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Table of contents
1. The challenges of asset based financing in Indonesia................................................................................. 1
Bibliography...................................................................................................................................................... 4

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Document 1 of 1

The challenges of asset based financing in Indonesia

Author: Jatim, Mustafa
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Abstract: Equipment leases were considered an alternative to the traditional short- and medium-term bank loan
when they were introduced to Indonesia in the early 1970s. The government's 1988 deregulation of the financial
services industry expanded the role of leasing companies, by allowing the inclusion of other asset-based
financing and clarifying the regulations to enable flexibility in lease financing. However, despite economic
growth and expansion in competition. The Indonesian leasing industry did not advance beyond the basic
finance lease phase. It was not until 1991 that the government clearly defined an operating lease. The
Indonesian definition of an operating lease is a lease that is not a full pay out lease, does not specify a purchase
option by the lessee, and has a contract term lower than that specified as the minimum economic life of the
asset. Regardless of how it is defined, the one principle that drives this service is the client's requirements.
Full text: When equipment leases were introduced to Indonesia in the early 1970s, they were just an alternative
to the traditional short and medium term bank loan. The early spon. sors of leasing companies were foreign
banks who were late comers to Indonesia and, finding out that new bank (or bank branch) licenses were no
longer permitted, applied for the next financial service vehicle available.
As a direct result of the application of traditional bank lending principles to equipment leasing, cash lending
perceptions more or less pushed aside the asset-based financing concept that is the basic foundation of
equipment leases. Lessors were not too concerned with the details of the asset being financed, making their
judgements more on the client's credit assessment. While this is not entirely wrong under the principles of
finance leasing, over time it created a mental obstacle in many Indonesian Lessors to being creative, and made
them reluctant to take true residual risks.
In the first 13 years the number of leasing companies in Indonesia expanded from three to 83, with contract
value expanding from Rp1.3 billion to Rp1,800 billion. While the figures were impressive, they were dwarfed by
the country's industrial growth and the expansion of bank lending in the period.
The government's 1988 deregulation of the financial services industry expanded the role of leasing companies,
by allowing the inclusion of other asset based financing and clarifying the regulations to enable flexibility in
lease financing. Licensed companies under the newly established multi finances grew from 102 to over 140,
with some specializing in single products, such as venture capital or factoring. Contract values reached a high
of Rp4,200 billion in 1990, before contracting to around Rp3,800 billion in 1991. For 1992 volume is expected to
be the same as in the previous year.
With the backdrop of economic growth and expansion in competition, one thing remained the same. The
Indonesian leasing industry had not advanced beyond the basic finance lease phase.
The fast economic growth of the 1980s and earlier 1990s left many large and medium sized corporations
lacking in basic capital for asset replacement and capacity expansion. Apart from traditional bank financing,
leasing companies offered only higher priced, straight line, finance leases. Hence, during the boom, the debts of
many corporations soared.
More customer-focused asset-based financing become important, and direct competition with bank financing to
win lucrative transactions made it necessary for leasing companies to develop flexibility and innovation, and
depart from products that are seen as just a bank loan look-alike.
It was not until 1991 that the government clearly defined an operating lease. In many respects the operating
lease, as a value added service, provides another potential financial supplement which is very much needed in
the Indonesian market.
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I need not go into the internationally known definition of operating leases, however, it would be interesting to
note that the government defines the product as:
* A lease that is not a full pay out lease (taking a residual risk),
* A lease contract that does not specify a purchase option by the lessee,
* The lease contract term is lower than that specified as the minimum economic life of an asset.
Another key feature in the Indonesian operating lease ruling is that the full rental, recognised as income by the
lessor (a tax deductible expense by the lessee), would be subject to 10 per cent VAT, withheld in payment by
the lessee.
Regardless of how it is defined, the one principle that drives this service is the client's requirements. The
advantages of equipment use without resale risks are genuine, and the off balance sheet possibilities are
significant.
Although one can justify more than one approach to operating leases in the industry, in Indonesia's case the
most appropriate approach is to look at the asset type and the service elements.
TYPE OF EQUIPMENT
Most of the major freight forwarders, distribution companies and many of the large manufacturing and transport
companies operate vehicle fleets. Some companies still prefer ownership, but we can already see trends for
operators to maximise profitability by concentrating on what they do best.
Construction companies usually work on contracts that nn for 18-24 months at a time, and the ability to charge
out the cost of the use of specific heavy equipment to current revenue streams would be a definite financial
advantage, compared to carrying unused equipment between working contracts.
Rapid technological advances also mean that medium to large sized companies need to frequently update or
extend their computers and other office equipment.
Most Indonesian shipping companies cannot afford to maintain as many vessels as they would like to. As new
potential charter contracts come up for shippers, there is usually a scramble to get the boats needed. The
Indonesian archipelago is spread out and retum trip schedule might just not meet the specific timetable needed.
The government's deregulation of the airline industry allowed private airline operators to use larger jet engined
aircraft. However, the many domestic routes available do not all promise profits. Owning a fleet to service the
assigned routes, on a hial and error basis, would be a disaster.
Other asset-specific opportunities can be easily spotted in many other industry segments.
TYPE OF SERVICE
Operating leases with full-service support by the lessor can be profitable if the essential expertise and
capabilities are there. Financial institutions regard this as excessive. Contracting the support services to a third
party is seen to be more appropriate.
Operating leasing can help overcome capital adequacy problems by shifting some of the financial burden to
equipment intensive companies. The service will follow the equipment.
Understanding the risks of operating leasing is an essential part of offering services. Assuming ownership risks
means:
* Correct valuation of residuals to determine the pricing and appropriate structure of the lease.
* Asset value forecasting is more important than traditional credit analysis.
* Assessment of the useful life and usage pattern of the asset.
* Taking into account obsolescence issues.
* Location, tracking of assets, relocation and maintenance.
* Establishing the secondary market for re-use/resale.
In managing risk, it is important that lessors ensure a fixed lease term and obtain an indication of renewal at the
end of that term. The recovery of all costs plus an adequate return should be worked out through fixed rental
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payments, renewal and available tax benefits. Be realistic in the anticipation of renewals, given expectation of
future market values.
While we talk of the potential markets, yet untapped, in Indonesia, preparing an operating leasing operation
might not be as easy as it seems. The leasing company would need an extensive asset management
department to track down its assets, in great detail, and develop specific skills in asset evaluation, support
services, and secondary market knowledge. For a financial institution this phase of acquiring technical
capabilities is usually the major hesitation.
Mustafa Jatim is secretary general of Asosissi Leasing Indonesia.
Subject: Security interests; Operating leases; Market potential; Leasing companies; Equipment financing;
Deregulation; Definitions;
Location: Indonesia
Classification: 9179: Asia & the Pacific; 8300: Other services; 4310: Regulation; 3100: Capital & debt
management
Publication title: Asset Finance & Leasing Digest
Issue: 199
Pages: 26
Number of pages: 3
Publication year: 1993
Publication date: Jun 1993
Year: 1993
Publisher: Euromoney Institutional Investor PLC
Place of publication: Coggeshall
Country of publication: United Kingdom
Publication subject: Business And Economics--Banking And Finance, Business And Economics--International
Commerce
Source type: Trade Journals
Language of publication: English
Document type: PERIODICAL
Accession number: 00728921, 00413745
ProQuest document ID: 229467279
Document URL: http://search.proquest.com/docview/229467279?accountid=150435
Copyright: Copyright Euromoney Publications PLC Jun 1993
Last updated: 2014-05-23
Database: ABI/INFORM Global

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Bibliography
Citation style: APA 6th - American Psychological Association, 6th Edition
Jatim, M. (1993). The challenges of asset based financing in indonesia. Asset Finance & Leasing Digest, (199),
26. Retrieved from http://search.proquest.com/docview/229467279?accountid=150435

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