North Korea’s central bank has begun acting as a middleman in conducting wire transfers and offering loan services to facilitate financial transactions between firms and factories to make the country’s ailing financial system more efficient, sources from the country said.
As mediator for the transactions that used to take place directly between firms and enterprises, the central bank is now wiring cash transfers to regional and local bank branches, they said.
Such transactions were previously done through the issuance of promissory notes—called haengpyo— by the central bank, they said.
"Regional banks of the North Korean national bank are partially conducting remittances and loan services especially for financial transactions between factories and companies, which have changed from haengpyo to cash transactions," a North Korean source in China told RFA's Korean Service.
“For instance, if a factory in Pyongyang wants to send 1 million North Korean won [U.S. $125 on the black market] to another factory in Chongjin, it deposits the money in a Pyongyang bank and notifies the Chongjin-based factory. The factory can then withdraw the money [less a service fee] at a local branch of the bank,” the source said.
"The Central Bank of North Korea and the regional banks have converted [to the new system]," the source said. "Previously, the factories and companies handled transactions using haengpyo, but now they do all their transactions in cash."
Central bank withdrawals
The North Korean cabinet previously set one-year plans for each factory and issued haengpyo to it to implement them, he said. But the promissory notes became worthless after the planned economy collapsed due to a devastating and widespread famine in the mid-1990s following cutbacks in assistance from the former Soviet Union and Eastern bloc.
During this time, the central bank no longer was involved when firms and factories switched to cash for their transactions, the source said.
“The Songchungang branch of the central bank in the 1990s was closed all the time because it did not have enough money to operate, and workers at the bank stopped operating there because they had to earn money through commercial trades in the market,” said a North Korean defector in his mid-50s from Hamhung city.
It appears as though the central bank has hardly functioned since Kim Jong Un became leader of the country in 2012, sources said.
During the last few years, some firms and factories have been forced to rely on wealthy North Koreans to loan them money, they said.
A North Korean media report last December on the 3rd National Finance Bank Workers’ Conference, a gathering of bankers who discuss operational issues, noted that Pyongyang and the provinces have now set up regional banks.
During the 7th Congress of the ruling Korean Workers’ Party which ended in early May, several officials received promotions to strengthen the power of the government cabinet, as national leader Kim Jong Un attempted to make the country’s financial system more efficient, sources said.
Among those promoted were Prime Minister Park Pong-ju to chairman of the Standing Committee of the Politburo, and government officials Kwak Pom-gi, O Su-yong and Ro Tu-chol to members of the Workers’ Party Political Bureau.
The screws are tightened
Sanctions imposed on North Korea as punishment by the West for recent missile launches and a nuclear test have further restricted the regime’s ability to conduct financial transactions and get access to the hard currency it needs to survive.
Institutions as well as individuals in North Korea prefer to do business in U.S. dollars or Chinese renminbi because the value of the North Korean won fluctuates severely and is not considered a stable currency.
“North Korea under the sanctions imposed by the outside world seems to have introduced the new financial system in order to attract foreign currencies inside of the country, because the money can help the country avoid the sanctions,” said an expert on North Korean sanctions who declined to be named.
North Korean hackers have been linked to an attempt to steal money from foreign banks through fraudulent wire transfers. In February, hackers tried to steal U.S. $1 billion from Bangladesh’s central bank, but got away only with U.S. $81 million after bankers in New York stopped the transfer.
The expert pointed out, however, that it’s uncertain whether North Korean residents, who have experienced hardship caused by frequent currency reforms such as the one carried out in 2009 to tackle hyperinflation and black market activities, are willing to deposit cash they have hidden in their homes in national banks.
The move six years ago, during which the 1,000 won note was replaced by a new 10 won, caused a rush to convert the currency to U.S. dollars and Chinese yuan.
Reported by Young Jung for RFA’s Korean Service. Translated by Dohyun Gwon. Written in English by Roseanne Gerin.