Challenges of Asset Finance

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30 December 2015 ProQuest



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1. The challenges of asset based financing in Indonesia................................................................................. 1

Bibliography...................................................................................................................................................... 4

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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




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






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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Challenges of Asset Finance