dominican republic banking

What Are Your Investment Options In The Dominican Republic?

Investing With Fixed Income Securities

Dominican Republic Multi-Currency BankingFor starters lets discuss what are known as fixed income investments.  Fixed income normally refers to things like bonds, certificates of deposit or any type of investment whereby you are basically putting your money on deposit for a fixed period of time and for a fixed rate of interest.  A bond is a type of fixed income investment and is in essence a loan.  When you purchase a US government bond, you are loaning the government your money for a fixed time period and for a fixed rate of interest.  When you purchase a corporate bond, from a company such as Pepsi or IBM, you are loaning that corporation your money in the same fashion.  The term Bond is used when talking about a loan that is greater than one or two years.  Most bonds are issued for five years, ten years, twenty-years and so on up to thirty years. When watching the financial news you will often hear the term US government long bond.  They are talking about 30 year US government bonds. 

Interest on a bond investment is normally paid every six months to the investor. At the end of the bond time period or when it matures, the principal amount is returned to the investor.  As an example, if you invest $100,000 in a five-year bond at 6%, you will receive two interest checks every year, for a total of $6,000 every year that you own the bond (one check every six months for $3000).  After five years, your $100,000 is returned to you.  Interest on a bond is normally paid out every six months, but there are some bonds that pay interest monthly.  It can be difficult to purchase long-term bonds in the Dominican Republic because many companies are fearful about borrowing money at a high rate for a long period of time.  Just like investors who are looking for a mortgage, they do not want to be locked into a high interest loan if rates should go down in the future.  Locking in a high rate over a long period of time is very good for the investor, but is not favorable for the entity borrowing the money.

What is Commercial Paper or Shorter Term Fixed Income Securities?

Commercial paper is in effect a very short-term bond, usually for any period less than one year.  When talking about commercial paper investments, we are in fact discussing a type of short-term investment for 30 days, 90 days, 180 days or any time frame that is one year or less. Most investors that understand a bank certificate of deposit can relate that to a commercial paper investment.  The difference of course is that you are loaning your money directly to a company and not to the bank.  In essence it can be said that you are by-passing the bank because in reality banks that offer money market accounts or savings accounts are purchasing commercial paper with depositors funds and keeping the spread between what they really earn and what they pay the depositor.

Most of the commercial paper issued in the Dominican Republic in previous years were issued for a minimum of 90 days and thus constituted a bulk of these kinds of investments with regards to term or time line.  However, more recently in 2013 and 2014 local companies in the country issuing commercial paper have opted for longer term maturities.  So, for this reason, you might find maturities of between 2 and 7 years as being more common and less of the shorter term variety (less than one year).  Investors that make this investment are in effect loaning their money to a company for a short-term need, although as we have stated, many businesses are now attempting to lock in rates for longer time periods in terms of securities being issued in 2014.  Interest is usually paid monthly with a commercial paper investment and at the end of the maturity period, the principal or initial investment is returned to the investor.  When we work with our clients that are interested in the higher yields found in Dominican Peso Investments, we have made special arrangements with the brokers we work with so your monthly interest is automatically credited to your Dominican Peso or US Dollar local Bank Savings Account.  This way this is no hassle cashing your monthly interest check and you always have access to your money via your ATM card (which can be used worldwide at any bank machine that is a member of PLUS or CIRRUS).  The commercial paper can also be registered in your name directly or if you prefer, in the name of your corporation, foundation or trust. 

Why Are The Interest Rates Higher In The Dominican Republic?

Money is a commodity, like oil, silver, bananas or coffee.  When it is in demand, the price or interest rate with regards to money, goes up.  Stated another way, the price of money is the interest rate, and when it is in short supply, interest rates are higher.  This is the situation at times in the Dominican Republic and elsewhere.  Many companies either need money for a short term need or they do not want to issue longer term bonds and would prefer to continuously re-borrow every 90 days at the prevailing rate.  The thinking behind this is that the company will not become locked into a very high rate on a long-term basis if the interest rates come down.  Part of this business philosophy has come about because rates in the Dominican Republic have in fact come down from a high of over 30% which was the case in the not too distant past.  However, in 2013 and 2014 that philosophy has changed somewhat in that many companies now seem to be concerned about possible future higher rates and are increasingly issuing securities with 5 year maturities in many cases, hoping to lock in what they think are current lower rates (which is to suggest the belief that rates could could up over the next few years, making borrowing more costly).

Some companies do have a need for US dollars in order to trade with the United States and of course Euros in terms of Europe.  Since there are often not enough dollars in the banking system at times, companies must attract individual investors by offering a better rate of return than can be found elsewhere.  An example of this can be seen with Reid & company, a 50 year-old Dominican conglomerate that happens to have a vehicle and heavy-duty equipment distributorship.  Since the car manufacturers in Detroit or elsewhere wants to be paid in dollars, not pesos, they needed to borrow US dollars for this purpose.  Investors therefor have an opportunity to take advantage and get a good rate of return from a large and well managed local company.  Of course, interest rates offered on bonds or commercial paper investments will always fluctuate all depending upon demand, but the rate is usually locked in when you make an investment.  However, the rates being offered 6 months later of course might be very different from the rate you obtained when you purchased your bonds or commercial paper previously.

General Dominican Republic Banking Information

Many of our clients have chosen the Dominican Republic for their own banking or investment needs.  Bonds (which might have maturities currently ranging from 2 to 5 years) or commercial paper investments (90-day or longer) offer the opportunity for higher rates of interest than what may be found elsewhere.  As an example of the rates available for locally issued US Dollar bonds (as of September 2014) maturing in 5 years, recent issues offered have paid about 4 to 5 percent annual interest.  Making a comparison for 5 year commercial paper denominated in Dominican Pesos, interest rates now in 2014 are about 9.5 percent.  And interest for such deposits is paid monthly, which may be direct deposited to your bank savings account if you set it up that way with your broker.

Should it be appropriate for you, investing in time deposits denominated in the local currency, the Dominican Peso, could offer yields up to 9% for a bank CD or up to 16% for commercial paper.  Again, the term can be anywhere from 30 days up to 360 days, or in recent cases 36 months or more.  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), and if the foreign bank issuing the check has a US correspondent banking relationship whereby the check is payable through the US banking system (this will be indicated directly on the bank check issued to you).  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 will offer US Dollar savings accounts, Euro Savings Accounts, US Dollar Certificates of Deposit, Euro Certificates of Deposit, ATM debit card facilities and a secured VISA & MasterCard program. If you would like to have some sort of investment providing the maximum tax-free monthly interest that is possible, then you may wish to consider either bonds or commercial paper over a bank certificate of deposit.

In terms of using a regular VISA or MasterCard issued by a Dominican Bank, such cards can be used at any establishment worldwide that accepts such credit cards 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 establishing the card, you have the option of requesting that your monthly charges be paid in full from your US dollar savings account or Peso 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 or emailed to you, etc.).

With regards to using an ATM debit card, some banks will offer a debit card containing the Visa or Master-Card logo, allowing the card to be used at those merchants that accept such cards (the card is swiped and you would enter your pin code).  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).  However, in most cases, the ATM card will be issued or connected to your Dominican Peso Savings Account.

You may of course establish a Bank Certificate of Deposit in whichever 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.  If you will not be spending the bulk of you time in the Dominican Republic, keeping your accounts strictly in US Dollars or Euros (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 or Peso back to Euros in the future.

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 or Euro 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 can be higher than other countries, at least in the case of bonds or commercial paper.

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 noinvesting 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), and the FDIC insurance fund is UNDER FUNDED once again (now in 2012).  Aside from private US banks getting bailouts from the Federal Government, FDIC also requires a tax-payer bailout or additional funding to cover it's potential liabilities.  In fact, had the Federal Government and The Federal Reserve Bank not bailed out the major banks inside the US, some certainly they would have been declared formally insolvent and taken into receivership by the FDIC, which would have needed a bailout of it's own to cover the insured deposits.  In our opinion, this would have been better rather than rewarding bad or very foolish behavior by the private bankers, but such is a theme for another day.

The point is however, FDIC is one of the most miserably run insurance programs of it's kind, and if it were a private insurance company, would have been out of business due to insolvency previously.  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 0.79%?  (See the FDIC's own public information, whereby in reality it has only 0.79% - LESS THAN 1 PERCENT in reserve for the entire insured number of banking deposits as of December 31, 2013).  But here is the real joke: by law, the FDIC Deposit Insurance Fund must achieve a minimum reserve ratio of 1.35 percent by 2020.  By The YEAR 2020!

But let us get away from percentage statistics for just one moment and talk about cash.  The FDIC has about US$ 47 Billion Dollars (December 31, 2013 figures) in the bank insurance fund.  It has been estimated that 90 percent of the US banks are financial institutions with less than US$1.5 Billion in assets.  However, the remaining 10 percent are banking behemoths, such as JP Morgan with an estimated US$2 Trillion Dollars in assets.  Just 5 US Banks are calculated to hold more than US$8 Trillion in assets collectively (as of 2011 figures), and among those five are: JP Morgan Chase & Co., Bank of America Corp., Citigroup Inc., and Wells Fargo & Co.  So, what that means is IF just one of those large banks go bust, the entire FDIC insurance fund is WIPED OUT.  It would take about 30 of the smaller banks (with about US$1.5 Billion in assets) to go under in order to also wipe out the entire FDIC Deposit Insurance Fund.  To put that into perspective there are in excess of 7,000 banks supposedly covered by the FDIC insurance program.  So, what that means is, IF ONLY ONE HALF OF ONE PERCENT of the small banks go under, the FDIC Deposit Insurance Fund would be kaput.  Again, LESS THAN 1 PERCENT.  Think about that for just one moment.

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 had given out money previously, 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 it certainly would seem that the answer is the Dominican Republic and not the US.

One Final Important Point About The Current So-Called Global Banking Crisis

First off, you must understand that there is NO world banking crisis.  There is a banking situation specifically effecting the banks inside the US and the European Union for the most part, but these two political entities do not constitute the entire world, even though they may think so.  The banks, and the banking system in many of the so-called emerging or developing market countries (which includes the Dominican Republic) are just fine, in comparison to their counterparts in the US or Europe.  Why is this so?

Well, let us consider that many banks inside the US previously got themselves involved in very loose credit practices as it pertains to issuance of unsecured credit cards and of course housing mortgages.  There is no need to go into extensive detail about all this because already there has been a plethora of books, news programs and even Hollywood films touching upon this theme, but the basic synopsis is - this is what happened.  However, it had infected the European banking system due to the fact that many of these dubious quality mortgages were packaged and sold to foreign banks as safe AAA rated investments.  As such, these securities were dumped off on others, namely European Banks and even sovereign wealth funds, such as those administered by national governments in the Middle East and Asia (China).  In fact, if you bother to investigate the recent audit of the New York Federal Reserve Bank, the initial emergency aid of US$700 Billion pushed through by Henry Paulson was to bailout China's investment into these junk mortgage securities, or so goes the reporting and results of the audit.

To be fair and as a side note, the current banking situation in Europe is now centered on over exposure to sovereign bonds issued by member countries in severe trouble (Greece, Italy, Spain), but the initial financial hit to the European system was the American issued mortgage backed securities.

In any event, and in very simple terms, all of this nonsense did NOT happen in the emerging market countries because A. They did not invest in or buy these dubious quality mortgage backed securities offered by the US financial community, B. They did not get involved with derivatives (which have a relationship with the mortgage backed securities), and C. Local lending practices, be it for home mortgages or credit card issuance, remained very conservative as it has been.  And so, explained another way - Why is it the banks and banking system in other countries did not become poisoned?  Answer:  Because they did not drink the same poisoned Kool-Aid as the banks or investment firms elsewhere.

The only reason we mention all this, is because there still are a number of people that want to question the idea or integrity of investing or banking in another country, or another market.  To be sure, all that glitters is not gold and people should investigate as much as possible, what they are investing in and whom they are doing business with.  However, with that said, do not believe for one minute that financial institutions in the so-called developed markets have a monopoly on safe and healthy banking practices.  Nor should you be led to believe that governments in other countries are lackadaisical or inept when it comes to banking regulations, and supervision inside their own country.  It is a big world out there, and there are a number of worthwhile options to consider.