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.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 $29.6 billion at year-end 1998. Here is the Link, so you can read for yourself:
Also, as of 1998, for each US$ 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:
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.