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Banking
& Investments in the Dominican Republic
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About
the author: John Schroder
lives
in the Dominican Republic and is associated with Ascot Advisory
Services.
Ascot Advisory assists clients with residency in the Dominican
Republic,
local incorporations (and other services such as Panama Foundations),
assistance
with banking introductions and investment advice, plus assistance with
matters
such as title search. For more information about living in the
Dominican
Republic, contact John by telephone 809-334-5387 or 809-756-1917.
Email:
info@ascotadvisory.com |
Bonds or Longer-Term Fixed Income Investments
..
For 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, which currently pays about 5% at the
moment.
.
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.
.
Commercial Paper or Shorter-Term Fixed Income Investments
.
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 is for a minimum of 90 days. Investors that
make this investment are in effect loaning their money to a company for a
short-term need. Interest is usually paid monthly with a commercial
paper investment and at the end of the 90 days, 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 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 Rates Higher in the Dominican Republic?
.
Money is a commodity, like oil, silver,
bananas or coffee. When it is in short supply, the price goes up.
The price of money is interest rates and when it is in short supply, interest
rates are higher. This is the situation 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% a few years back.
.
Some companies do have a need for US
dollars in order to trade with the United States. Since there are
often not enough dollars in the banking system, 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.
They recently offered up to a 14% interest rate for 90-day commercial paper
in US dollars so they could re-stock their inventory. Since the car
manufacturers in Detroit want to be paid in dollars, not pesos, they needed
to borrow US dollars for this purpose. Investors therefor had an opportunity
to take advantage and get a good rate of return from a large and well managed
local company.
.
The interest rates of course will change
weekly, depending upon the market and demand.
.
How Do We Work with our Clients?
.
We have relationships with a number of
banks, brokerage firms and mutual fund companies. In the case of commercial
paper offerings in the Dominican Republic, the firms that we do business with
keep us informed regarding that latest opportunities that are available, so
we may in turn inform our clients. We also review these offerings and
select the opportunities that offer the best rate of return with the minimum
amount of risk. It is fair to say that all investors are interested
in receiving a good rate of return, but also want to make sure their interest
will be paid on a timely basis and that their initial investment will be returned
when stated. This is our goal for our clients when reviewing potential offerings.
In addition, clients know that we are here to protect their interests exclusively
and have no vested interest in seeing investment money directed to one particular
offering or one particular firm. There is no other firm we know of
that works this way in the Dominican Republic, or attempts to protect foreign
clients in this regard.
.
When a client wishes to make a commercial
paper investment, we need to know how the ownership should be titled and
what the interest payment instructions are. Commercial paper in US
dollars, for example, pays monthly interest in dollars. Interest checks
are drawn off a US dollar bank account in the United States, so investors
have no problem cashing their checks. As an alternative, we can also arrange
for the clients check to be sent to their foundation or company bank account
in Panama. Regarding Dominican Peso investments, we can arrange for a local
savings account in Santo Domingo with one of the local banks. This feature
offers our client tremendous convenience because, by special arrangement,
the brokers we work with will offer direct deposit service for monthly interest
payments. When the commercial paper matures, the client can either re-new
for another 90 days or request that the principal be deposited also to their
savings account. For clients that live in the Dominican Republic or abroad,
access is their money is always possible through their bank ATM card.
.
Current Interest Rates for Commercial
Paper in Dominican Pesos range from 16% to 24%, depending upon the company,
length of the investment and also the amount invested. Deposits of
RD $ 1 Million pesos (about US$ 65,000) will always pay a higher rate than
the minimum deposit of RD$ 100,000 (about US$6500).
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General Banking Information
.
Many
of our clients have chosen the Dominican
Republic for their own banking or
investment needs. US Dollar savings accounts, bank certificates
of
deposit (90-day or longer) or commercial paper investments (90-day or
longer)
are both locally tax-free and also offer the opportunity for higher
rates
of interest than what may be found elsewhere. As an example of
the
rates available for a 90-day time deposit (minimum US$ 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 Banking….
.
.
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.
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