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Banks in N. Korea (2)


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Last time, we learned about North Korean banks and their roles. In brief, North Korea runs the mono-bank system, where the central bank handles all the bank business, and North Korean banks hardly ever play a commercial role. But the country has set up regional banks in local areas in recent years, as market activities have become widespread. Today, we’ll learn more about the regional banks in North Korea from lawyer Oh Hyun-jong. 

North Korean media have reported about local banks in provincial areas since around 2015. In an article on December 14, 2015, the official Rodong Sinmun newspaper covered the story about a nationwide event of bank workers. At the time, the paper said that Chairman of North Hamgyong Province Bank Ri Kwang-ho was one of the debaters at the event. Notably, the bank was not called the branch of the Central Bank, reflecting that it was a newly established regional bank. The title “chairman” also indicates that the bank was given some autonomy. Also, the Pyongyang Broadcasting Station mentioned “Jagang Province Bank.” It is assumed that this bank became independent of the Central Bank or took over a considerable part of the Central Bank’s business. It seems North Korea set up regional banks in the course of establishing economic development zones in each province and decentralizing economic management. 

North Korea enacted the Commercial Bank Law in 2006 and announced the establishment of the State Development Bank with an investment of 10 billion dollars in 2010. However, the country could not set up commercial banks quickly due to the difficulty in raising funds and heavy opposition from those who stuck to a planned economy. But North Korea revised the Commercial Bank Law in 2015 and allowed the local branches of the Central Bank in cities and provinces to perform some commercial roles. It also approved the establishment of commercial banks in the form of local banks with investment from the rising class of wealthy individuals known as donju. As a result, North Korea completed the project of setting up regional banks by creating South Hamgyong Province Bank, Jagang Province Bank, Ryanggang Province Bank and South Pyongan Province Bank in 2015, and Pyongyang Bank in the capital in 2017. 

During the extreme economic contraction in the 1990s, the North Korean economy was almost paralyzed and the role of the Central Bank weakened. At the time, enterprises could not produce goods properly due to low productivity, and banks could not collect revenue of state-run enterprises. Banks suffered from a serious financial pinch, all the more because merchants who earned money didn’t deposit their money at banks. 

Under Kim Jong-un’s rule, North Korea has pursued decentralization by transferring the central government’s economic authority to local governments. 

In May 2013, North Korea established a law on economic development zones to designate special economic zones. But it had difficulty in financing the development plan. Considering the situation at the time, I guess regional banks in North Korea have tried to draw money from businesspeople by offering interest on their deposits, just like commercial banks. In a socialist, planned economy, the state, in principle, should provide funds needed to establish and manage commercial banks. But it is said that North Korea has recently taken a drastic measure to allow enterprises to set up commercial banks in local areas after getting approval of the Central Bank, as long as they can afford to do so. 

In the past, North Korea’s Central Bank dealt with money circulation, ensured demand for money and controlled use of money all across the country. But the new regional banks have independent authority and take charge of monetary management in their regions. Lawyer Oh tells us more about the roles of regional banks in North Korea. 

Regional banks are said to handle 13 kinds of bank business, including deposits, loans, opening and managing bank accounts, domestic and foreign settlement, foreign exchange, credit verification and card issuance. 

Among them, loans, bond issuance, transactions of precious metals, registration of fixed property and affairs related to the national treasury were originally managed by the Central Bank. On the other hand, currency exchange, opening personal bank accounts, settlement, card issuance and deposits are new services assigned to regional banks. Previously, the Central Bank provided deposit and loan services only to enterprises, while restricting the services for individuals. But regional banks allow individuals to open accounts, from which they can transfer money. 

Even though North Korean regional banks adopted some commercial elements, they certainly have limitations. In the North, it is private financing that plays the role of banks for individuals, offering high interest on deposits, lending money and even providing a remittance service. Regional banks cannot work as commercial banks properly, as long as private financing continues to offer higher interest on deposits than regional banks and local residents distrust the banks. Besides, regional banks provide a loan service only in a limited way. 

North Korea has stopped short of sweeping reforms but carried out reform measures in a restricted way. As a result, regional banks are not entirely free when it comes to management, just like enterprises. In South Korea, banks provide loans to anyone based on collateral, as long as the collateral meets certain requirements. That’s not the case with regional banks in North Korea, where the loan service is restricted to supporting enterprises suffering from a temporary shortage of funds. Also, regional banks are established on the local government budget, so they support government projects first, rather than seek to create profit through efficient monetary management. 

Regional banks in China mostly supported major projects of local governments in the initial stage of their establishment. With many enterprises becoming insolvent, banks saw their profitability worsen and had difficulty in providing financial services to small businesses and local residents. I guess North Korea has a similar problem.


North Korea needs to embrace more elements of a market economy, at least to let regional banks work properly. If enterprises are funded by banks and improve their sales performance, they will deposit their profit at the banks. In other words, if local banks are given greater autonomy in the loan service, enterprises can operate their business more smoothly. This will lead to a rise in sales and more deposits at banks. Banks will then provide more loans to create a virtuous circle. For that reason, some regions have already legalized unofficial or private financing. 

Roles of regional banks will be only limited, unless North Korea legalizes private financing. Those who work in private financing are called “money traders.” There’s a need for an institutional framework to allow local banks to receive investment from the money traders to increase their assets. In fact, South Pyongan Province Bank established a commercial bank using funds provided by donju in the Pyongsong region and provides a loan service based on the funds. 

Also, I think it will be great for local banks to introduce the card system. Currently, cards are used only in big cities, including Pyongyang. If North Korea adopts South Korea’s card settlement system, regional banks in the North can increase their revenue through card fees and resolve the problem of a cash shortage caused by local residents’ reluctance to deposit their money at banks.

The establishment of commercial banks in North Korea indicates that the communist regime has started financial reform in earnest. But there are still many tasks to contend with until regional banks secure profitability and perform the role of commercial banks appropriately. We hope North Korea will share South Korea’s experience of developing financial infrastructure so it can increase public trust in banks and engage in transparent financial transactions. 

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