Workshop on Strengthening Finance Companies and Venture Capital in Indonesia

May 17-18, 2006 Hotel Mulia, Jakarta, Indonesia

By Susilo Sudjono

Assalamualaikum Wr. Wb. Honorable Ibu Sri Mulyani, Minister of Finance, Republic of Indonesia; Honorable Bapak A. Fuad Rahmany, Chairman of BAPEPAM; Honorable Bapak Ngalim Sawega, Director, Directorate of Banking and Financial Services, Ministry of Finance; Honorable Mr. Andrew Steer, Country Director, World Bank Jakarta Office Respectable Speakers; Ladies and Gentlemen: I am delighted to be here for the precious Workshop on Strengthening Finance Companies and Venture Capital in Indonesia, and I would like to thank the committee for inviting me. I believe that regular engagement with the International and Local Financial Communities like this is one of the strengths of the policy formulation process in our country, Indonesia. I would value this opportunity and as a chairman of Indonesian Financial Services Association I would like to update you on the developments and to address our expectations. In my capacity as a chairman of IFSA, there are a number of issues which I would like to touch upon today. First and foremost, however, I would like to acknowledge both the crucial role played by the multi finance company and the significant benefits it generates for the Indonesian economy overall. I am conscious of the fact that the Multi Finance Company forms a key part of the Indonesian economy. The asset of multi finance companies in Indonesia has reached IDR 100 T or equal to USD 11 B in year 2005 while the Net Income achieved was IDR 3.5 T or equal to USD 380 M. Accordingly, the tax contribution of Multi Finance Company to the Government was IDR 1.5 T or USD 170 M. This figures probably significantly understate its true contribution to the economy. Multi Finance is one of the fastest growing financial sectors in the country (300% assets growth in last 6 years). If we look at the 2005 portfolio, the total portfolio consist of 65% Consumer Finance, 31% Financial Lease, 3% Factoring, and 1% Credit card. It is of considerable importance on the employment front, and the substantial tax receipts generated.

Factoring business the absence of clear regulation in legal and tax aspects has resulted in the stagnant growth of this product despite the growing demand for factoring facility. Due to very high investment in terms of systems and funding availability and keen competitive with the bank communities, credit card business is not very attractive to the MF player. The financial services sector is a significant contributor to the services sector overall - directly employing over 100,000 people, not to mention the employment created from the growth of automotive, heavy equipment and other industries financed by multi finance companies. Regulatory Highlights & Lines of Business Indonesian multi finance industry started in the 1970s by the formation of leasing companies which were based by a joint ministerial decree issued in 1974 by the Minister of Finance, Industry and Trade and later revoked by a Presidential Decree in 1988 (No. 61/1988) issued on 20th December 1988. Furthermore, one of the Ministry of Finance Decree in 2000 (No. 448/KMK.017/2000) reconfirming that multi finance companies shall be allowed a broader scope of business activities to include Leasing, Consumer Financing, Factoring, and Credit Cards. - Leasing shall be financing activities in the form of the provision of capital goods by both optional leasing (finance lease) and non optional leasing (operating lease). - Factoring shall be financing activities in the form of the purchase of short term receivables in certain companies from domestic or overseas trading transactions. - Consumer financing shall be financing activities to procure goods under a system of installments. - Credit card business. The need for a national level organization to contribute the broadening and upgrading of leasing services led to the birth of the Indonesian Leasing Association in 1982. In year 2000 the Indonesian Leasing Association was changed into Indonesian Financial Services Association, currently having 134 members, which consists of 96 local companies, 37 joint venture companies and 1 state owned company.

As said earlier, the competitive position in supporting Indonesian economic shall remain our primary goal, therefore on behalf of members of the IFSA please allow me to address some of our concerns with regard to the regulation as well as policy in relation to the Multi Finance company operation, as follows : 1. Regulation and Supervision As we all are aware that in the financial services market MF company and Banks are sometime in head to head competition especially in Consumer Finance business, however Banks are given advantage by the regulation such that they can obtain funding directly from people with lower cost of fund. Nevertheless, most of the MF company are still in the good shape simply because MF company operates efficiently, cover wide range of branches and can offer more flexible terms, faster approval process without sacrificing credit risk criteria. The position of MF business today, reflecting that current setting of supervision by Ministry of Finance is considered sufficient to control the operation of MF in Indonesia. Since the members of IFSA are representing almost all active MF players, IFSA is certainly a strategic partner for authority in order to perform their monitoring duty. The empowerment of IFSA is one of the alternative in strengthening coordination, supervision and control of the MF operation in Indonesia. 2. Funding Sources The main funding source of multi finance industry in Indonesia is basically derived from the banks. In the last 5 years, already exists, alternative funding scheme from the bank, instead of direct bank borrowings, a finance company can obtain funding from a bank through the cooperation with the bank in the form of joint financing or channeling schemes to finance the small to medium business entities or individual consumers. I am pleased to note that the initiative of the collaboration between the Banks and MF Companies through Joint Financing Scheme has maximized the value to the consumers as well as the Banks and MF itself. Through such a co-operation scheme both the bank and finance company may finance more efficiently each in its own proportions which in turn is beneficial to the customers. Most importantly, for this scheme, the finance company would not face mismatch funding in term of interest and financing term. The issuance of finance companys corporate bond, which should be issued through the capital market, is becoming more attractive as another alternative to obtain medium or long-term source of funds. The market capitalization of corporate bonds now is more than Rp. 11 trillions thru 15 Finance Companies.

This is representing around 19% of the total Indonesian Corporate Bonds. I have noted that most of the major players in multi finance business in Indonesia, both local and joint venture finance companies, have tapped the opportunity to get medium or long-term funding (2 to 5 years) thru corporate bond issuance. The above limited sources of fund has been quite an obstacle to the growth of MF services. I would propose that through such secured scheme, MF may also have a chance to accept private placement from pension fund, insurance company and public listed company. However, to attract and protect the risks of potential investor, MF companies issuing CP or MTN for private placement, should be rated properly by rating agency, with certain mandatory requirements (for example: A rated). 3. Growth In 2002, new license issuance was terminated, therefore currently the need of opening new MF company has to be based on the non active license issued. This situation leads us to the difficulties of growth of the MF business in Indonesia especially to absorb the foreign investment needs in this sector. Therefore, after 4 years of termination period, new license issuance for a very selective candidates is considered appropriate today. However, in order to have strength and sustainable finance company, for the new license issuance, such minimum rating requirement for potential shareholders of the company (for example : min A rated) , should be considered as mandatory requirements. On the Debt to Equity Ratio as stipulated in the KMK 448/2000, maximum DER allowed for a MF is 15X, comprises of 10X for on-shore loan and 5x for off-shore loan. Knowing that Indonesia has adopted free financial market, where border is no longer an important issue, if possible we would propose that the calculation of DER can be based on total loan disregarding the source of fund to provide more flexibility. 4. Taxation In relation to tax matters, currently we are facing some difficulties in the operation such as WHT on interest payment made by the customers. Under current tax regulation any interest payment to non bank entity shall subject to WHT, however the nature of MF transaction implies interest as basic income to the MF company, since this nature is similar to the Banking services , we would propose an exclusion of WHT on interest payment paid to MF company as applied in the Banking sector. As you may be aware of, besides new vehicle, equipment and machinery financing, there are other big opportunities of financing demand which is under

Sale and Lease Back transaction, both for technical reason (lessee acts as importer and user as well ) and working capital requirements for lessees cash flow operational support. Normally this financing was carried out by way of Sale Purchase Agreement and Leasing Agreement. This transaction is very potential within the Industry and very attractive for business environment, however the VAT imposed on the Sale and Lease Back transaction will make this transaction not attractive anymore. We would certainly propose that Sale and Lease Back transaction by MF company is excluded from any VAT. In reality, there is no added value related with this transaction and there is no transferring of goods. We would also propose that Provision for Doubtful Account under Consumer Finance and Factoring transaction could be considered Deductible Expense, to give business incentive as it is already recognized under Financial Lease transaction. 5. Foreign Partnership As the market of financing in Indonesia is huge and the extended support of MF company is very much required, I propose to review the termination of issuance of new license, therefore we should be able to attract foreign investor to bring fresh funds from abroad as well as to maximize the participation of existing foreign partner in the Joint Venture MF companies in Indonesia. I would suggest that under existing and new license issuance, for Joint Venture MF company the ownership of foreign partner can be increased from 85% to 99. In view of the above, I believe that The Government is moving on a wide area of policies relevant to general level and we can expect that the main thrust of policy under the headings of our consumer value, competition and regulatory reform will continue to be directed at maintaining our national competitiveness at home and in the region. Finally, Honorable Speakers, Audience, Ladies & Gentlemen; Again I would re-iterate how important it is that our financing industry is represented in the policy making process through representative groups such as this valuable forum. I would like to thank you once again for your invitation and for your attention. I wish to commend on your forward looking and far thinking efforts on behalf of our industry and to wish you a very successful workshop here today. Thank you. Ass Wr Wb.