than their US counterparts when it comes to things like credit cards, car loans and home mortgages.  Because there are no credit bureaus to speak of, Dominican Banks usually ask for at least one, sometimes more guarantees or co-signers to any loan, including credit cards (which are a form of unsecured personal loans in effect).  This means you must demonstrate collateral or at least have one or more other people stick their neck out for you when trying to apply for a car loan or any other kind of loan.  The result is, if you do not pay, the bank will most assuredly go after your brother in law, sister, best friend (and their assets) accordingly.

US banks on the other hand give out money, often enough seemingly based on a smile.  This is all well and good when the economy is fine and everyone is working.  But what happens when there are massive layoffs in the US and people stop paying?  The Central Bank of the Dominican Republic requires incredible (insurance) deposit ratios for both secured and especially unsecured loans (credit cards) on the books of Dominican Banks.  In fact so much so, it would explain the high credit card interest people pay (there are no usury laws in the DR, and annual credit card interest rates of 40% or more is not unusual).  The banks need to charge this to make money due to the large amounts of money they must put up with the Central Bank as collateral or what we can call insurance deposits for such loans.  US banks, on the other hand, have gotten so competitive that they charge the same amount of interest for car loans or home mortgages as they do for unsecured credit card lines of credit (a far riskier business).  So, if you want to make a comparison regarding which banking system is more secure or more solvent, in my opinion, it is the Dominican Republic and not the US.

BANKS IN
DOMINICAN REPUBLIC
ATH Dominicana - ATH Dominicana-
Banco BHD - Banco BHD-
Banco Central de la Republica Dominicana - Banco Central de la Republica Dominicana-
Banco Continental de Desarrollo, S.A. - Banco Continental de Desarrollo, S.A. - Dominican Banking institution (not offshore) dedicated to the provision of state-of-the-art Private & Investment Banking Services on a regional basis with an international profile.
Banco Mercantil - Banco Mercantil -
Country Profile of the Dominica Republic - Country Profile of the Dominica Republic -
Inter-American Development Bank - Inter-American Development Bank - Banco Inter-Americano de Desarrollo.

 

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