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Banking & Investments in the Dominican Republic
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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).
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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).
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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.
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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.
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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.
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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?
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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?
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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).
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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.
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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.
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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).
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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.
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A quote from the 1998 FDIC Report to Congress:
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The BIF (Bank Insurance Fund) has grown steadily from a negative
fund balance of $7 billion at year-end 1991 to $29.6 billion at
year-end 1998. Here is the Link, so you can read for yourself:
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http://www.fdic.gov/about/strategic/report/98Annual/cond.html
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Also, as of 1998, for each US$ 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:
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http://www.fdic.gov/about/strategic/report/98Annual/122.html
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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?):
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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.
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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.
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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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