Banks are some of the least trusted institutions in North Korea. Faith in them completely eroded after the currency reform of 2009. Because of this, wealthy individuals, or donju, try to keep their assets in foreign currencies such as dollars or yuan rather than North Korean won. This practice has naturally carried over to ordinary North Koreans as well. Some North Koreans even sarcastically say North Korean currency “is as worthless as grass.”
North Korean authorities are not happy about this “dollarization,” which is to say, the use of foreign currency instead of their own. If North Koreans continue to shun local currency, not only does this render authorities unable to stimulate the economy through monetary policy, but it can also lead to sudden instability due to fluctuations in prices and exchange rates. In this case, one could see the regime’s base of control weaken as people’s livelihoods grow increasingly insecure.
Accordingly, North Korean authorities are working to stop this dollarization by improving the financial system.
According to the Korea Central News Agency (KCNA), North Korean leader Kim Jong Un sent a letter entitled “Let Us Dynamically Accelerate the Building of a Thriving Nation by Bringing about a Turn in Financial and Banking Work” to the third national conference of financial and banking officials in 2015. In it, he said financial and banking work was an important economic activity that used currency and funds to deliberately build the nation’s livelihood and regulate and control the management of state economic institutions and enterprises. He wrote, “It is necessary to financially guarantee the party’s Songun revolutionary leadership and the building of a thriving socialist nation by consolidating the financial foundations of the country and ensuring fluent circulation of currency. This is the general task for the financial and banking field.”
However, in order to avoid the mistake of 2009, when a rash currency reform effort earned angry protests from North Koreans, North Korean authorities are considering a policy of low-level capital absorption.
NK Economy, a South Korean media outlet specializing in North Korea, reported that in a recent essay entitled “Important Issues in the Improvement of the Central Bank’s Information System for Loan Duties” in Vol. 1 of “Economic Research 2020,” North Korea said the Central Bank’s information system for loan activities should reflect “the ability to collect data that could determine the nationwide currency distribution situation.” It said the system should be able to “regularly determine the amount of cash flowing into the distribution system through wages and the like,” as well as the “amount of currency transactions, deposits and loans accompanying the distribution of products.”
The essay said the system must ascertain the degree of currency stability by “reflecting in real-time the extent of changes in state and market prices,” and called for “scientific analysis of collected data by applying several economic mathematical methods.”
Essentially, the essay called for determining and analyzing the flow of cash used by North Koreans through improving the loan system and reflecting the results in economic policy.
In North Korea, banks provide hardly any personal loans since they do not function properly. When North Koreans need money, they have no choice but to rely on private lenders, and suffer from high interest payments. From this perspective, the essay could be read as preparation by North Korean authorities to improve the loan system to better control local currency while directing public demand currently focused on private lenders to public lenders.
Generally speaking, national central banks issue and control currency. They do not handle other financial duties. However, North Korea’s Central Bank provides some financial services to locals.
Moreover, North Korean commercial banks offer high-interest deposits to attract people’s money.
According to Radio Free Asia, North Korea forced families in some parts of South Pyongan Province to open accounts at commercial banks last January, promising them 10% annual interest.
Daily NK also reported that some North Korean commercial banks were attempting to absorb North Koreans’ idle money, advertising high-interest deposits of 10%.
However, North Koreans still harbor much suspicion as to whether they would actually collect the 10% interest offered by North Korean authorities, or whether their principal would be safe.
North Korean authorities are working to expand the amount of idle cash by normalizing banking functions, but North Koreans are reacting coldly. This is because they still distrust authorities and the banks they run following the 2009 currency reform.
One sector North Korean authorities are looking towards to attract idle money is fintech. This is a strategy to absorb North Koreans’ capital based on speed, accuracy, transparency and convenience through “financial digitalization.”
For quite some time, North Koreans have used “mobile money,” called by some a form of “North Korean fintech.” Mobile money is a service for topping off mobile phone minutes that came into being around 2010. Some time later, however, North Koreans began to use it for micropayments and simplified transfers. North Koreans filled the absence of financial services with some fintech of their own, i.e., “mobile money.”
However, North Korean authorities banned turning mobile money into cash in July. Instead, they attempted to replace the transfer and payment role played by “mobile money” with bank-issued electronic payment cards.
North Korean authorities ordered locals to install an application on their smartphones to connect their check cards to state trade banks or major provincial banks. In October, North Korean authorities launched the mobile electronic payment system “Ullim 2.0,” which added an offline simplified payment function using QR codes.
Moreover, according to North Korean propaganda outlet Arirang Meari, the country adopted in the same month a mobile electronic payments system called “Jonsong,” jointly developed by North Korea’s central bank and Pyongyang Information Technology Bureau.
North Korea suddenly suspended “mobile money,” a popular means of making simplified payments, and rushed out alternatives at lightning speed. So quickly did alternatives appear, in fact, that one might suspect that the move had been in the works for some time.
However, many North Koreans are turning a cold shoulder to the authorities’ mobile financial systems, concerned that authorities will steal their hard-earned money. One can surmise that public distrust of the financial system is pretty deeply rooted.
Experts, too, believe the proliferation of mobile devices and lack of institutional financial infrastructure is driving the growth of fintech. They say fintech can boost convenience and accessibility amid outdated financial infrastructure.
North Koreans could use “mobile money” with older phones rather than a smartphone. The financial ecosystem North Korea is trying to build, however, requires a smartphone. The authorities believe smartphones are crucial to bringing North Koreans into the financial network they are creating.
In fact, North Korean authorities are accelerating the development of smartphones. Models verifiably released from the end of last year through this year alone include the Pyongyang 2426 and 2428, Chollyong 201 and 202, Jindallae 6, 6ga and 7, and Phurun Hanul S1 and S2.
The Pyongyang 2426, Jindallae 6ga and Phurun Hanul S1 and S2 are believed to be popular models less capable than the Pyongyang 2425, regarded as North Korea’s flagship model. Likewise, the Pyongyang 2428 improved only a few specs, forgoing innovative changes. That is to say, of the nine smartphones North Korean authorities released over a year, four were popular models while one was a modest improvement of an existing model.
North Korea’s strategy to naturally boost smartphone penetration and fintech usage by distributing relatively cheap popular smartphone models appears to be falling neatly into place.
North Korean authorities are trying to draw people’s money into the formal sector as they regularize banking functions and provide mobile financial systems, but the reaction from locals has not been good. Over a decade has passed since the 2009 currency reform, but North Koreans still distrust the authorities and institutional finance.
Wary of how they sparked angry protests from locals at the time of the 2009 currency reform, North Korean authorities are expected to proceed with financial policy by encouraging soft landings for its mobile payment systems.
Meanwhile, observers raise the possibility of North Korea building a communications network that can smoothly handle smartphone usage. North Korea currently operates a 3G network, but recently supplied smartphones can use 4G. North Koreans can immediately use 4G as long as the communication network is there, and authorities could leverage this to boost usage of mobile financial systems.