The Structure and Function of the Informal Credit Market in South Korea

Abstract

It was in the early 1960s that South Korean economic development got fully underway. Since that time, the Korean economy has been developed under strict government control. Under a succession of export-driven economic development plans, the Korean government selected specific industries that seemed to have strong growth potential, and allocated scarce capital to those industries. As a result of this economic policy, many small-to-medium sized companies had serious difficulties raising necessary capital and they had no choice but to depend on the informal credit market to solve the problem of capital shortage. The Korean informal credit market enjoyed rapid growth due to the strong and steady demand. The role of suppliers of capital to this market was played by a few men of property, the so-called KUNSON, a Korean term of signifying rich people. The Korean informal credit market has continued to meet capital demand not only from small-to-medium sized enterprises but also from individuals, providing various financial services such as asset-backed loans and credit loans. In conclusion, the Korean informal credit market has adjusted itself to the fast changing Korean economic environment and has played several important roles such as supplying information and capital to small and medium-sized companies. The informal credit market thus functions as a complementary market to the established Korean financial institutions.