BANKING SYSTEM OF MARSHALL ISLANDS

As the RMI uses the US dollar as its currency, there is no central monetary authority and no restriction on the movement of funds into or out of the country. The RMI financial system is an extension of that of the US. This effectively precludes the use of monetary policy in the RMI’s economic management. If RMI residents do not like local financial conditions they can hold reserves and borrow money overseas without restriction, and clearly many do so. By the same token, the Government cannot print money to finance a budget deficit, debasing the currency and fuelling inflation in the process.

The formal financial sector - where the moneylenders do their banking -consists of two US commercial banks, the Bank of Guam and the Bank of Hawaii, and one domestically incorporated commercial bank, the Bank of the Marshall Islands. Each of the three banks has branches on Majuro; the Bank of Guam and the Bank of the Marshall Islands also operate on Ebeye. The sector also includes the government-owned Marshall Islands Development Bank. The Bank of the Marshall Islands is majority owned by the Government. The deposits of the US banks are protected (up to $100,000 per depositor) by the Federal Deposit Insurance Corporation, which supervises their operations, alongside the Federal Reserve Bank and the US Treasury.

The Bank of the Marshall Islands is supervised under RMI law, and its depositors do not benefit from US Federal Depository Insurance Corporation (FDIC) cover. Nevertheless it has the biggest share of deposits in the RMI, and its supervision presents the RMI authorities with an awkward responsibility.
The Banking Act of 1987 provides the legal framework for the conduct of banking and established the Office of the Banking Commissioner. The act envisages the establishment of prudential banking standards through regulations and policy directives; the codification of rules for accounting and reporting; promotion of understandings in relation to credit risk appraisal; licensing of banks; analysis of the financial condition of banking institutions; and formal procedures for inspection of banks and enforcement actions.
This orthodox supervisory regime demands much greater resources than the RMI, in common with most small developing countries, can justify allocating to it. Commonly in the Pacific islands, as in the RMI, only one or two commercial banks are locally incorporated, the others being branches of banks incorporated and supervised in much bigger and better-equipped jurisdictions. The difficulty and cost of installing and maintaining competent local supervisory capacity is out of proportion to the likely benefits. Some form of regional cost sharing seems the obvious answer, and attention is currently being given to this with the help of the Pacific Financial Technical Assistance Center (PFTAC).

There are only three banks operating in RMI:
Bank of Guam
Bank of Hawaii
Bank of the Marshall Islands