The Dominican Republic is entering a risky but rewarding stage of economic development. The country's leadership has passed laws in recent years to try to achieve a stable and prosperous market for financial products. Purchases and investments that lead to a better standard of living are usually out of reach for most Dominicans, but financial services companies are starting to offer ways for Dominicans to access lines of credit for homes, cars, and educations.
This isn't without its problems, though. Too much easy credit, not secured by satisfactory salaries or a stable currency, can turn a country's dream of financing itself into prosperity into a nightmare of endless debt repayment and indentured servitude to lenders. New projects go unfinished; homes and cars get repossessed; retirement plans melt away, and eventually the country's experiment with opening up its financial markets earns a brief, cautionary entry in economics textbooks.
But there is good reason to believe that this scenario will not play out in the Dominican Republic, and lenders are optimistic that introducing financial products to the country is a safe enough bet.
“We know that the economy here is growing. We will take advantage of this opportunity. We expect to continue to grow our businesses. We expect to see an improvement in the levels of liquidity, and thus in the levels of consumer optimism. They will start spending more money," Guillermo Arancibia, the Dominican Republic country manager for JMMB, a financial services company that offers loans, pension plans, mortgages and other products. JMMB also operates in Jamaica and Trinidad, countries with similar aspirations as the Dominican Republic to enter the next stage of economic development by increasing the sophistication of financial markets.
The course the Dominican Republic charts through financial markets depends in part on the decisions of regulators and politicians, decisions Arancibia is watching closely.
Arancibia said that one of the principle goals of his company is to educate consumers about the possibilities of financial products, as they are a relatively new concept in the Dominican Republic. He gave an example of how JMMB has worked with the government to widen opportunities for consumers.
“There are thousands of people who have died without their right to have a pension, for themselves and their families. The regulators now ask for information about beneficiaries if the client dies. This is something that happened because we brought up the issue," he said.
Pension funds don't just benefit the retirees and their families. Indeed, they can allow the government to leverage new infrastructure projects or public housing using securities. In more developed economies, multibillion-dollar public pension funds rely on a long-established system of securitization.
However, just because an economy considers itself “developed" does not mean it is immune from the danger of unregulated greed or the exploitation of the vulnerable. In the US, for instance, the Great Recession came about in part due to predatory and illegal practices by multibillion-dollar banks. The consequences rippled across the world, taking investment banks down with it, evicting millions of families from their homes and destroying countless lives. The Dominican Republic should take note of the American experience.
Right now, according to attorneys at Guzman Ariza, a Dominican law firm, there are no limits for what kind of interest bank loans can charge borrowers. Especially in an economy unfamiliar with financial products, that poses a serious risk for consumers, who could be stuck with ballooning interest rates they can't pay. There is great promise, of course, in opening up credit markets, but extreme peril in doing so without the proper precautions.