Why is South Korean banking so difficult

© KBS

When North Korean refugees living in South Korea go to a bank, most of them are initially amazed at how convenient it is to collect money. Many of them are unfamiliar with the transaction process, even if they had an account with a bank in their old homeland. How do banks work in North Korea? Kang Mi-jin, who fled North Korea and now works as a reporter for the online newspaper Daily NK, says:

North Korea's central bank has branches in different regions of the country. The history of banks goes back to December 1945 when Chosun Bank opened an “accounting office” in its branch in Pyongyang. On January 9, 1946, the central bank was established on the basis of the branches of Chosun Bank. In April of the same year, the farmers' bank was also created. On October 29, the central bank and 58 local banks were no longer under the control of the Soviet armed forces, but were under the direct control of the Ministry of Finance in the north.

North Korea defines finance as the economic activities that state banks conduct in managing funds. There is no clear distinction between finances and the treasury because the state distributes the money according to its own plans:

North Korea has a so-called mono banking system in which the central bank also takes on the role of a commercial bank. South Korea's central bank, the Bank of Korea, issues the local currency and has its own monetary policy. However, it does not manage deposits or loans. The proportion of loans in banks in North Korea is small. They also control businesses by money, a phenomenon called "control by won". All companies in North Korea just have one account with the central bank and carry out the transactions through it.

The main role of North Korean banks is to control the economy through monetary policy and corporate finance and to manage the treasury for leadership. For example, the Korea Kwangson Banking Corporation under the Foreign Trade Bank requires that all users who trade in foreign exchange pay three percent transaction fees, which are used to secure special funds, including the funds for the management. The role of the central bank is, of course, to ensure a smooth flow of money by withdrawing liquidity or engaging in the insurance business through the regional branches. But the lack of money in the banks makes it difficult for people to withdraw money. It is therefore not surprising that the North Koreans avoid depositing the money they have saved in banks. During the severe economic crisis in the 1990s, also known as the arduous march, more and more people turned away from the banks:

North Korea's fiscal policy became virtually unusable from the mid-1990s when a great famine and extreme economic contraction set in. Almost all monetary transactions were suspended while the issuance of commercial papers came to a standstill. In the early stages of the arduous march, people began to act. Before the economic difficulties, goods were traded at prices set by the state. But the problems led to the formation of capitalist markets, and state prices became meaningless.

The centrally controlled North Korean economy was paralyzed in the 1990s. The role of the central bank diminished because it could no longer collect profits from the state-owned companies. The citizens hoarded their money as far as they had a job. More and more private moneylenders, the “money dealers”, appeared:

The North Koreans traded things for others before a capitalist market could naturally form. Traders in the new market began setting exchange rates, such as the dollar or the yuan to the North Korean won. The dealers made money by taking commissions from local citizens or overseas dealers.

According to a report by the South Korean Korea Development Bank, private North Korean money dealers lent money at a monthly interest rate of 20 percent in the 1990s. But the amount of money for the private loans was rather small. Since 2010, more valuable currencies such as the dollar or the Chinese yuan have been used for loan transactions. The dealers were mostly dealers with saved money or the wives of party cadres traded in money. But the role of the banks has been revived:

If someone wants to send money to their children or other relatives, they go to a local bank and receive a ten-digit code that acts as a bank account. The code and his card number are sent to the recipient. He then goes to a bank in his region and receives the money. The banks take a transaction fee of ten percent. Despite the high fees, North Koreans now prefer banks to private lenders for secure transactions when they want to send money.