‘P2P Loan’, New Hope for the Small-Loan Finance

With a rapid deepening of economic polarization, the number of delinquent borrowers are increasing severely. P2P lending(P2P loan), an abbreviation for Peer to Peer, has come into the spotlight on this account as an alternative to the small-loan finance. P2P lending is a deal which enables a borrower to receive a loan with low and reasonable interest rates (about 26% per year) compared to those of the private money lending and credit card loans (about 39% per year). In this regard, both the lenders and the borrowers get benefits; through its diversifying effect, which makes lending money spread out across a number of borrowers, the lenders are able to lower the risk of being bilked by the borrowers and make a great profit as well. One of the advantages of the P2P loan is that the borrowers and lenders can communicate with each other. Unlike other loan systems, P2P loan makes the borrowers represent the reason for receiving the loan as well as their repayment plan. This is for to replace borrowers’ bad credit and sets out a flexible qualifications for borrowers. It would benefit low-income earners who would otherwise be under pressure of high interest rates and repayment.

 

P2P lending was introduced to Korea in 2007. It is still at its early stage and most transactions are involved with personal financing for the people with bad credit rating. Since its interest rates are at 20~30%, which is comparatively lower than the private loan, P2P loan is expected to expand this year. However it is still facing some difficulties related to credit assessment and a risk management because the deals are made between the party concerned without a broker. Thus to settle the matters and to vitalize the small-loan finance;

I. the investors should be informed of the qualities of P2P loan and be clarified where the responsibilities lie

II. regulatory means to protect financial speculators should be sought

III. ways to use P2P loan in various categories such as profit making and supports for foundation of small businesses should be improved.

안 소 빈 / An So Bin (sbann629@hotmail.com)

 

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What should be done for ASEAN Economic Community: Lessons from Euro zone crisis

Euro Zone and ASEAN Economic Community

 Euro Zone is an economic and monetary union, which European Union countries have adopted euro as their common currency to pursue economic welfare and foster regional synergy with stabilized exchange fluctuation. Benchmarking such type of economic and regional integration, 10 ASEAN countries including Thailand, Malaysia, and Singapore have agreed on formating Asian Economic Community(AEC) and realizing its four primary objectives-single market and production base, highly competitive economic region, region of equitable economic development, and region fully integrated into the global economy-by 2015. Through AEC, ASEAN is expected to expand its leverage while combining the market of 600 million people and 2 trillion dollars GDP.

Raised Concern

However, as there was an outbreak of euro zone crisis, concerns about modelling AEC was raised and the progress for it has been slowed down. According to Wall Street Journal on May 30th, 2012 Indonesian President Susilo Bambang Yudhoyono warned that the member states should not rush to adopt the common currency and to become an integrated economy, but build more structured and coordinated policy. In addition, he highlighted ASEAN Governments need to learn a lesson from Euro zone crisis. Then, what has to be learned and considered for a successful establishment of AEC?

 1. Bridging the economic gap between member countries

The structural root cause of the Euro zone crisis lies here: sharing the same currency among countries with different economic conditions. The monetary integration was supposed to secure the stability of exchange rate in order to increase trade volume in the region and achieve member countries’ economic development. But at the same time, this came to lose the price function of exchange rate which reduces the imbalance among rich and poor countries. And finally it turned out to deepen the economic gap and trigger the debt crisis.

This consequence of Euro zone implies ASEAN countries should acknowledge the economic gap between member states in the process of realizing AEC. The below chart which depicts the GDP gap among ASEAN countries obviously shows some countries’ economies are much bigger than the others. For example, Thailad’s GDP ($345 bil) is 44 times bigger than that of Laos ($7,891 bil). As a result, not to repeat the same crisis as euro zone, ASEAN needs to go through detailed negotiations with regarding the existing gap.

Unit: Billion, Source: IMF, As of 2011

2. The need of strong leadership in the region

 The absence of leadership is regarded as the decisive factor that led to the euro’s demise. Since EU consists of several countries with their own interests and political stances, it is difficult for the euro zone to come up with a centralized authority that can legislate and enforce monetary policies. Rather, leading members still put their own profits before the region’s problems.

This issue can also be identified as key challenge for AEC. It is expected that the underlying problems of political uncertainty and regional conflicts, such as Thailand-Cambodia border issue, will make AEC difficult to cooperate within the economic bloc. Therefore, it is essential for them to organize monetary authority and structured management system for economic governance.

Conclusion

Accordingly, ASEAN should take account of the economic gap among member countries and a strong need of governance system to successfully establish AEC. In doing so, it will become important economic bloc along with the rapid expansion of economy in the region.

CHOI SO YOUNG(90soyoung.choi@gmail.com)

Financial Stability Imbalance

Nowadays we can easily get the news about ‘crisis’, like global crisis or financial crisis dozens of times. There’s danger lurking everywhere in Korea economy with high price, oil, polarization and slow growth. Then what about Korea economy? The bank of Korea says that they developed an index which can be an indicator of economy’s health. This is called FSI(Financial Stability Imbalance).

FSI (Financial Stability Imbalance) is an index which converts many economic indicators to only one indicator so we can get information of finance fluctuation obviously. Also it can be used when diagnose macro prudential situations quickly to catch systemic risk which caused by financial imbalance. It is calculated with 20 indicators which represent financial stability quickly responded well. After the survey to financial specialist and economist, it is calculated with weighted average.From 0 to 100, it is more unstable when get closer 100 point.

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Using this index, Korea have suffered three times of crisis so called ‘real’ crisis since 1996. Asian financial crisis in 1998, IT bubble crash of 2001 and global financial crisis of 2008, while Asian financial crisis placed first in shock wave, global financial crisis came second, followed by IT bubble crash. Then how’s the Korean economy level goes now? The level of FSI has been goes up and down with “Caution” step but not goes up to “Severe”.

 

NTS Revises the Taxation Practices of Offshore Private Equity Fund

As early as from July this year, offshore private equity fund in Korea need to submit the list of investors on their funds in order to avoid tax hike from their capital gain. Recently National Tax Service (NTS) announced that the agency has finalized the revision of taxation practice on foreign based private equity fund in Korea. Since it had been heavily controversial issue for years derived from the outstanding capital gain of LoneStar, Texas based private equity fund, from selling major share of Korea Exchange Bank (KEB) after acquiring one of the major local banks during financial crisis in 2003 allegedly under the less-than-expected price range, without paying appropriate amount of tax, which is not considered to be a tax evasion, NTS began to review current taxation practice on the limited tax rate based on tax treaties between Korea and certain countries  Under the amendment, private equity fund in Korea, which legally registered on countries where either tax-free or lesser tax rate is offered, also known as, ‘tax haven’ based on tax treaties, need to disclose the investors’ list of their funds to continue its tax benefit from now on; otherwise, the fund shall not only lose its privilege of tax benefit, but also it is eligible to impose general tax rate from capital gain up to 22%.

 

Typically private equity fund itself tends to raise its fund by attracting investors who are not necessarily willing to reveal their identities in public. In order to maximize capital gains from investment as well as operate the management more freely, the fund prefers to setting up the legal entities on certain countries where offer less tax rate by tax treaties with target countries. According to the tax treaties, offshore private equity funds are eligible to pay the tax payment at limited tax rate regardless of investors’ identities, i.e. nationality, residence. At presents, Korea has agreed with 78 countries in treaties to mitigate the effects of double taxation including United States, Japan, China, U.K, Australia, Germany, Swiss, Belgium, and Singapore etc.

 

So until now, current foreign based private equity funds who invested in Korea enjoyed this generous tax benefits from their investment in Korea as an offshore private equity fund; however, according to the amendment, they should consider revealing the investors’ list to avoid tax hike from their capital gain. NTS mentioned that it is expected to prevent offshore private equity fund from possible tax evasion and able to identify the rich who intend to evade the tax payment via investing offshore private equity funds.

As for fund managers of offshore private equity fund, the current change of taxation practice would not be welcomed because they should either sacrifice the investors’ identities to keep tax benefit, the limited tax rate or take a significant risk of tax burden from not disclosing the investors’ list. The former would be able to retrieve the expected capital gain from keeping the applied tax rate under the current tax treaty; in return, it is possible to lose the current and potential investors for fear of revealing their identities. The latter would have to pay more tax payment than the estimated, which the rate of return will decline. Eventually underperformance and lower return will eat away the investors no matter what.

As for national tax agency, it will be absolutely effective for them to access and review the list of investors of offshore private equity fund for taxable purpose. However, tougher restriction on offshore private equity fund may discourage investing activities and opportunities in Korea.

 

Jin Mok Kim(jinmok.kim@gmail.com)

Seoul hosts a major international pension conference in 2013


In 28-30 October 2013, Seoul will host the annual general meeting of the International Organisation of Pension Supervisors (IOPS) and the OECD/IOPS Global Forum on Private Pensions. The decision was made at the meeting of the IOPS Executive and Technical Committees, held in 5-6 June 2012.

For those who are not well upon the IOPS, the IOPS is a Paris-based international body of private pension supervisors with membership of 66 countries. The Organisation was established in July 2004, following the dissolution of the International Network of Pension Regulators (INPRS), for the need of more formal and independent organization. This international pension organisation’s major goal is to improve the supervision of private pension systems, and its specific aims are; 1) setting the international standards on pension supervision, 2) promoting cooperation and exchanges of relevant pension bodies, 3) providing a forum for private pension policy dialogue and information exchange, 4) working with relevant international bodies, e.g. improving statistical collection and analysis, and 5) distributing, communicating, and collecting such information.

Since its inception, the IOPS has been working closely with OECD with regards to private pension systems. The two organizations have annually held the joint Global Forum on Private Pensions since 2005. As for this year’s Forum, it is scheduled to be held in 23-24 October in Santiago, Chile under the theme of “Making Funded Pensions Work.”

Against the backdrop of growing pension market in Korea, and increasing challenges to private pensions around the world – for which the OECD recommended countries to seek later retirement and extend the coverage of private pensions (Pensions Outlook, June 2012) – the Financial Service Commission is looking forward to promote international exchanges of private pension issues and experiences, and contribute to improvement of pensions system by hosting the IOPS conferences in Seoul.

Asia Financial Cooperative Network

Seok-dong Kim, the chairman of Financial Services Commission (FSC) visited Thailand and Hong Kong from June 9 to June 13. This business trip was an extension of his endeavour to establish Asia Financial Network including previous business trips to Mongol (September 2011) and Vietnam and Indonesia (March 2012).

It was a meaningful achievement to set up a cooperative system with Thailand and Hong Kong. Above all, Thailand has been Korea’s sincere allied nation since Korean War. In 1958, after establishing diplomatic ties, Thailand is now the 17th export country ($8.4billion), the 22nd import country ($5.4billion) and the 21st foreign direct investment country ($0.176billion).  Also, it is needless to say the importance of Hong Kong because, as a centre of global finance and trade, there are a lot of global finance companies including 34 Korean companies.

Beginning his first schedule, Kim reinforced the corporation between Korean and Thai financial authorities. In detail, FSC and Thai financial authorities such as Office of Insurance Commission (OIC) and Securities and Exchange Commission (SEC) signed MoU to strengthen cooperation. Considering geopolitical factor of Thailand which is located in the centre of Indochina Peninsula, close cooperation might play an important role for Korea to advance into Asia rising countries such as Laos, Cambodia and Myanmar. According to this MoU, both authorities can exchange information about financial policies and supervisions. Also, they agreed to share political experiences and professionalism through regular meeting. Especially, at the meeting with Vorapool Socatiyanurak, secretary general of Thai SEC, FSC agreed the close cooperation to foster capital market and establish financial infrastructure in ASEAN and Greater Mekong Subregion (GMS).  From this, both authorities expect for Korean private company to advance into Thailand actively.

In Hong Kong, Kim made an effort to establish the market stabilization plan against the Eurozone crisis. Visiting Hong Kong Monetary Authority (HKMA) and Hong Kong Securities and Futures Commission (HKSFC), he shared opinions about Euro crisis and tried to seek cooperative counter plan. In particular, HKSFC conceded the necessity of reinforcement of cooperation, so acceded to cooperate with signing MoU in the near future as well as currently availing through International Organization of Securities Commissions (IOSCO) and APRC.

During the business trip, Kim also held a meeting with local advanced businessmen in both Thailand and Hong Kong. The participants highly requested for Korean government to support the companies’ advances and the local business activities continuously. They said the support is critical because Thailand and Hong Kong are located in the centre of Indochina and the core of Chinese economic region respectively.

FSC evaluated this cooperation with Thailand and Hong Kong as a promising achievement because of their geopolitical advantages. With the previous business trip to Mongol, Vietnam and Indonesia, this business trip has a significant meaning of expanding Asian Financial Cooperative Network to Indochina Peninsula and Hong Kong (China). FSC will keep strengthening financial diplomacy concentrating on the rising countries to support Korean companies’ advances to the global market.

Chaehack Chad Suh (chaehack.suh@gmail.com)

‘Crisis is not over’: Kim says the current global crisis is as crucial as the Great Depression.

World economy has been experiencing the most critical crisis since the Great Depression in the 1930s. Euro crisis which started from Greek financial deficit has now spread to Spain’s bank crisis. At the executive council meeting on June 4th, Seok-dong Kim, the chairman of Financial Services Commission (FSC), diagnosed the global economic challenge to have originated fromEurope.

 

At the meeting, Kim emphasized the importance of the ability to confront crises. He discussed the possible reasons behind deteriorating crisis inEurope, stating the conceptual problem of the single currency as well as the Greek government’s failure to respond expeditiously.

 

The ambiance of the meeting room grew tense as the debate moved on to the Spanish crisis. Since, the economic size ofSpainis five times larger than that ofGreece, if theSpain’s crisis becomes a reality, the impact on the world economy and the financial market will be beyond imagination. Given the situation, Kim requested people to realize the seriousness of the current situation and to take proactive measures.

 

During the meeting, the executives suggested another analogy. The devastating circumstances of Euro crisis could not help but be compared to the unforgettable economic tragedy, the Great Depression. The similarity lies in each event’s strong momentum to shift existing economic paradigm into a new one. We have already witnessed the Great Depression drive out a principle of laissez-faire, and bring forth revised capitalism. Now we are on the brink of another transition to a newly advent paradigm, so called capitalism 4.0*, which will highlight the market autonomy with better stability and order, the protection of investors, and social responsibility. As one of the main organizations responsible for the installation of capitalism 4.0 inKorea, FSC and financial fields will have to carry out these adaptations with much care to overcome the crisis.

 

*capitalism 4.0 – refers to the latest version of capitalism. The idea was suggested in the book Capitalism 4.0: The Birth of New Economy in the Aftermath of Crisis by Anatole Kaletsky. Briefly, capitalism 1.0, 2.0, 3.0 and 4.0 matches to Adam Smiths laissez-faire, Keynesianism after the Great Depression, Regan’s new paradigm after the stagflation in the 60-70s, and the well balanced capitalism in construction today, respectively.

 

What we have done

 

Thanks to many experiences from 1997 Asian financial crisis and 2008 global financial crisis,Koreais already well trained for crisis management. First of all, Korean government has cleaned up the troubled savings banks which were one of the most obstructive factors. Twenty savings banks which amount to 40% of its assets were successfully cleaned up without injecting public funds. This successful action curbed the spread of distrusts and anxieties from other banks. Moreover, a well-planned-out strategy was established by the government to control household debts. Policies such as microfinance were reconsidered within this context to include the lower income households.

 

In addition, the plans against the danger of bubble in Korean capital market are in smooth progress. The amount of call money on stock firms has decreased from 13.9 trillion won in May 2011 to 8.2 trillion won this May. The credit loan balance was reduced by 38.5% this year. Speculative trades are restrained by raising FX margin deposit and planning to make healthy ELW market. Lastly, Stress test of banks inKoreahas been performed since the second quarter of 2011, earlier than any other countries. At the same time, delivering medium and long term foreign funds has expanded. These efforts fostered the ability to react against the foreign capital deficit which was one of the most vulnerable at every crisis in the past.

 

What we have to do

 

Chairman Kim insisted that even though we have made a considerable effort to build strong risk-handling system against the financial crisis, all our endeavors may become useless if not equipped with proper policy and prompt reaction. With this in mind, he addressed that the crisis management plans should be ready to be applied whenever they are needed. A brief outline of future direction of policy is as follows.

 

As mentioned before, one of the continuous issues for Korean economy was how to cope with the market volatility. The vulnerability of Korean market has always been the high dependence on foreign capitals. However, through constant inquiry, FSC has come up with numerous methods to mitigate the fluctuation. FSC will strictly regulate the short selling by improving transparency. At the same time, intensive monitoring on ELW and FX margin trade will be conducted. These will encourage removing immoderate speculative trading and restructuring foreign dependent capital market.

 

Another point brought up was the significance of protecting small and medium enterprises (SMEs). These enterprises are what consist of so called “the real economy”. The real economy takes up a considerable ratio of trade not only with GDP but also with the capital market. Moreover, the real economy is also a vulnerable subject to further proliferation of Euro crisis. Thus, it is inevitable assignment for FSC to establish a secure bulwark to help SMEs survive through the crisis.

 

On top of all these efforts, Kim promised that FSC will take endless actions against the potential crisis and market jitters with much readiness and investigation.

 

Chaehack Suh(chaehack.suh@gmail.com)