Part 1 of 7: Financial Access and the Path to USDM1
Introduction
The Republic of the Marshall Islands (RMI) is a sovereign nation and former U.S. territory positioned between Hawai‘i and Australia, with the major economies of East Asia just beyond its western horizon. Its roughly 1,200 islands are spread across nearly two million square kilometers of ocean – an area comparable to the size of Mexico. This vast geography shapes all aspects of life in the RMI, from healthcare and education to trade and financial access. It has also forged traditions of resilience and innovation that have defined the Marshallese identity.
Since independence, the RMI has built modern, rules-based institutions aligned with global standards. The country maintains a unique and long-standing partnership with the United States through successive Compact of Free Association (COFA) agreements, first established in 1986, most recently renewed in 2024 and extending through 2043. The RMI operates entirely on the U.S. dollar standard and is serviced by the U.S. Postal Service. Its commercial statutes are modeled explicitly on Delaware law. Delaware non- statutory law is incorporated by reference for non-resident corporations, and RMI courts look to Delaware precedent. As of 2025, approximately 40 publicly listed NYSE- and NASDAQ-traded companies are domiciled in the RMI. The RMI ship registry is the second largest in the world after Panama. It covers roughly 15 percent of global commercial shipping capacity, maintains white-list status under both the Paris and Tokyo MOUs, and administers more than 5,000 vessels. Despite these strong institutional foundations, the RMI’s unique geography has been a source of persistent constraints, limiting financial access and raising costs across the region. Against this backdrop, the global retreat of correspondent banking has significantly intensified the country’s challenges.
The Correspondent Banking Crisis in the Pacific
A decade ago, Pacific Island Countries maintained approximately 1,200 correspondent banking relationships. Since then, roughly 700 of these relationships have disappeared. Several sovereign nations-including the RMI – now rely on a single correspondent banking partner.
The Cause
Following the 2008 global financial crisis, international banks faced rising compliance burdens and higher capital and operational requirements. Global AML/CFT standards intensified, and penalties for compliance failures became substantial. Between 2012 and 2016 alone, global banks paid tens of billions of dollars in fines, with several individual penalties exceeding $1 billion (making compliance an input into banks’ operational capital ratios, as supervisors demanded higher buffers for compliance, operational and reputational risk.)
While these reforms were intended to strengthen global oversight of large financial flows, the fixed costs of compliance were calibrated for high-volume markets. In the Pacific, costs (including capital requirements) rose while transaction volumes remained static. Banks reassessed their risk-return profiles, and many decided maintaining small island nation correspondent banking relationships was no longer economically viable. Despite the region being assessed as low-risk for actual financial crime, banks withdrew and framed their withdrawal as a step in global de-risking.
The Consequences
The impact of losing correspondent banking relationships in the RMI has been severe, with reliance reduced to a single correspondent bank and only a handful of domestic branches. Citizens face the burden of having to take an expensive inter-island flight simply to cash a check. Cross-border settlement channels have dwindled as well, increasing costs for both households and businesses.
These issues have created enduring ripple effects. Remittance fees across Pacific corridors currently average 10 percent – triple the United Nations Sustainable Development Goal target. International USD wires can cost four to five times the global average, with settlement taking up to a week due to correspondent banking constraints. Since domestic transfers rely on the same limited banking infrastructure, inter-atoll payments can face unusually high costs and due-diligence requirements – at times resembling the friction a U.S. family office faces when wiring funds internationally to Switzerland. Digital banking does not resolve these bottlenecks, as it still requires correspondent banks for USD clearing, settlement and access to payment rails.
Merchant infrastructure is similarly constrained. Local networks are not supported by Visa or Mastercard, and the Bank of the Marshall Islands’ card system functions as a closed-loop domestic network that cannot accept international cards. This fragmentation contributes to card-transaction costs that exceed global averages by a wide margin.
Cash Dependency
As a result of these issues, households and businesses rely heavily on physical cash. However, this also creates complex dynamics, as the nature of the RMI’s geographic dispersion makes accessing physical cash difficult.
In the RMI, physical dollars arrive infrequently – often quarterly – and typically arrive by boat in a shipping container. The country’s sole correspondent bank charges for deliveries and caps the amount of physical currency that can be purchased at once. Local banks respond by imposing withdrawal limits on how much cash can be taken out at a time. Even when citizens stay within these limits, ATMs and branches periodically run out of cash faster than anticipated, and restocking can be slow and unpredictable in the interim. In the face of these challenges, many households hoard (rather than spend) excess cash in anticipation of future shortages.
In the 24 atolls home to roughly one-quarter of the RMI’s population, banking centers are hundreds of miles away, and in the face of cash constraints informal economies have arisen that are maintained through IOUs and barter.
Studies of cash-constrained economies show currency scarcity often acts as a structural tax on economic activity. Localized shortages reduce output, increase transaction premia and constrain employment. These outcomes can be felt across the RMI.
Inflation
Following the COVID-19 pandemic, when global inflation rose above nine percent, local prices in the RMI increased as well. In 2020, when global supply chains faltered, external inflation in the RMI was amplified further, above 7 percent. Most countries have mechanisms to address inflation. However, the RMI is a fully dollarized economy, which means it lacks the independent monetary tools available to larger economies with central banks. In times of crisis, like the global shocks felt across the early 2020’s, inflation dries up domestic liquidity at an accelerated rate, worsening the impact of price pressures and limiting the economy’s capacity to absorb them. As import prices rise, local demand for dollars outpaces supply, liquidity tightens further and every dollar in circulation becomes more expensive.
Coordination Crisis
Multilateral institutions have begun to recognize the Pacific’s correspondent banking crisis as a systemic failure requiring coordinated intervention. In 2024, the World Bank approved a $68 million Correspondent Banking Relationships Project to stabilize access in Pacific countries at risk of losing their last foreign banking link. In the short run, this can help subsidize correspondent banking services. However, subsidizing reluctant banks to provide structurally uneconomical services creates a secondary dependency on external stabilization efforts, leaving the region exposed to the same fragilities that caused the crisis in the first place.
The overall result in the Pacific is a coordination failure, where rational individual bank decisions have created collectively irrational outcomes, and individual nations have been forced to bear the costs of maintaining an architecture designed for economies thousands of times larger than their own.
Context
In discussing the RMI’s approach to solving these challenges, it is important to understand its history and context.