North Korea’s financial system is based upon the mono-banking system centered around the Central Bank of the DPRK. The Central Bank of the DPRK serves diverse functions - aside from financial activities, it also acts simultaneously as a central bank and a commercial bank.
Such framework, however, underwent considerable changes with events such as the Arduous March and the monetary reform in 2009, along with weakening of state control and increase in marketization. The Central Bank’s function of providing capital has attenuated, with private finance filling the gap. Especially, the 2009 monetary reform triggered a spike in both the price level and exchange rates, sparking the disbelief towards the North Korean won and financial institutions as well as worsening the dollarization trend.
North Korea is facing challenges in utilizing domestic and foreign capitals to foster economic growth. The financial sector which is supposed to channel private saving into investment through financial institutions is malfunctioning, and North Korea’s nuclear issues makes it incapable of accessing the foreign finance market.
North Korea seems to know the significance of domestic finance in stimulating the economy, and is seeking to foster savings and absorb foreign capitals. The Central Bank Act or the Commercial Banking Law also indicates the nation’s willingness to move towards the two-tier banking system. However, North Korea’s current situation cannot be resolved merely through a partial change in operational methods nor through institutional adjustments and therefore a fundamental change is necessary in order for the financial system to fulfill its role as a catalyst for economic progress.
This research aims to use China and Vietnam’s experience of financial reforms to draw out implications for North Korea’s financial reform. Along with an analysis about current North Korea’s situation, we focus on China and Vietnam’s reform process, specifically from pre-reform to early institutional settlement phase.
Firstly, China had favorable economic conditions in 1978, at the beginning of the reform: stable price levels and growth rate, high savings rate with a strong government control. While The People’s Bank of China initially performed as a commercial bank before the reform, a switch to two-tier system and enactment of the Central Bank Law led to the establishment of policy banks, commercial banks and other financial institutions.
The savings rate was already high before the reform, and the government worked to guarantee the effective interest rate after the reform. There were policy efforts to increase the accessibility of banks such as depositing of wages into accounts, and there were few issues with the withdrawal. Extensive low-interest funds were provided to state enterprises at the initial phase of reform, which triggered large scale Non-Performing loans (NPLs). The NPLs were cleared out in 1999 with the formation of Asset Management Corporation, before the listing of National Commercial Bank.
Since the issuance of long-term treasury bond in 1981, measures such as the diversification of bond maturity and sales method or the permission of re-trading helped invigorating the loan market. After certain periods, the stock exchange market was established in the early 1990s with few listed companies. It initially experienced stock index spike and bubble burst, which led to the founding of a supervisory institution.
A dual exchange rate system separating the trade exchange and non-trade exchange rate was implemented, yet the official rate significantly diverged from the market rate. However, the two rates eventually converged, following the shift to a single exchange rate system in 1994. This was also the period when the inter-bank foreign currency market was set up.
Private loans emerged at some regions at the early phase of reform, but it was soon suppressed and merged into the system. Likewise, there were no noteworthy instances of dollarization.
Unlike China, Vietnam was having several difficulties ？ low growth rate, international isolation, hyperinflation as a repercussion of the failed 1985 monetary reform - when it took its first step towards reform.
To overcome such problems, the Vietnamese government adopted an openness policy called Doi Moi in 1986 which included financial reforms. The reform meant a change towards the two-tier financial system, and financial institutions such as joint banks, commercial banks, policy banks, and a number of credit cooperatives were established.
Vietnam’s savings rates were initially low, which can be attributed to distrust towards domestic currency and financial institutions due to experiences of hyperinflation and bankruptcy of rampant credit cooperatives (1991). After its relationship with international financial institutions normalized, financial support from such institutions and expansion in FDI were instrumental in securing the necessary financial resources. The government took various measures to mitigate distrust, such as stabilizing inflation, betterment of rural · provincial financial systems that replaced credit cooperatives, guaranteeing of real interest rates by gradually liberalizing interest rates, and improving of payment and settlement system. Besides, dollarization (foreign currency deposit / total currency deposit) worsened at the incipient phase of reform. Such phenomenon was eased by the stabilization of price level and currency, convergence of market and official exchange rate, and maintenance of the interest rate difference between domestic and foreign currency deposits.
Loan to state enterprise was a problem in Vietnam as well. While Asset Management Corporation was set up in 2013 to address the issue, its effects are not very clear.
In 1992, dong and foreign currency denominated treasury bonds with 1 to 3 year maturity were first issued, and maturity diversification and opening of circulation market (1995) followed. The stock exchange market opened in 2000 with 5 listed companies.
The discrepancy between official and market exchange rates resolved relatively quickly. In 1985, just before the onset of the reform, market exchange rate was almost 8 times the official rate, but the two rates converged in 1992. The foreign currency market was established in 1991.
From the experience of China and Vietnam’s financial reform, we derive several implications for North Korea.
With the enactment of the Law on Central Bank and Law of Commercial Bank, North Korea already has institutional foundations for financial reform. What matters is to draft and carry out specific plan for implementation, create an environment conducive to its enforcement, and to continuously practice the plan. It is imperative to ensure the explicit prohibition of financial asset provisions via central bank, guarantee smooth operation of commercial banks taking the primary role in savings and deposit, acquire substantive tools for currency and foreign exchange market operation, and stimulate both the capital and foreign currency market.
In order for the banking system to smoothly operate, one should first secure deposits as the main source of assets. This requires proper compensation for real interest rates, along with assuring the withdrawal of deposits, alleviating fear towards exposure of accumulated assets, and increasing familiarity with financial institutions such as depositing wage into accounts. This is especially the case for absorbing foreign currency deposits, and the issue of converting foreign currency deposits to won deposits should be a subsequent matter. NPLs are likely to occur at the initial stage of reform, which demands stringent supervision from the start, provision of mortgage system, and establishment of supervisory institution.
Considering the financial situation and the need to prohibit currency issuing for the purpose of financial funding, an early issuing of treasury bond seems to be desirable. Combined with foreign currency denominated treasuries, it should serve as a useful tool to absorb foreign currency. As the discrepancy between market · official exchange rates is much severe than China and Vietnam’s case, the problem of dual exchange rate needs to be urgently addressed. Also, there needs to be a foreign exchange market which all exchange banks participate. Accessing international financial market would cause desirable effects, such as the procurement of foreign assets, enhancing trust towards financial institutions by the operation of foreign institutions, learning from advanced financial techniques, and fostering the transparency of accounting system.
In conclusion, North Korea’s current situation involves myriads of system-wide problems that cannot be eased by a fragmentary approach. Overall reform in the financial sector that parallels marketization is crucial, and favourable environment for implementing reform should be created.
In order to normalize deposit and savings within the banking sector, private finance should be incorporated into the system. Donju’s experiences may come handy in managing financial institutions. Also, overcoming dollarization necessitates comprehensive and long-term approach along with consistent policymaking in order to recover from the mistrust. This should be accompanied by forestalling currency evaporation and ensuring reliable supply of foreign currency and resources.
Moving towards a market-based financial system demands a lot of experience and know-hows, thus one can make use of foreign capital and the entrance of foreign financial companies through an open-door policy. The experience of its Southern neighbour ？ which underwent rapid development not only in the economic but also in the financial sector ？ would be beneficial. Moreover, it is imperative to recognize such reform plans are conditional upon remedying the distrust towards the government and meeting the terms required to lift the sanctions against North Korea. 

서언

국문요약

제1장 서론

1. 연구의 배경 및 목적
2. 연구의 방법과 구성

제2장 북한 금융시스템의 현황과 주요 과제

1. 기존 금융시스템의 주요 특징과 현황
2. 금융여건의 변화와 과제
3. 소결

제3장 중국 금융시스템의 전환과정과 평가

1. 개혁 당시 경제여건
2. 금융개혁과정
3. 인민은행의 개혁
4. 상업은행의 개혁
5. 자본시장의 형성
6. 외환관리와 환율
7. 금융감독기구
8. 평가

제4장 베트남 금융시스템의 전환과정과 평가

1. 개혁 당시 경제여건
2. 금융개혁과정
3. 베트남국가은행(SBV)
4. 국영상업은행
5. 민간은행
6. 증권시장
7. 환율과 외환시장
8. 국제금융기구와의 관계 정상화
9. 평가

제5장 중국·베트남 금융개혁이 북한에 주는 함의

1. 북한의 최근 상황과 중국·베트남의 개혁 초기 여건
2. 이원적 금융제도로의 전환
3. 은행부문의 자금 조달과 운용
4. 자본시장의 단계적 발전
5. 환율의 현실화와 외환시장 구축
6. 해외자본 유입

제6장 결론

참고문헌

부록: 중국 금융개혁 과정 연표

Executive Summary