CENTRALE BANK VAN ARUBA & THE FINANCIAL SYSTEM

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1 CENTRALE BANK VAN ARUBA & THE FINANCIAL SYSTEM The establishment of a central bank and the issue of a national currency on the 1 st of January 1986 marked the beginning of a separate financial system for Aruba. Besides the Central Bank, the financial system mainly consists of five commercial banks, (as of October 2001), two US-based offshore banks, and other bank-like institutions of which the most important are OHRA Hypotheekbank N.V., Fundacion Cas pa Comunidad Arubano (FCCA), Aruban Investment Bank N.V., and island Finance Aruba N.V. The institutional investor s sector comprises life insurance companies, and general (non-life) insurance companies operating in or from Aruba. CENTRALE BANK VAN ARUBA The Centrale Bank van Aruba is a legal entity in itself (sui generis) with an autonomous position within Aruba s public sector. The Bank started its operations on January 1, 1986, when Aruba obtained its status as an autonomous country within the Kingdom of the Netherlands. With the inception of the Bank, the Aruban florin was brought into circulation, pegged to the U.S. dollar at a rate of AFL 1.79 = US$ This exchange rate has remained unchanged since then. The mission of the Bank is to maintain the internal and external value of the florin and to promote the soundness and integrity of the financial system, to be accomplished by motivated and qualified employers, for the general benefit and well being of the people of Aruba. The Central Bank s tasks and mission The principal tasks of the Central Bank, as stipulated in the Central Bank Ordinance are to: Conduct monetary policy; Supervise the financial system; Issue bank notes; Issue coins on behalf of the government; Act as the banker for the government; Be the central foreign exchange bank and, as such, regulate the flow of payments to and from other countries; Advise the Minister of Finance on financial matters. 22

2 The Bank performs these tasks through a variety of activities, which include: Formulating and implementing monetary policy and related measures through, among other things, regulating bank credit and liquidity; Supervising the activities of the commercial banks and other financial institutions by, inter alia, monitoring their liquidity and solvency to protect the interests of depositors and policy holders, and to maintain monetary and financial stability and financial integrity in Aruba; Managing Aruba s official gold and foreign exchange reserves; Regulating international payments according to the State Ordinance on foreign exchange transactions (A.B No. GT 6); Bringing bank notes into circulation to meet the needs of businesses and the general public; Issuing treasury bills and government bonds as an agent for the government; and Monitoring economic and financial developments. FOREIGN EXCHANGE REGIME The Centrale Bank van Aruba deals with the local foreign exchange banks within a margin of percent. Accordingly, the Bank s buying and selling rates for the U.S. dollar are, respectively, AFL and AFL The rates for other main currencies against the Aruban florin are set on a daily basis using the exchange rate of the U.S. dollar vis-à-vis other major currencies as the basis for calculation. FOREIGN EXCHANGE REGULATIONS Foreign Exchange Transactions Pursuant to the State Ordinance on foreign exchange transactions (AB 1990 no. GT 6), the bank is responsible for the implementation of the regulations concerning foreign exchange transactions for the account and risk of the government. These regulations aim at monitoring and regulating the inflows and outflows of foreign currencies. Payments to and receipts from nonresidents may be made in any convertible currency. Licenses As of January 1, 1997, all current transactions with nonresidents may be executed freely. When transferring company profits, a declaration of the Bank should be obtained (among other things by submitting proof, e.g., annual accounts) stating that these profits were actually realized. As of July 1, 1998, a general license was issued that allows resident natural persons to carry out capital transactions (loans, investments, and other capital transfers) with nonresidents up to a maximum amount of AFL 200,000 per calendar year. For resident entities, capital transactions higher than AFL 500,000 still require a special license. These licenses are generally granted liberally. The amounts were increased as of July 1, 2002, to respectively, a maximum amount of AFL 300,000 per calendar year for capital transactions with nonresidents, and for resident entities, the capital transactions were increased to an amount of AFL 750,

3 Investment regime for institutional investors (40-60 percent rule) All institutional investors operating in Aruba, being life insurance companies, pension funds, and saving funds, are required by the Bank to invest a certain amount locally. The amount is related to the total liabilities (excluding shareholder s equity) of the institutional investor, and is based on a progressive scale of 40, 50, and 60 percent. Nonresident accounts Nonresidents are free to open accounts (nonresident accounts) in any foreign currency at a local commercial bank. They are also allowed to hold bank accounts denominated in Aruban florin. Conversion into Aruban florin Proceedings from the export of goods and services must be converted into Aruban florin or credited to a foreign currency denominated account within eight working days after receipt, unless a special exemption is obtained from the Bank. Import and Export of Aruban florin Nonresidents are allowed to bring into Aruba any amount of checks, or bank notes denominated in foreign currency. The exportation of cash in Aruban florin is prohibited, apart from certain small accounts for travel purposes. FOREIGN EXCHANGE TAX The Sate Ordinance on foreign exchange commission stipulates that residents must, in general, pay a 1.3% tax on payments to nonresidents. Transactions in Netherlands Antillean guilders are exempted, on the basis of an agreement between the two governments concerned. Certain groups of companies (mainly government-related) are also exempted. This was by virtue of the State Decrees on foreign exchange commission exemption of July 1998 and October 2001, respectively. Additionally, based on article 12 of the State Ordinance on the free zone of July 2000, the companies concerned may request an exemption to the extent that their payments for goods and services are linked to re-exports. Offshore companies and Aruba Exempt Corporations (the so-called AVV s) are by law considered nonresidents and, thus, are not subject to this commission. Pursuant to article 4 of the State Ordinance on foreign exchange commission, the government is responsible for determining the policy with respect to the foreign exchange commission, while the Bank is entrusted with the collection thereof. In 2001, total collections rose by 2% to AFL 24.4 million. Because of transitorial items, AFL 24.8 million was transferred to the Treasury. The share of this commission in total tax receipts edged up from 3.8% to 4.1%. 24

4 FOREIGN EXCHANGE RESERVES At year-end 2001, the total amount of foreign reserves of Aruba (excluding revaluation differences of gold and official foreign exchange reserves) amounted to US$ million. SUPERVISION OF FINANCIAL INSTITUTIONS The Bank is entrusted with the prudential supervision of the Banking and insurance sector as well as the company pension funds. This prudential supervision aims at preventing financial institutions from taking risks that could harm the interests of depositors and policyholders, and endanger the stability of the financial system. To that end, continuous off-site surveillance and periodic, risk-oriented on-site examinations are conducted. Furthermore, regular bilateral meetings are held with the institutions in concern, as well as with the representative organizations to discuss supervisory matters. Depending on the type of financial institution, detailed reports are submitted to the Bank on a weekly, monthly, quarterly, and/or annual basis. Furthermore, each institution is required to file its own annual audited financial statements and the management letter issued by its external auditor. The Bank analyzes these documents and discusses its findings with senior management of the institution. COMMERCIAL BANKS There are Currently five commercial banks operating in Aruba. One is a branch and one a subsidiary of respectively, Banco di Caribe N.V. and Maduro and Curiel s Bank N.V., both established in Curaçao. Thus, two of these five banks also are supervised (on a consolidated basis) by the Bank van de Nederlandse Antillen. The following commercial banks are currently active in Aruba: Aruba Bank NV; Banco di Caribe NV; Caribbean Mercantile Bank NV; Interbank Aruba NV; RBTT Bank Aruba N.V. The aggregated balance sheet total of the five commercial banks increased by 6 percent to AFL 2,430 million at the end of 2001 equivalent to 71 percent of estimated Gross Domestic Product (GDP). Loans granted in 2001 grew by AFL 41 million or 3 percent to AFL 1,599 million, compared to a 13 percent increase in Loans to individuals increased by 7 percent, while the commercial loans decreased by AFL 15 million or 2 percent. The latter is mainly as a result of the subdued business activities. On the liability side, deposits rose by AFL 102 million or 5 percent. Capital and reserves increased with AFL 56 million or 6 percent. 25

5 As a result, the banks aggregated risk weighed capital asset ratio increased from 8.1 percent in 2000 to 10.6 percent at the end of 2001, well above the minimum capital requirements of 8 percent, adopted by the Basel Committee on Banking Supervision. Compared to 2000 there was a substantial increase in the banks liquidity ratio by 4 percentage points to 28 percent well above the minimum prudential requirement of 20 percent. SOURCES: Brochure of Centrale Bank van Aruba, Tasks & Activities 2000 Annual Report 2001, Centrale Bank van Aruba, Annual Report and Financial Statements for the year 2001 Havenstraat 2, Oranjestad, Aruba Phone: (297) Fax: (297) cbaua@setarnet.aw Website: ARUBAN INVESTMENT BANK The Aruban Investment Bank N.V. (AIB), a private corporation, is a result of the joint efforts of the Government of Aruba and the private sector compromising international banks, local banks, insurance companies, pension funds, corporations and the people of Aruba. The total subscribed capital of the Bank amounts to AFL 14,967,000 as per December 31, 1987 and is fully paid up. For increasing its financial resources the Government of Aruba has originally granted the Bank a subordinated loan sum of AFL 20,000,000. The year 2000 witnessed a substantial growth in the loan and investment activities of the Aruban Investment Bank N.V. These activities grew by 58% from AFL 60 million in 1999 to AFL 95 million for the year The Bank has been successful in its approach to team up with institutional investors in order to attract the long term funding, essential for the growth of the loan and investment activities. The borrowings of the Bank grew from AFL 29.6 million in 1999 to AFL 65.4 million in the year 2000, an increase of 120 %. AIB s departments The bank is managed by a Management Board under the supervision of a Supervisory Board elected by the General Meeting of the shareholders. The Government of Aruba appoints the Chairman of the Supervisory Board. The Policy Committee of the Bank, whose members are also members of the Supervisory Board, supervises the Bank s credit policy. 26