The Dominican Republic’s banking system is described in many different ways, with most of the words used starting with one of two letters.
First is the letter ‘d’, for words like diverse and dynamic. Next is the letter ‘s’, for solid, stable and strong.
The 48 institutions in the country’s financial ecosystem supervised by the Banking Superintendency (SB) are buoyant, with profit margins increasing, loans and deposits growing and non-performing loans falling at an accelerated rate.
“The Dominican banking system is very stable and solid. We have not seen any pressure in terms of capacity,” says Larisa Arteaga, director of Latin America financial institutions at Fitch Ratings.
The Dominican banking system is very stable and solid. We have not seen any pressure in terms of capacity.
Her assessment is repeated by top people in the banking system.
José Obregón, director general of international banking and corporate governance at Banreservas, says: “The Dominican financial system continues to strengthen, which is reflected in consolidation of the banking sector and its increasing position within the external market.”
Bernardo Fuentes, vice-president of economic research at Banco BHD, adds that the financial system is “showing dynamic growth, accompanied by healthy levels of non-performing loans (NPLs) and growing profits levels”.
Banreservas is the country’s largest bank, with 33.8% of the market, while BHD is in third place with 15.3%, according to the SB.
The numbers speak for themselves. Loans within the financial system increased by 16.5% in the first half of 2023 compared with a year earlier, reports the SB. Deposits in the system increased by 13% during the same period and are equivalent to 39.4% of gross domestic product (GDP). Return on equity increased by 2.3 points to 11%, while return on assets remained steady at 14.3%.
NPLs fell to 1.1%, their lowest level in seven years. The Dominican Republic has the lowest NPL ratio of the countries in Central America with which it is most often compared and benefits from the Central America-Dominican Republic trade agreement with the US.
In addition to low NPLs, the banking system also has extremely robust loan loss provisions at 292.4% as of June 2022. They had reached 300% in April 2023.
The Banco Central de la República Dominicana (BCRD) has also played a role in the performance of banks this year. It increased the benchmark interest rate to 8.5% in November 2022 and left it there for six months to fight inflation. Annualised inflation reached 9.64% in April 2022, but fell to 4.35% in October 2023.
The interest rate policy contributed to much slower GDP growth than was originally forecast for 2023. The bank began an easing strategy in May that included different policy moves to pump money into banks.
The BCRD freed up 119bn pesos ($2.09bn) through changes to its reserve requirements. The funds were gradually released to banks at an interest rate of 3% so that they could be passed along to clients, particularly microenterprises and small businesses, at interest rates below 9%.
“The bank’s approval of greater liquidity for financial institutions to channel them to economic sectors at attractive rates has helped increase loan portfolios,” says Mr Fuentes.
Ms Arteaga says the system’s resilience was on display in a stress test carried out by the BCRD and published in September 2023. She says the results were encouraging from many angles. “The results of the stress test showed that there were not significant vulnerabilities that would lead to a collapse of the financial system,” she adds.
The BCRD looked at three scenarios, two of which the country has lived through already (climate-related and biological), and one geological that affected Haiti, the country with which the Dominican Republic shares the island of Hispaniola. The test looked at the spike in NPLs if any of these events were to occur.
The climate scenario focused on different phenomena, but the major issue was the possibility of a hurricane. The Dominican Republic was ravaged by Hurricane Georges in 1998, causing losses equivalent to 10% of GDP. The stress test found that a Category 4 or 5 hurricane on the Saffir-Simpson scale would force up NPLs to 6.1% of total loans.
NPLs would increase to 9.8% of the total in the event of an earthquake measuring six or seven on the Richter scale. The Dominican Republic has not had a massive earthquake since the 1940s, but neighbouring Haiti has been struck by a series of strong quakes in recent years, with a 7.1-magnitude quake killing more than 100,000 people in 2010.
The most significant hit to the system would be biological, essentially another pandemic. This would push NPLs to 13.5%. GDP contracted by 6.7% during the Covid-19 pandemic, according to the International Monetary Fund.
The system works
The banking system includes 17 full-service banks — the SB lists 18, but one, Bancamérica, is in receivership — 16 savings and loans, 10 savings and loan associations, three credit corporations and two second-tier public banks.
The three largest banks, Banreservas, Banco Popular and Banco BHD, represent close to 70% of market share.
Banreservas, a state-owned bank, is the largest in the system, with 33.78% market share at the end of November, according to the SB. In 2022, Banreservas became the first bank in the Dominican Republic with assets above the threshold of 1tn pesos. It is now close to 1.2tn pesos.
Banco Popular had a 20.78% share, with 718bn pesos in assets, while BHD was at 15.26% with 528bn pesos. In fourth place, but well down from the leaders, was Canadian-owned Scotiabank, with a 4.7% market share and 161bn pesos in assets.
Commercial loans accounted for 53.8% of loans in the system as of June 2023, followed by consumer loans at 23.5% and mortgages at 18.2%. The rest is represented by credit cards, which is the fastest growing segment today. According to the SB, debt on credit cards increased 26.6% between January 2019 and June 2023. Consumer loans were up 21.4% during the same period, while mortgages were up 15.7% and commercial loans by 14.1%.
Loans, although growing, remain low for a system the size of the Dominican Republic’s.
“Credit penetration to GDP is still low, which is something that hinders faster growth,” says Patricio Vimberg, associate director of sovereign and international public finance ratings at S&P Global Ratings.
The Dominican Republic’s credit-to-GDP ratio was 27.3% in June 2023, according to the SB. It is one of the lowest in the region, coming in just above Nicaragua at 25.2%. Of the other countries in Central America, Panama is the clear leader at 105%, followed by Honduras at 67.4%, Costa Rica at 50.7%, El Salvador at 49.4% and Guatemala 38.1%. Neighbouring Haiti has the lowest in Latin America and the Caribbean with 8.6%.
In 2024, we expect to continue seeing acceleration led by the health and tourism sectors.
The banks are lending in the most dynamic sectors of the economy. Banco BHD has seen a 38% increase in loans compared with a year before, with 65% of these in the energy, retail and tourism sectors.
“In 2024, we expect to continue seeing acceleration led by the health and tourism sectors, together with an important reaction in the construction sector,” says BHD’s Mr Fuentes.
For its part, Banreservas occupies a unique space as a state-owned bank. It is the largest lender to both the public and private sectors.
“Banreservas carries out important activities to improve the Dominican economy, financing infrastructure projects in energy generating, housing and tourism, as well as providing special financing for supply chains,” says Mr Obregón.
While the Dominican Republic is at the low end of the spectrum with its credit-to-GDP ratio, it occupies the top spot in Latin America and the Caribbean in terms of savings as a percentage of GDP, according to an SB report published on October 31 to commemorate World Savings Day.
Savings-to-GDP stood at 27.5% at the end of 2022, compared with an average of 19.3% in the region. Of the savings, 89.9% are in full-service banks. Deposits include 44.1% in fixed-term accounts, 38.2% in savings accounts and the remainder in chequing accounts. Close to 30% of the deposits are in a foreign currency, mostly US dollars or euros.
Remittances and transformation
The Dominican Republic, like most countries in the region, receives a healthy injection of cash from remittances. Remittances totalled $9.84bn in 2022, and the Inter-American Development Bank forecasts $10.12bn for 2023. Banks have different strategies for capturing them.
Banco BHD has Flexienvios, which is a completely digital format that allows remittances to be received free of charge. It is a complement to existing services, such as Remily, and has helped the bank see a 24% increase in remittances it processes, compared with a 4% increase in the financial system as a whole.
The bank is also focused on the Dominican diaspora in the US, working to encourage investment at home. An estimated 2.5 million Dominicans live outside the country, most in the US or Spain. There are 11.2 million people in the country.
“We have been promoting the acquisition of real estate in the Dominican Republic among Dominicans living abroad,” says Banco BHD’s Mr Fuentes.
The big mover on this front is Banreservas, which in 2023 became the first Dominican bank to open branches overseas. It is the first Latin American bank in years to open a branch in the US without first acquiring the assets of an existing institution.
Banreservas opened an office in Madrid in January 2023, following this with a full branch in New York in September and in November opened a branch in Miami. Dominican vice-president Raquel Peña cut the ribbon to open the office, showing the importance of the move to the country.
The expansion strategy calls for a branch to be opened in the near future in Panama, extending the footprint to Central America.
“These offices are part of Banreservas’ internal strategy to serve Dominicans wherever they may be and provide them with services. It is an opportunity for them to save for their retirement or a mortgage,” says Mr Obregón.
He adds that the branches will also provide more leverage for Dominican companies wanting to do business in Spain or the US, as well as facilitating investment in the Dominican Republic.
Banks are also moving aggressively with digital transformation. “Many institutions are immersed in a process of digital transformation with the goal of addressing new challenges and setting the foundation for sustainable growth over time,” says Mr Fuentes.
BHD has a digital wallet, Billet, while two other banks have launched digital products for savings and loans: Banco Fihogar with Reset and Vimencash by Banco Vimenca.
According to the SB’s 2023 ranking of digitalisation of the Dominican banking system, 45.6% of transactions in full-service banks are now carried out through digital channels.
The most significant changes have been in digital advances in back-office operations to increase efficiency. The SB, in its reports on digitalisation, anticipates that progress being made with blockchain and artificial intelligence is going to further revolutionise the financial sector’s back offices as the decade progresses.
As with its overseas push, Banreservas has been at the cutting edge when it comes to tech changes. It has a digital wallet, Mío, which allows users to do everything from pay bills to send and receive remittances. It also allowed the bank to provide access to the government’s social welfare programmes.
It has a chatbot, Alma, and separate applications for individual customers and business clients that allow for 24/7 solutions.
The digital transformation is also framed within the context of financial inclusion. In August 2022, the central bank launched the National Financial Inclusion Strategy 2022-2030. The plan calls for 65% of the population to be using at least one financial product by the end of the decade, up from 47% when the strategy was launched.
The bank’s analysis found big disparities along educational, geographical and income lines. According to the research, 79.8% of Dominicans earning more than $240 per month had at least one financial product, while only 36.9% of those earning below that had a bank account. A similar gap was found for education, with 70.3% of people with at least a high school education having an account, while only 35.8% of those with less education used a financial service. In terms of geography, 53.2% of people in urban areas used banks, while this dropped to 39.4% in rural zones.
The strategy has six objectives, which include deepening access to financial services, strengthening the use of digital products, fostering an innovative financial ecosystem, strengthening transparency and client protection, improving the financial-economic capacity of the population and supporting research to identify barriers to reaching these objectives.
“Banreservas has focused its guidelines within the National Financial Inclusion Strategy, implementing policies to facilitate access to products and services within the formal financial sector,” says Mr Obregón.
Fitch’s Ms Arteaga says the overall financial inclusion strategy is working in the sense that it has made more resources available for microfinance lending and low-income housing. “At the end of the day, the strategy depends on the banks and their appetite to attend to sectors traditionally outside the system,” she says.
The technological advances have not translated into the same kind of boom for fintechs in the Dominican Republic as they have in other countries.
“Fintechs are not as relevant in the Dominican Republic as they are in countries like Brazil and Mexico. The country does not have the same kind of open banking legislation that has allowed for a boom in digital banks,” says Ms Arteaga.
The Dominican Republic has 63 fintechs, according to the Dominican Association of Fintechs. The list includes a digital bank, Qik, which was launched in 2022. Qik is part of the group that owns Banco Popular, the country’s second largest bank. The SB, in its 2023 report on digital transformation, called Qik an “inflection point” for the country’s banking sector.
The government’s investment promotion agency ProDominicana announced in October a new strategy to foster growth of fintechs locally and help those already operating to expand internationally. The agency wants the Dominican Republic to become a fintech hub for Central America and the Caribbean. The Dominican Republic and Costa Rica have the greatest number of fintechs in the region.
ProDominicana stated that while most fintechs in the country were founded locally, there are fintechs from Argentina, Colombia, Ecuador, Hungary, Mexico, Panama, Spain and the US operating in the country.
The rise of fintechs and strategies for financial inclusion are coming together to expand the financial system in the Dominican Republic, offering opportunities for growth and profits for the companies in the ecosystem. The change is happening just as the economy is poised to enter a period of sustained growth.
Ms Arteaga says that banks have been growing strongly and that 2024 should be even better. “The economy did not grow at its potential this year, but that will change and banks will reflect that,” she adds.