Korea urged to reform real estate finance system

As competition among nations to dominate advanced industries intensifies, finance is playing an increasingly critical role in identifying promising companies and nurturing them into future growth engines through investment. Around the world, financial institutions are accelerating efforts to replicate the innovation ecosystem of Silicon Valley in the United States, which was cultivated by venture capital. Against this backdrop, calls are growing more urgent for a fundamental transformation of South Korea’s financial industry, where interest income from loans secured by homes and land remains the largest source of profit.

The city-state of Singapore accounts for more than 70 percent of total venture capital investment across the six major member countries of the Association of Southeast Asian Nations. Having recognized early the importance of fostering startups, Singaporean banks are willing to extend loans exceeding 100 million won even to companies less than two years old, provided they have differentiated ideas. Innovative firms, including those that developed vertical smart farms in downtown Singapore, were launched with the help of such financial support.

As a result, companies from China, Southeast Asia, the Middle East, and many South Korean startups are relocating their headquarters to Singapore. Manus, a Chinese artificial intelligence company dubbed the next DeepSeek, moved its headquarters from China to Singapore last year, expanded rapidly, and was recently acquired by Meta, the operator of Facebook and Instagram, at a valuation of several trillion won.

While financial institutions in competing countries invest in advanced industries and the future potential of emerging companies, South Korea’s financial sector, particularly its banks, remains heavily dependent on mortgage lending. Mortgages now account for 31 percent of domestic banks’ won-denominated loans, up from the previous year. Nearly three decades after the 1997 International Monetary Fund foreign exchange crisis, which exposed the risks of excessive corporate lending, banks have yet to move away from a risk-averse business model that relies on real estate-backed loans widely regarded as virtually guaranteed profits. Even venture capital firms, whose core business is risk capital investment, are concentrating more on recouping funds than on identifying high-potential startups to expand investment. Under these conditions, the emergence of new unicorns such as Toss or Baedal Minjok seems increasingly unlikely.

When financial resources are tied up in low-value real estate, the national economy inevitably loses momentum. This is a key reason South Korea’s potential growth rate has declined by roughly one percentage point every five years and now stands below 2 percent. The country’s financial sector must take the lead in promoting innovative finance that channels household savings, currently locked in homes and land, toward future growth industries such as artificial intelligence and semiconductors.