Dominican Republic-Banking and Financial Services

The Dominican Republic had a diversified, dynamic financial system in the 1980s, which had undergone rapid expansion throughout the post-Trujillo era. In the late 1980s, more than 400 financial enterprises, representing 17 types of institutions, made up the country's financial services sector, which contributed 7 percent of GDP in 1988. The financial system in the 1980s included the Dominican Central Bank (Banco Central de la República Dominicana--BCRD); see Monetary and Exchange-Rate Policies , this ch.), commercial banks, savings and loan institutions, private development finance companies (or financieras), mortgage banks, state banks, and assorted other establishments.

The financial system grew rapidly after 1961, as the private sector gained greater access to credit, new forms of finance became available, and Dominicans created new institutions to meet their growing credit needs. The number of formally regulated financial institutions rose from 7 in 1960 to 31 in 1970, and to 78 by 1985. These institutions had a total of 263 branch offices. Much of the growth in the 1970s and the 1980s involved consumer finance companies and larger financieras, which underwrote medium-term and long-term loans for priority economic sectors. The financial sector experienced a crisis in the first half of the 1980s because of the poor macroeconomic climate, but increased government regulation as part of a 1985 stabilization program eased some of the system's problems. Despite high inflation and unusually high interest rates, many new commercial banks and related services were founded in the late 1980s.

Twenty-four commercial banks made up the core of the private financial system in 1989. Commercial banks controlled about 64 percent of the financial system's total assets, and over 40 percent of commercial bank funds were deposited in one bank, the Reserve Bank (Banco de Reservas de la República Dominicana). Although it served as the main fiscal agent of the government, the Reserve Bank also operated as a commercial bank. Banks were largely Dominican-owned, especially after several foreign banks sold most of their portfolios to local banks in 1984 and 1985 because of the unfavorable economic climate. Nonetheless, Chase Manhattan and Citibank, from the United States, and the Bank of Nova Scotia, from Canada, maintained local operations in the late 1980s. Banks provided a full range of services, and they were the only institutions offering checking accounts. The Superintendency of Banks, within the Secretariat of State for Finance, regulated the banks in conjunction with the Central Bank.

Commercial bank loans to productive sectors favored manufacturing, which received 34 percent of bank credit in 1987; followed by agriculture, 19 percent; services, 8 percent; and construction, 6 percent. The remainder financed exports, imports, and consumer purchases.

The growth in investment in the priority areas of assembly manufacturing and tourism increased the private-sector share of total domestic credit, beginning in 1984, despite tight credit conditions. Large corporations dominated access to bank credit, often irrespective of their credit worthiness or need for credit, mainly because of their superior "connections." Besides their assets in the domestic banking system, Dominicans held an estimated US$1 billion in accounts overseas, mainly in the United States.

Savings and loan associations and mortgage banks were the main sources of household finance. Seventeen savings and loan associations served the nation in 1989, up from only twelve in 1970. These associations, established since 1962, contained 19 percent of the financial system's assets and catered mostly to middle-income home-buyers, but they also offered passbook savings, certificates of deposit, and collateralized loans. The National Housing Bank (Banco Nacional de la Vivienda--BNV) regulated the savings and loan institutions by imposing perfamily lending ceilings. Fourteen mortgage banks, holding about 10 percent of the financial system's assets, served mostly upperincome homeowners. The most prominent of these institutions was the Dominican Mortgage Bank (Banco Hipotecario Dominicano--BHD). Unlike the savings and loans, however, mortgage banks also financed the short-term needs of builders and medium-term and long-term commercial construction. Both the Central Bank and the BNV regulated mortgage banks, but they imposed less stringent regulations than those applied to the savings and loan associations. Lower-income homebuyers obtained credit via the National Housing Institute and household finance companies (sociedades inmobiliarias).

The very popular financieras, the equivalent of private development finance companies, controlled 6 percent of national assets, and they were an important vehicle for the financing of medium-term and long-term investment in priority sectors. The number of financieras had grown from eight in 1970 to twenty-five by 1989. Established in 1966, financieras issued stocks and funded bonds, guaranteed by government financial institutions, to mobilize capital in major development projects in agribusiness, industry, transportation, and tourism. In addition, they supplied technical assistance to borrowers, and they served as guarantors of the liabilities of others. As many as 300 consumer finance companies, also called financieras, providing short-term consumer credit throughout the countryside, were largely unregulated. Increased government regulation of the small financieras, particularly in the area of currency speculation, forced many to close in the late 1980s.

Three state banks played a relatively minor role in the financial system. These included the BNV, which provided some housing-related finance, and the Industrial Finance Corporation, which played a smaller role than its name suggested. The Agricultural Bank of the Dominican Republic (Banco Agrícola de la República--Bagricola), by contrast, was an important creditor. Through its thirty branch offices, Bagricola covered most of the countryside in an attempt to serve small farmers. It faced an uphill battle, as both public sector and private sector credit policies favored urban activities. The bank declined in importance during the early 1980s because of a high level of unpaid debt, but it rebounded in the late 1980s as it became more autonomous and, for the first time, mobilized capital through savings accounts.

A wide range of other financial enterprises, providing a broad array of financial services, also existed in the Dominican Republic. Many of these organizations served the large informal sector. The Dominican Development Foundation and the Association for Microenterprise Development were successful lenders to microenterprises and unincorporated businesses. Rural credit unions, in existence for decades, also served rural borrowers and savers. Money lenders abounded as well. Monetary authorities closed down some seventy exchange banks in 1988 as part of foreign exchange reforms; it remained unclear in 1989 whether that was to be a permanent policy. Fifty insurance companies, half of which were locally owned, underwrote policies in the late 1980s, under the supervision of the Superintendency of Insurance.

Data as of December 1989