SEOUL (Reuters) - Devoid of consumer high street banks, North Korea has seen a recent rise in underground financing and investment, much of which supports state-managed projects, a South Korean report said on Thursday.
The system grew out of the famine of the 1990s, when North Korea’s official economy all but collapsed and paved the way for an informal network of private market traders, smugglers and investors to meet a desperate demand for food and goods.
The rise of these guerrilla bankers was fueled by the regime’s inability to fund state projects after the crisis, said the report, released by South Korea’s state-run Export-Import Bank of Korea (KEXIM).
“The evolution of private financing is expected to stimulate both the market economy and economic reforms,” the report said.
Private financing has “evolved into a market with its own supply and demand structure, and since the 2010s has developed a remittance system too,” according to KEXIM.
A now moneyed class of these early investors are known as “donju”, a Korean word meaning “masters of money”.
It is they who are behind this underground banking phenomenon, the report said.
Some of the richest people in the North Korean underground economy are money-lenders who change cash at a black market exchange rate roughly 80 times higher than the state’s officially-publicized exchange rate of around 100 won to the dollar.
That unofficial exchange rate of around 8,000 won to the dollar is now widely used to price goods and services across North Korea and more accurately reflects the market value of the won.
With their experience of trading in hard currency, some of those money-lenders now manage the surplus capital owned by the “donju”, the report said.
Much of this underground money funds North Korean public-private partnerships, whereby state enterprises raise money from underground private North Korean investors to fund construction and other projects in the official economy.
The report said it is this demand from the state economy on these unofficial venture capitalists which has helped fuel the boom in underground banking.
Additional reporting by Jeong-eun Lee; Editing by Kim Coghill