High noon in San Francisco de Macoris, a place with a reputation for rebellion. Gripping 12-bore pump-action shotguns across their knees, security guards Felix and Oscar lounge idly in the quiet shade of the bank, seemingly alert to the eerie moment when the streets empty and a posse of hardened outlaws rides into town. Disappointingly for fans of spaghetti westerns, nothing could be further from the truth. “We’ve never had a robbery here,” Oscar admits cheerfully. “I’ve worked for this firm for seven-and-a-half years and I’ve never even heard of a robbery. We’re only here because that’s what the law says.” Even so, he adds: “Neither of us keep our own money in a bank.”
Like more than two-thirds of all Dominicans, Oscar and Felix neither save, borrow nor transfer cash using the formal banking system. That is not because of any lack of security. Rather, on salaries amounting to less than $200 per month, Oscar and Felix, like many of their compatriots, have practically nothing to save, and interest on mortgages they have been offered exceeds what they can afford.
Meanwhile, the remittances that many Dominicans receive from abroad are handled efficiently, if expensively, by specialist companies that bring their service to the doorstep. Finding a way to develop services that can cater for a wider customer base is therefore one of the principal challenges facing the Dominican Republic’s banks.
Crisis recovery
Less than four years ago, however, the banking sector was wrestling with much graver problems. In 2003, Banco Intercontinental (BanInter), then the country’s second largest bank, collapsed amid a scandal of embezzlement, fraud and mis-management, not least its decision to offer unregulated lines of credit to many senior government politicians. Two other banks, Banco Mercantil and Banco Nacional de Credito (Bancredito), swiftly followed BanInter into difficulties. To the astonishment of many, rather than let the banks fail, the Dominican central bank decided to cover all their liabilities, despite having no obligation to do so. Bailing out the banks cost the country a huge slice of its national income, variously estimated at between 15% and 21% of gross domestic product in 2003, more than the combined output of the agricultural, mining, forestry and construction sectors.
Throughout the crisis, shrewd analysts continued to emphasise the underlying soundness of the Dominican economy but, even after democratic elections in 2004 replaced Hipólito Mejía’s administration with that of Leonel Fernández, it was difficult to believe salvation was close at hand. Nevertheless, Mr Fernández moved swiftly and successfully to restore confidence and within 18 months had returned the country’s economy to an even, if somewhat weather-beaten, keel.
Mr Fernández also pushed through a new regulatory framework for the banking sector and oversaw the restructuring of the banking supervisory body. While this has imposed significantly increased compliance costs on the country’s banks, it has nevertheless been widely welcomed. Dominican banks now appear refreshed after a cathartic few years and are embracing a challenging future with enthusiasm.
Corporate banking
Historically, Dominican banks have been relatively strong in corporate banking – unlike those in many other Caribbean states, where it has often been left to foreign banks. BanReservas, the main government-owned commercial bank, can trace a solid 65-year record in the field and an ample base of top-tier corporations among its customers, including Verizon, León Jimenes and Shell. High liquidity generated by a diversified customer base, including deposits from government ministries, means that BanReservas has been granted generous lines of credit by its foreign correspondent banks, enabling it to cover major imports, such as crude oil.
Retail deposits
Retail banking, on the other hand, is comparably less developed, though beginning to take important strides. Opportunities for attracting new business, not least from the vast number of small and microbusinesses that operate without bank accounts, are plentiful.
In part, microbusiness owners still worry that holding money in a bank will expose them to taxation, bank default or a seizure of assets, fears that are for the most part exaggerated: income tax, for example, does not kick in until income exceeds about 20,000 pesos.
Standing in the door of his tiny café overlooking the main square in Cotuí, 72-year-old José Cabrera is a typical sceptic. “I don’t save with [banks] and I don’t borrow,” he announces. Yet his monthly turnover gives him a better-than-average income and he also receives regular remittances from his five children working abroad. Whatever he does not need for living expenses or re-investing in the business, he invests in fixed assets, such as his house, or saves as cash for a rainy day. He is exactly the sort of customer that the banks need to attract into the system if they are to boost their business.
Fortunately for the banks, José’s young neighbour takes a very different view. “We use several accounts at different banks,” says Barbara, who runs one of the numerous Banca Frandy lottery booths scattered around the town. It is a lucrative business with a need to secure takings quickly and yet also be in a position to make pay-outs on demand. Easy access to cash is therefore essential. Barbara believes that local banks already deliver the services she needs; meanwhile, the company reduces its exposure to bankruptcy and liquidity risks by spreading its assets between banks.
In general, however, most mainstream banking services remain targeted at people in the middle and upper income brackets. For these customers, plastic card business and internet banking is rapidly becoming the norm. “We currently have about 538,000 debit cards on issue,” says Evelyn Alvarez, treasury director at BanReservas, the country’s largest commercial bank. “We’re trying to incentivise people to use their cards by charging a service fee for over-the-counter transactions, while ATM and internet transactions are free.”
BanReservas’s focus on better customer service, including investing in new self-service centres at its main branches, has led to a marked upturn in product sales and it now boasts about one million customers and a 25% share of the market by value.
Mortgages and loans
The high proportion of Dominicans who own their own homes, however rudimentary, has sustained the country through difficult economic times, guaranteeing most people a place to live even when unemployment rates reached one in four of the workforce.
“Most property in the Dominican Republic is not mortgaged,” says John Schroder, a financial consultant. Instead, it is more common to buy a plot of land using money raised from within an extended family network and to build a house on it slowly.
Although on the face of it, widespread home ownership might sound desirable, this state of affairs is not without significant drawbacks, not least the amount of capital that even the poorest people keep tied up in property. The reason is not difficult to discern: the restrictive mortgage lending criteria typically found in the republic.
Mortgages from Dominican banks are typically structured around a 20%-25% down-payment and a repayment period of just 15-20 years, rarely more. As well as first claim on the mortgaged property, banks often require an additional co-signatory to act as guarantor, who stands to lose their own property if a default occurs.
“Banks here are very strict about lending,” says Mr Schroder. “The super-low rate at Banco BHD is 14%: that’s an all-time low and is variable, not fixed.”
General loans from BanReservas are attracting 18% interest fixed for six months, one of the best rates available. Every year the bank offers about 1500 cheaper rate loans for vehicle purchases – this year the rate on these is 11.65% – and offers special agricultural loans at 15%.
For many potential customers in the lower income brackets, neither the usual size of loans on offer from the mainstream banks nor the terms are attractive. Microfinance institutions have grown to fill this yawning gap. Perhaps the best known, Banco Adopem, plans to add 50 new branches to its network over the next four years and to introduce ATMs and plastic cards for cash withdrawals and payments.
The market is potentially huge. “There are 600,000 microbusinesses in the Dominican Republic,” says Mercedes de Canalda, Banco Adopem’s president. “If they need money, most would borrow cash from street lenders at interest rates of 20% daily: that’s our main competition.”
It is competition, however, that could soon find itself out of business. Banco Adopem now ranks fifth for profitability among Dominican banks and demonstrated the highest profits growth of any Dominican bank in 2005.
Remittances
Mainstream Dominican banks have only recently begun to enter the market for handling remittances from abroad, about $2.5bn of which – growing at nearly 7% annually – is sent home every year from the US and, increasingly, from Spain, Italy and the Netherlands. In the past, banks made little headway in the sector, not least because the remittance companies can be relied upon to deliver cash right to the door in even the most rural communities, a service the banks do not aspire to match.
“We’re trying to find a way of servicing this sector. We’re competing with the exchange houses, but they offer a good service and people don’t like to change”, says Juan José Arteaga executive vice-president of Grupo Progreso.
Ms Alvarez of BanReservas agrees: “Wire transfer services are very efficient at getting money to the door. It can be deposited at 5.30pm in New York and by 6.30pm it’s paid out here.”
High levels of illiteracy and an innate suspicion of institutions among poor people also contribute to the unwillingness of many to entrust a vital component of their income to the apparently more mystical and inevitably less personal services offered by the banks. “People don’t like banks: they’re too complex. Many people with low education levels don’t understand them,” says Ms de Canalda.
Yet similar problems have been addressed elsewhere in Latin America, and signs of change in the Dominican banking system are becoming apparent. The Achilles heel of the remittance company model is costs: much of the value of remittances is lost to the high charges entailed by door-to-door service and the need to protect remittance dispatchers from being robbed. It looks likely that, as banks expand their branch networks and as new technology (such as ATM cards) becomes more prevalent and familiar, especially among the young, then there will be a trend towards mainstream banking for remittance transfers.
BanReservas, for example, now has 126 branches nationwide, along with 44 mobile banks that serve outlying areas and 265 ATMs, giving it a geographical presence almost on a par with the largest of the remittance companies.
“We’ve been looking for niches to get us into this market,” says Ms Alvarez. “We can offer better exchange rates and improved legal arrangements over our [remittance company] competitors.”
Likewise, Banco BHD, the first mainstream bank to tackle the remittances issue, now has a remittance division; Banco Popular has entered the field; and Banco Adopem – with competitive advantages stemming from its solid customer base among the poor – is developing a portfolio of remittance products, including savings accounts for education, housing, holidays and funeral expenses, as well as accident and life insurance. The Dominican Republic-Central America Free Trade Agreement might also help accelerate change if more international banking groups enter the Dominican market and facilitate quicker and more convenient cross-border transfers.
