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In line with the Bank of Korea’s decision to freeze its benchmark interest rate again, commercial banks in South Korea offer near-zero deposit interest rates. The low-interest rates have driven a large part of bank deposits and installment savings to flow into real estate or stock markets. To prevent the savings exodus and retain their customers, local banks are providing favorable interest rates. 

How does the socialist state of North Korea operate banks? Today, we’ll learn about North Korean banks from lawyer Oh Hyun-jong. 

The Central Bank of the Democratic People’s Republic of Korea was established in October 1946. The North Korean central bank issues banknotes, controls the currency, and ensures the smooth functioning of payment systems across the country. It is the only North Korean bank that deals with insurance business. It occasionally issues lotteries and commemorative coins. In November 1991, for instance, it issued lotteries that had the face value of 50 won. 

It has issued commemorative coins on special occasions since former leader Kim Il-sung’s 75th birthday in April 1987. It also released a commemorative medal to mark the first anniversary of the June 15 inter-Korean summit. 

The central bank has its headquarters in Pyongyang and its branches in administrative regions. In addition to the central bank, North Korea has special banks such as the Foreign Trade Bank in charge of foreign transactions, the Korea Taesong Bank, the Korea Kumkang Bank, the Korea Joint Bank and the Koryo Commercial Bank. 

South Korea’s central bank, the Bank of Korea, issues and controls the national currency, while commercial banks take deposits, lend money and do insurance business. In contrast, North Korea has a mono-bank system, where the central bank is in charge of all the bank business. The main job of the central bank is to provide funds to the government, public institutions and enterprises under the instruction of state agencies including the State Planning Commission. In the North, the role of financial institutions is strictly restricted to supply funds in accordance with the state’s economic plans. 

After establishing the so-called revolutionary regime following Korea’s liberation from Japanese colonial rule, North Korea defined banks as state institutions, not profit-making enterprises. Banks in the North have the purpose of managing national revenue and guaranteeing that all agencies and enterprises use it in a proper way. North Korea banks are completely different from those in South Korea, in terms of their role. 

North Korea nationalized major industries and banks in August 1946. Under the centrally-planned economy, banks are supposed to ensure that the state will provide enterprises with the financial resources needed to execute their projects. That is, the role of banks is limited to secure and distribute funds to map out and implement national fiscal plans. Therefore, North Korean banks have evolved in a very different way from banks in a market economy.

 

While North Korean banks hardly ever play a commercial role, the central bank does offer some savings plans. According to research on North Korea’s monetary and banking system released by Professor Cho Young-gi of the North Korean Studies Department at Korea University in 2015, there are ordinary savings, reserve savings and lottery-like savings in the North. The last one is most popular, as it does not set particular interest rates but pays interest of 30 to 50 percent through a lottery. 

It is said that most North Korean citizens are reluctant to deposit their money at local banks, in the belief that it’s not easy to withdraw their money from banks. 

North Korean people seldom go to banks, even if they have money. Rather, they store cash individually, like burying it deep in the closet or stashing it underneath a ceiling tile. That’s because savings at banks are not regarded as a means of property increase for individuals, but a means of mobilizing idle money for the state to carry out its fiscal plans. There are no policy measures to protect savings, and the supervisory institution charged with savings management is little more than a name. 

Moreover, it’s difficult for North Koreans to withdraw their money from banks. The same is true of money sent from overseas. During the extreme economic difficulties in North Korea in the 1990s, local banks didn’t even allow people to take out money that had been sent from their relatives in Japan. Those who hope to draw their money from banks are said to bribe officials or give up a large portion of the money to receive it only in part. In a word, it seems North Koreans think that banks exist to take away money from them, not lend them money. 

In South Korea, it is common to take out loans from banks to buy a house, raise funds for a business or secure some for living. But it doesn’t seem to be the case in North Korea. Lawyer Oh continues to explain. 

In North Korea, it’s impossible for individuals to receive bank loans. There were no bank-related laws whatsoever in North Korea until September 2004, when the country enacted the Central Bank Law. Two years later, it also passed the Commercial Bank Law. Some North Korea watchers believe that the enactment laid the legal groundwork to build a two-tier banking system, where the central bank and commercial banks play their respective roles. 

But we’ve yet to find any bank that performs the commercial role in North Korea, although it’s been well over ten years since the introduction of the Commercial Bank Law. In principle, personal loans are prohibited in North Korea and enterprises are allowed to take out loans only within a limited range.  

The Central Bank’s regional branch offices in North Korea handle insurance business, but the insurance sections exist only in name. There is a non-bank financial institution called the Korea National Insurance Corporation, which is said to take charge of property insurance for ships, railways and cars. But it is unknown exactly how large the institution is or what results it has produced. So, it is uncertain if the institution is actually in operation. 

With North Korean banks failing to play the commercial role, an unofficial financial market or private financing has been developing in the country. 

North Korean banks couldn’t perform the job of deposits and loans properly. To make matters worse, the central bank was unable to provide necessary funds to enterprises in the 1990s, due to the economic difficulties. As a result, private merchants or financiers possessing a lot of money, known as donju, built a network with state-run enterprises. It provided funds to the construction, service and manufacturing industries to give rise to informal financing. Private financing has expanded further since 2012, as the country’s reform measures allowed enterprises to secure necessary funds for production on their own. 

The donju class has served as investors and managers in various industries. Some analysts even say that the economic activities of donju have contributed to recovering the North Korean economy. Their activities vary, ranging from loan sharking and investment in companies to foreign exchange transactions and cross-border remittances between individuals and between enterprises. In the 1990s, the usurious private money market was rather small in scale. But it has now become a highly specialized market, where the interest rates are decided depending on the social status of users. While banks are not working properly, these people are seen as an advance guard for leading market activities and private financing. 

With private financing flourishing, North Korean authorities are showing interest in how to improve the financial sector. The authorities are seeking a major change by strengthening the commercial elements of banks. Since 2015, North Korean media have also reported about local banks in provincial areas. 

Continuing our focus on this story, we’ll learn how North Korea uses local banks for economic development in the next installment of Inside North Korea.