What Began as a Black Market Has Developed Into an Operation That Is Hard to Root Out

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What Began as a Black Market Has Developed Into an Operation That Is Hard to Root Out

Modern private money lending in Korea has its roots in the black market money changers of the 1950s. When contraband military supplies were traded on the black market, dealers in need of cash would borrow from the money changers at 1 percent daily interest.

In the 1960s, when modern business began expanding rapidly, company bonds and commercial paper became the main item that private moneylenders dealt in. They would require steep discounts for taking notes from holders as they paid cash in exchange.

Then in 1972, as economic conditions pushed smaller companies and businesses to the edge, the use of private, nonregulated money markets proliferated, and the government shut down the market. The result was a freeze in the market as the government required registration for all private capital movement. With the escalation of the Vietnam War and the beginning of the construction boom, the private capital market began operation. It again came to be the source of capital for smaller businesses with lower credit ratings or those that lacked properties to put up as security.

A series of financial scandals involving large private moneylenders broke out in the early 1980s, bringing into open the persistent problems of the underground capital market. Many of the moneylenders chose to become established as mutual savings companies in the face of a government crackdown. Others sprung up in a variety of loan operations: cash loans in exchange for taking the borrower's credit card which has available purchase limits, loans with excessive interest even after taking the borrower's car as collateral, demanding high premiums in negotiating notes, checks or certificate of deposits.

Once popularly known as a business run by older, greedy and ruthless people, private money lending today has become a complex operation involving sophisticated investment decisions and credit analysis. The private money lending business is becoming known as the "third financial sector."

by Chung Jeh-won

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