South Korea: Nature and extent of loan-sharking; protection available for victims of loan sharks
| Publisher | Canada: Immigration and Refugee Board of Canada |
| Author | Research Directorate, Immigration and Refugee Board of Canada, Ottawa |
| Publication Date | 11 April 2007 |
| Citation / Document Symbol | KOR101977.E |
| Cite as | Canada: Immigration and Refugee Board of Canada, South Korea: Nature and extent of loan-sharking; protection available for victims of loan sharks, 11 April 2007, KOR101977.E, available at: https://www.refworld.org/docid/47d6545e23.html [accessed 31 May 2023] |
| Disclaimer | This is not a UNHCR publication. UNHCR is not responsible for, nor does it necessarily endorse, its content. Any views expressed are solely those of the author or publisher and do not necessarily reflect those of UNHCR, the United Nations or its Member States. |
Loan-sharking – the practice of lending money at exorbitant rates of interest – has been a significant problem in South Korea (Hankyoreh 23 Oct. 2006; The Korea Herald 9 Mar. 2007) since the 1997 Asian financial crisis following which household debt "skyrocketed" (The Korea Times 27 Dec. 2005; Peterson Institute 27 Sept. 2005, 12-14; see also Stakelbeck 2005). As the Washington-based Peter G. Peterson Institute for International Economics – "a private, non-profit, non-partisan research institution devoted to the study of international economic policy" (Peterson Institute n.d.) – explains,
[i]n the aftermath of the crisis, lenders went from bingeing on corporate lending to bingeing on household lending: South Korean household debt registered the fastest growth in the world, increasing 18 percentage points of GDP in two years .... (ibid. 27 Sept. 2005)
By 2005, South Korean households were an average of USD 27,000 in debt (Stakelbeck 2005).
In response to the financial crisis, South Korea repealed its Interest Regulation Act in 1998, eliminating controls on interest rates reportedly to address the country's "urgent economic situation" (The Korea Herald 9 Mar. 2007). The move caused interest rates to soar to an annual average rate of 200 percent (ibid.). According to government statistics, 80 percent of those who borrowed money at these rates went bankrupt and did not repay their loans (ibid.). For example, The Korea Times reports that the number of people who defaulted on credit card and other loans "ballooned" to 3.72 million people in 2003, up from 2.08 million people in 2000 (27 Dec. 2005).
The government of South Korea enacted legislation in 2002 reportedly to combat the practice of lending money at an excessive rate (The Korea Herald 9 Mar. 2007; see also Hankyoreh 23 Oct. 2006). The legislation established an interest rate limit for private moneylenders (ibid; The Korea Herald 9 Mar. 2007; Korea 26 Aug. 2002) and required that moneylenders officially register their businesses (ibid.).The Act on the Registration of the Moneylending Business and Protection of Consumers governs all moneylending businesses, whether they are registered with the government or not, according to a lawyer in a South Korean law firm (The Korea Herald 9 Mar. 2007). However, although the legal interest rate for private loans is 66 percent (Korea 29 Dec. 2006; Hankyoreh 16 Jan. 2007; The Korea Times 16 Jan. 2007), according to the Korean newspaper the Hankoyreh, lax regulation by the authorities means that the actual annual average interest rate remains at 200 percent (16 Jan. 2007).
Indeed, according to government estimates reported in the Korean media in 2006, around 5.6 million people borrowed money from private moneylenders at an average interest rate of 200 percent (Hankyoreh 16 Jan. 2007; The Korea Times 15 Jan. 2007). The outstanding balance owed to private moneylenders in 2006 is estimated to be 796 billion Won (KRW) [approximately CAD 977 million (XE.com 10 April 2007a)], up from 570 billion Won (KRW) [approximately CAD 701 million (ibid. 10 April 2007b)], according to statistics from the National Information Credit Evaluation (NICE) (The Korea Times 15 Jan. 2007). The NICE also reports that the number of people borrowing from private moneylenders went from 205,000 a year ago to 325,000 in September 2006, and that the majority of borrowers were in their 20s and 30s (ibid. 9 Jan. 2007).
As several sources explain, people who are unable to meet the conditions of established financial institutions are turning to moneylenders instead (The Korea Times 6 April 2006; Hankyoreh 23 Oct. 2006; Korea 29 Dec.2006). Would-be borrowers refused by banks or other financial institutions because of bad credit ratings tend to use private moneylenders for loans, as do unemployed young adults (The Korea Times 6 April 2006; Hankyoreh 23 Oct. 2006; Korea 29 Dec.2006). The National Police Agency (NPA) also indicates that Koreans who are not considered creditworthy by banks and other financial institutions borrow from private moneylenders when they are short of cash (Korea 29 Dec. 2006). Because the borrowers are such a high credit risk, interest rates are reportedly "murderous," with firms charging one or even two percent daily (Hankyoreh 23 Oct. 2006). In addition, The Korea Times reports that "many" people, once in debt, also turn to loan sharks to obtain money to pay down their loans (27 Dec. 2005).
There are some 16,000 private moneylenders registered with the South Korean government and a further 40,000 private moneylenders are reportedly operating illegally in the country (The Korea Times 15 Jan. 2007). In addition to charging exorbitant interest rates, illegal private moneylenders, or loan sharks, commonly resort to violence to collect money from recalcitrant debtors, according to the NPA (Korea 29 Dec. 2006).
Unlawful methods of debt collection are spelled out, among other regulations, in the 2002 Moneylending Registration Act (Korea 26 Aug. 2002). For example, Article 10 of the Act states that moneylenders shall not [translation] "assault or threaten" borrowers in order to collect money (ibid.). Nor can they [translation] "significantly harm" the private or work life of the borrower by causing [translation] "fear or uneasiness" to either the borrower or people connected to the borrower (ibid.). They likewise cannot visit the borrower, or those connected to the borrower, without just cause (ibid.). Anyone who breaches the prohibitions of the law is subject to a maximum prison term of either three or five years or fines of up to KRW 50 million [approximately CAD 62,000 (XE.com 13 Mar. 2007a)] or KRW 30 million [approximately CAD 37,000 (ibid. 13 Mar. 2007b)], depending on the nature of the offence (Korea 26 Aug. 2002., Art. 19).
The NPA has indicated that beginning in January 2007, it is undertaking a three-month special crackdown on loan sharks who engage in violent business practices and who charge illegal interest rates (ibid. 29 Dec. 2006; Newsis 18 Jan. 2007). As part of the crackdown effort, a task force team will provide direction to 235 police stations and 1,236 team members as they investigate [translation] "violence, kidnapping, invasion of private life and so on" and monitor the extent to which criminal groups enter private moneylending markets (Korea 29 Dec. 2006). The police are also setting up call numbers and a Web site through which citizens can report illegal private financing activities (ibid.; see also The Korea Times 15 Jan. 2007). Moreover, any police officers who excel at apprehending people suspected of loan-sharking will reportedly be rewarded in various ways, for example, by receiving a promotion (Korea 29 Dec. 2006). The crackdown has been advertised to the public by various means throughout South Korea (ibid.). Police managed to arrest at least two private moneylenders in separate incidents for charging and collecting interest higher than the legal limit in violation of the moneylending law (Newsis 19 Jan. 2007; Kukmin Ilbo 29 Jan. 2007). According to the NPA, these loan sharks strive to keep their identities secret, for example by frequently moving their offices, using anonymous phone numbers and making financial transactions using accounts that cannot be traced to them (Korea 29 Dec. 2006). They use various methods to advertise their services such as spam e-mail messages and text messages, and posters on roadside trees and electric poles (ibid.).
Members of the government are also saying that it needs to do more to protect people from loan sharks (The Korea Times 22 Feb. 2007) According to The Korea Times, Finance-Economy Minister Kwon O-kyu, who is also deputy prime minister, says that a "state-initiated social safety net" is necessary to protect the many Koreans who are indebted to private moneylenders charging extremely high interest rates (22 Feb. 2007). In addition, Vice Finance-Economy Minister Chin Dong-soo was reported as saying that the government must prevent loan sharks from taking advantage of people with low incomes by charging interest rates over the legal limit (The Korea Times 22 Feb. 2007). The Ministry of Justice is reporting that the yearly interest rate limit will "likely" be reduced to 40 percent (ibid.).
This Response was prepared after researching publicly accessible information currently available to the Research Directorate within time constraints. This Response is not, and does not purport to be, conclusive as to the merit of any particular claim for refugee protection. Please find below the list of additional sources consulted in researching this Information Request.
References
Hankyoreh [Seoul]. 16 January 2007. "Finance Ministry to Ressurect Interest Rate Cap: Sources."
_____. 23 October 2006. Choi Hye-jeong "Loan Sharks Take a Big Chunk Out of Debtors." Translated by Daniel Rakove.
Korea. 29 December 2006. "Special Crackdown on Encroachments on the Small-Loan Sector of the Economy by Illegal Private Financing Activities Such as High Interest Rates and Retrieval of Loans by Violence." National Police Agency (NPA). Translated by the Multilingual Translation Directorate, Translation Bureau, Public Works and Government Services Canada.
_____. 26 August 2002. Act on the Registration of the Moneylending Business and Protection of Consumers. (Last amended 31 March 2005) Translated from Korean to English by the Multilingual Translation Directorate, Translation Bureau, Public Works and Government Services Canada.
The Korea Herald [Seoul]. 9 March 2007. "Law Talk: What Is 'Usury' in Korea?"
The Korea Times [Seoul]. 22 Febuary 2007. Lee Hyo-sik. "Minister Changes Position to Cap Rate."
_____. 15 January 2007. Lee Hyo-sik. "Ministry to Cap Loan Rates."
_____. 9 January 2007. Lee Hyo-sik "Young Jobless Turn to Private Moneylenders."
_____. 6 April 2006. Seo Jee-yeon. "Rate to Be Capped at 40 Percent."
_____. 27 December 2005. Kim Sung-jin. "Korea Struggles with Underground Economy."
Kukmin Ilbo [Seoul]. 29 January 2007. "Disclosure of Vicious Private Moneylender of Annual Rate of 475 percent." Translated from Korean to English by the Multilingual Translation Directorate, Translation Bureau, Public Works and Government Services Canada.
Newsis. 19 January 2007. "Illegal Private Moneylender who Requested Sexual Relationship on Top of Charging High Interest Rates was Caught." Translated by the Multilingual Translation Directorate, Translation Bureau, Public Works and Government Services Canada.
Peter G. Peterson Institute for International Economics. 27 September 2005. Marcus Noland. From Player to Referee? The State and the South Korean Economy.
_____. N.d. "About the Institute."
Stakelbeck, Frederick W. Jr. 2005. "The Role of Credit Cards in an Increasingly Indebted World Economy." SRC Insights. (Federal Reserve Bank of Philadelphia Web site]
XE.com. 21 March 2007a. . "Universal Currency Converter."
_____. 21 March 2007b. "Universal Currency Converter."
_____. 13 March 2007a. "Universal Currency Converter."
_____. 13 March 2007b. "Universal Currency Converter."
Additional Sources Consulted
Oral sources: Representatives from Consumers International, Korean Institute of Criminology, Lawyers for a Democratic Society, National Human Rights Commission of Korea, National Police University (Korea), Rutgers School of Criminal Justice, Sam Houston State University, University of Alaska and the University of Cambridge were unable to provide information within the time constraints of this Response.
Publications: Journal of Criminal Justice.
Internet sites, including: Amnesty International, Asian Development Bank, Centre for Free Enterprise, The Economist, Factiva, Human Rights Watch, Industry Canada, Korean Foundation, Korean International Labour Foundation, United States Department of State, World Bank.
