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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 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 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. 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 BANKS IN
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