North Korean banks have limited lending function. They function as a service provider, catering to trading companies conducting foreign transactions. Consumer deposits are a small part of bank liabilities, and we have often urged bankers to focus on building a depositor-based banking system to enable a more efficient commercial lending market.
Former World Bank staff and North Korea watcher Brad Babson recently wrote at NKnews about the need for a properly functioning domestic banking system for North Korea to accelerate development. Financial sector development in North Korea is an area we have always been concerned with, not just because our very first in-country program in the country focused on this area, but because easier access to capital is one of the things that domestic entrepreneurs sorely need. We support the growth of the domestic entrepreneurial sector, and capital is something this sector sorely needs.
The most interesting piece of recent news concerning the financial sector was an article published in Kim Il Sung University Gazette about mobilizing ‘idle funds.’ It goes on to say (re-citing from IFES):
The article states the following: “Some of the funds that are being circulated in the market have strayed away from the normal production process and distribution passage and remain harbored in the hands of organizations, enterprises, and people. . . . Mobilization of idle funds shall meet the funding needs of the state and serve as a source of supplementary income to increase state revenue.”
The article adds that “The state should secure idle funds of institutions and enterprises through banks and mobilize idle cash kept by the people through savings and insurance,” and furthermore states that “Banks should concentrate to have control over idle funds.”
If this idea is followed by good policy, it could potentially become a catalyst to the growth of domestic enterprises by enabling savings to be more efficiently channeled into investments. A pessimistic reading of the idea is that this could end up being a confiscatory measure meant to force domestic companies and individuals to pour their foreign currency into state bonds or state banks lending on non-commercial terms. This brings echoes of the 2009 chaos when a currency revaluation accompanied by a cap on the amount of old currency one could exchange into the new one devastated the merchant class and confiscated their wealth.
Some of our team members have toyed with various small-scale ideas on providing capital to small businesses in the country. Bank lending, venture financing, cooperatives, insurance or microfinance are all needed. Greater transparency in the sector, better reporting standards, and access for foreign players can help bring down interest rates. Building confidence in banks among depositors will be a key challenge.
With this new financial system in place, the Central Bank will have to take on an enhanced role managing an unprecedentedly complex financial sector (by DPRK standards). Traditionally, North Korean banks operate with limited oversight from the Central Bank or the Ministry of Finance. Given the Central Bank’s limited experience managing the financial sector, it will have a steep learning curve ahead of it, and this is a curve it needs to climb with greater knowledge assistance.