The Lending and Secured Finance Review: Indonesia


i General

Infrastructure development has been the top priority for the government under President Joko 'Jokowi' Widodo. The Jokowi administration is continuing with many initiatives intended to increase infrastructure spending to 2019. The government has been active in supporting players to obtain funding through alternative financing. In this regard, the government through its National Development Plan Agency has developed its task forces to boost the implementation of non-government budget funding for infrastructure projects. The alternative financing sources can be obtained from capital markets, managed funds, banking, insurance and other financing structures. A lot of recent cross-border financing is also related to the financing for infrastructure projects. Non-governmental infrastructure financing projects are targeted to reach a total value of US$30 billion in 2018.2 According to the Financial Services Authority (OJK), infrastructure project loans have been constantly increasing from 19.5 trillion rupiahs in 2015 to 44.4 trillion rupiahs in 2018.

In its external debt, Indonesia saw a slow increase in the first quarter of 2019 according to Bank Indonesia (BI).3 Total external debt was recorded at US$388.7 billion, only US$4.8 billion higher compared with the value at the end of the previous quarter. In the private sector, the loan demand for working capital and investment decreased to 68.2 per cent from 77 per cent in the previous quarter, and 74.7 per cent from 83.1 per cent in the previous quarter respectively. In contrast, statistics indicate an increase in loan demand for consumption, primarily for vehicle ownership. Private external debt is dominated by the financial and insurance services, manufacturing, power and mining sectors. Together, they constitute 74.2 per cent of total private external debt.4 Government debt was growing at 7.3 per cent5 (year-on-year) following the issuance of sharia government bonds in the framework of green bonds, and improvement in the global money market. Government external debt constituted 49 per cent of total external debt in the first quarter of 2019.6

ii Recent deal activity

Towards the end of 2018, Indonesia secured an (approximately) US$9.4 million loan from Japan for the second phase of the mass rapid transit project in Jakarta. The loan, which was made available through the Japan International Cooperation Agency, has a tenor of 40 years with annual interest at 0.1 per cent. Previously in 2015, Japan agreed to provide (approximately) US$17 million to finance the first phase of the project.7

In the power sector, state electricity company PT PLN (Persero) bagged a US$1.18 billion loan with a 10-year tenor to finance the construction of a 35,000MW electricity programme. The syndicated loan involved seven local financial institutions, including PT Bank Rakyat Indonesia (Persero) Tbk, PT Bank Mandiri (Persero) Tbk, PT Bank Central Asia Tbk, PT Bank CIMB Niaga Tbk, PT Sarana Multi Infrastruktur (Persero) and two sharia-based lenders, PT Bank BNI Syariah and PT Bank BCA Syariah. The loan was divided into two schemes, with 80 per cent funded by a conventional loan and the remaining under a sharia scheme.

Another transaction in the energy sector was concluded by PT Medco Power Indonesia (Medco), through its subsidiary PT Medco Ratch Power. Medco signed a US$222 million loan agreement with an international financing lenders consortium consisting of Asian Development Bank (ADB), International Finance Corporation (IFC), MUFG Bank, Ltd (MUFG) and Sumitomo Mitsui Banking Corporation. The 20-year tenor loan constitutes 76 per cent of the total investment to develop a 275MW combined cycle power plant in Riau.8

In sharia principle securities transactions, the government issued global Reg S/144A trust certificates of US$1 billion for five years and US$2 billion for 10 years due in 2022 and 2027, structured based on the sharia principle of agency contracts or Wakala. These global financial certificates are the largest US-dollar sukuk issued by the government of Indonesia to date and the largest non-Gulf Cooperation Council US-dollar sukuk transactions that have ever been issued.

Legal and regulatory developments

i Prudential principles in bank external debt and other liabilities in foreign currency

BI issued Regulation 21/1/PBI/2019 (Regulation 21) on 7 January 2019 (in effect since 1 March 2019), which broadens the scope of prudential principles to bank external debt and foreign currency-denominated liabilities, including domestic foreign exchange bonds and risk participation transactions. When applying prudential principles, Regulation 21 divides these liabilities into short-term and long-term liabilities.

Banks are required to limit the daily balance position of short-term and long-term liabilities in which the maturity is shortened to one year to a maximum of 30 per cent of the bank's capital. Several short-term liabilities are exempt from this restriction, including the following:

  1. those that are highly necessary to overcome urgent problems or to comply with laws and regulations;
  2. short-term liabilities from shareholders to ease liquidity problems;
  3. banks' obligations to non-citizens resulting from hedging transactions;
  4. giro held by non-resident non-controlling shareholders for the distribution of credit to infrastructure projects; and
  5. giro held by non-residents that accommodate funds from the issuance of bonds denominated in rupiah by supranational institutions for the financing of infrastructure projects.

Banks are required to obtain the approval of BI prior to entering the long-term liabilities market by submitting an application for approval and incorporating the plan to enter the market in the bank's business plan. The requirement to include long-term liabilities in a bank's business plan is not applicable to a subordinated loan carried out on the recommendation of the OJK or long-term liabilities that are necessary for overcoming urgent problems and compliance with laws and regulations.

ii First fintech lending regulation in Indonesia

The OJK issued the first regulation on financial technology (fintech) lending activities in Indonesia – OJK Regulation No. 77/POJK.01/2016, dated 28 December 2016, concerning Information Technology-Based Lending Services. This regulation is expected to support the growth of the fintech lending industry and peer-to-peer (P2P) lending platforms in Indonesia as a new financing alternative to conventional financial services industries.

It is also expected that P2P lending providers will open access to overseas or domestic loans from various areas to the Indonesian general public as part of the government efforts to support the National Strategy of Financial Inclusion.9

iii The implementation of Basel III

The government, namely BI and the OJK, has issued several regulations in regard to the implementation of Basel III. Related key regulations include OJK Regulation No. 11/POJK.03/2016, dated 29 January 2016, regarding the Minimum Capital Adequacy of a Commercial Bank.

This regulation requires commercial banks to comply with minimum capital adequacy in accordance with their risk profiles and to establish additional capital as a buffer.

Capital requirements

Minimum capital shall be calculated using the ratio of minimum capital adequacy and be set forth at no less than:

  1. 8 per cent of risk-weighted assets (RWA) for banks with a risk profile rating 1;
  2. between 9 per cent and 10 per cent of RWA for banks with a risk profile rating 2;
  3. between 10 per cent and 11 per cent of RWA for banks with a risk profile rating 3; or
  4. between 11 per cent and 14 per cent of RWA for banks with a risk profile rating 4 or 5.

Capital for banks having their head office in Indonesia shall consist of:

  1. Tier 1, no less than 6 per cent of RWA, with Common Equity Tier 1 no less than 4.5 per cent of RWA; or
  2. Tier 2, no greater than 100 per cent of Tier 1.

Tier 1 capital of a bank must primarily consist of high-quality capital instruments, namely common stocks and profit balance that form part of Common Equity Tier 1. A component of Tier 1, namely Additional Tier 1, shall only include financial instruments that are subordinated with non-cumulative payments of dividends or yields that meet a number of particular criteria. In line with the improvement in quality of Tier 1, a component of Tier 2 instruments has also been adjusted to include: (1) a capital instrument in the form of shares or in another form that meets the requirements referred to in the regulation; (2) agio or disagio deriving from the issuance of a capital instrument that is classified as Tier 2; (3) the general provision for loan losses no greater than 1.25 per cent of RWA; and (4) the purpose reserve.

A bank branch office domiciled overseas must fulfil the minimum capital equivalency of maintained assets set at 8 per cent of the total obligation of the branch office every month at a minimum of 1 trillion rupiah.

Additional capital requirements

Other than minimum capital adequacy, banks must establish additional capital as a buffer in the form of:

  1. a capital conservation buffer at 2.5 per cent of RWA, which shall be applicable to a bank that is classified as a business activities-based commercial bank (BUKU) 3 or BUKU 4;
  2. a countercyclical buffer in the range of zero up to 2.5 per cent of RWA, which shall be applicable for all banks; and
  3. a capital surcharge for domestic systemically important banks in the range of 1 per cent up to 2.5 per cent of RWA, which shall be applicable for a bank that is deemed to have the potential to be systemic.

The obligation to establish a capital conservation buffer is being applied gradually from 2016 to provide sufficient time for the banks to establish the additional capital, and is now fully effective commencing January 2019.

OJK Regulation 42/201510

Under this regulation, banks shall maintain sufficient appropriate liquidity and report bank liquidity analysis to the OJK, calculated using a liquidity coverage ratio (LCR) of no lower than 100 per cent on an ongoing basis. The LCR is a comparison between high-quality liquidity assets (HQLA) and total net cash outflows over the 30 days following a stress scenario. This requirement shall only apply to banks included in the BUKU 3 and 4 groups, the branch office of a bank domiciled overseas and foreign banks other than the branch office of the bank domiciled overseas. This fulfilment of LCR by banks has been implemented gradually since 2015 and reached 100 per cent on 31 December 2018.

Aside from the obligation to maintain the LCR, banks shall also monitor the condition and liquidity adequacy by using certain indicators (monitoring tools), which include the following:

  1. contractual maturity mismatch, which indicates banks' potential liquidity needs for defined periods when outflows occur;
  2. funding concentration, which aims to identify those sources of corporate funding that are of such significance that withdrawal of this funding could cause liquidity issues;
  3. available unencumbered assets, which have the potential to be used as collateral so that it can be taken into account as HQLA or funding can be obtained from the secondary market or central bank;
  4. the LCR based on significant currencies, to capture potential mismatches in certain currencies. This indicator uses the Basel LCR definition and calculation. A currency is considered significant if the aggregate liabilities denominated in that currency amount to 5 per cent or more of the bank's total liabilities; and
  5. market-related monitoring tools, including market information, information on the financial sector and bank-specific information.

The Basel Committee on Banking Supervision's 'Assessment of Basel III LCR regulations' in Indonesia in 2016 reported that the implementation of the key components of the LCR, such as HQLA (numerator), net outflows (denominator), net inflows (denominator) and LCR disclosure as contained in OJK Regulation 42/2015, is in compliance with Basel III.

OJK Regulation 50/201711

Complementing the regulation regarding the LCR requirement, OJK Regulation 50/2017 stipulates that banks belonging to the BUKU 3 or 4 groups and foreign banks must maintain adequate stable funding, which shall be calculated using a net stable funding ratio (NSFR) of no lower than 100 per cent. The NSFR shall be the ratio between total stable liabilities and equity for a period of one year to finance the activities of the bank (the available stable funding) and the total assets and off-balance sheet transactions that need to be funded by stable funding (the required stable funding). The obligation to fulfil a monthly NSFR was performed for the first time for the final report position of January 2018.

iv Development of anti-corruption laws and regulations

Indonesia's reformation of anti-corruption laws and institutions started with the ratification of the United Nations Convention against Corruption on 18 April 2006, through Law No. 7 of 2006 regarding Ratification of United Nations Convention Against Corruption. Following the ratification, the government established several supporting agencies, including the internationally acclaimed Corruption Eradication Commission, the Court for Corruption Crimes, the Financial Transaction Reports and Analysis Centre and the Witness and Victim Protection Agency.

Prior to that, the century-old Indonesian Penal Code provided several principal provisions relating to criminal offences conducted by officials. Aiming to fill the gap left by the Penal Code, the government issued Law No. 31 of 1999, dated 16 August 1999, on the Eradication of the Criminal Act of Corruption as amended by Law No. 20 of 2001, dated 21 November 2001, which broadens the scope of parties punishable for corrupt practices to include not only state officials but also individuals and corporations, adds the types of activities categorised as corruption offences and increases the sanction for breach of provisions.

Other penal sanctions are stipulated under Law No. 8 of 2010, dated 23 October 2010, regarding the Prevention and Eradication of Criminal Act of Money Laundering (Law 8/2010), which applies to an extensive list of proceeds from criminal acts, including those from the banking and capital market sectors as well as banknote counterfeiting. Penalties for money laundering under Law 8/2010 include imprisonment for five to 20 years, as well as a fine of 500 million to 100 billion rupiah.

In terms of prevention of corruption, the government has included an open data policy under Law No. 14 of 2008, dated 30 April 2008, on the Disclosure of Public Information, which enforce citizens' right to access public information. Following that, the recently enacted Presidential Regulation No. 13 of 2018, dated 5 March 2018, on the Application of the Know-Your-Beneficial-Owner-Principle by Corporations for the Prevention and Eradication of the Criminal Acts of Money Laundering and Terrorism Financing, requires corporations to disclose the name of an individual beneficial owner. This is an addition to the existing disclosure regime in the financial sector issued by the OJK through Regulation No. 12/POJK.01/2017, dated 21 March 2017, regarding the Implementation of Anti-Money Laundering and Prevention of Terrorism Financing (APU-PPT) Programmes in the Financial Sector; and by BI through Regulation No. 19/10/PBI/2017, dated 11 September 2017, regarding the Implementation of APU-PPT for Non-Bank Payment System Service Providers and Non-Bank Money Changing Service Providers.

v Regulation on green financing

Reinforcing its commitment to provide solutions for environmental issues through environmentally friendly financing products, the OJK released Regulation No. 60/POJK.04/2017 regarding the Issuance of and Requirement for the Issuance of Environment-Oriented Debt Securities (Green Bonds) on 21 December 2017. This regulation provides opportunities to gain additional funding through the issuance of a green bond for environment-oriented projects in 11 sectors, including those in renewable energy, water and wastewater management, environmentally friendly transportation and pollution control. Under this regulation, the issuer must use at least 70 per cent of the green bond proceeds to finance environment-oriented business activities.

vi Regulation on infrastructure financing

In July 2017, the OJK issued Regulation No. 52/POJK.04/2017 on Infrastructure Investment Funds in the Form of Collective Investment Contracts. This regulation provides a legal framework for the issuance of alternative infrastructure collective investment contracts (DINFRA), which are intended as a funding alternative for the development of infrastructure in Indonesia through securitisation of assets. It is an innovation to provide flexibility to investment managers in managing investment portfolios as DINFRA can be offered through public offering or an alternative. Important points under the regulation include guidelines for issuance of DINFRA participation units, guidelines for management of DINFRA, collective investment contracts, transparency documents, recording and reporting obligations and dissolution of DINFRA.

Tax considerations

i Withholding tax

Withholding tax is applicable to domestic or foreign lenders for the interest payable on the principal loan. Under the Income Tax Law, any income received by domestic or foreign taxpayers will be subject to withholding tax, including interest incurred from loans, which includes premiums, discounts and compensation for loan repayment guarantees.12

A foreign individual or a foreign entity not domiciled in Indonesia but who receives or accrues income from Indonesia will be considered as a foreign or non-resident taxpayer under the Income Tax Law. Interest payments made to a foreign lender – either a foreign individual or entity – will be subject to a 20 per cent withholding tax.

If a foreign lender resides in a jurisdiction that has a tax treaty with Indonesia, the withholding tax rate may be reduced or eliminated under the provisions of the tax treaty. Indonesia has tax treaties with 65 countries, including Australia, Austria, Belgium, Canada, China, Denmark, Egypt, Finland, France, Germany, Hong Kong, India, Italy, Japan, North Korea, South Korea, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, Taiwan, the United Arab Emirates, the United Kingdom and the United States.

ii Registration and notary fees, and stamp duty

Registration and notary fees for security over land (mortgages) and fiduciary securities are normally applied based on the value of the secured amount.

Particular to fiduciary transfers, a government regulation imposes a limitation on notary fees for preparing a deed of fiduciary transfers.13 Notary fees are capped as follows:

  1. a maximum 2.5 per cent of security values up to 100 million rupiah;
  2. a maximum 1.5 per cent of security values between 100 million and 1 billion rupiah; and
  3. for a security values above 1 billion rupiah, the fee can be determined as agreed between the notary and the relevant party with a maximum 1 per cent of the security values.

For documentary taxes, any agreement signed by the parties with a transaction value above 1 million rupiah is subject to a stamp duty of 6,000 rupiah.


On 18 March 2010, the government of the United States issued the Foreign Account Tax Compliance Act (FATCA) to overcome tax avoidance and tax evasion by US citizens who conduct direct investment through overseas financial institutions or indirect investment through overseas ownership of companies.

In relation to the application of FATCA in Indonesia, the government of Indonesia and the United States reached an 'agreement in substance' through an intergovernmental agreement (IGA), which came into effect on 30 June 2014.14 To comply with the provisions of FATCA, the government of Indonesia has decided to pursue a reporting model on the basis of an agreement agreed between the government of Indonesia and the government of the United States.15 Under the agreement, the government of Indonesia has committed to provide data and information on US taxpayers to the US government. The implication of this agreement is that the Indonesian financial institutions and companies that are categorised as foreign financial institutions, and certain non-financial foreign entities are required to identify accounts belonging to US citizens, to provide information about these accounts and information on US nationals who have accounts of foreign companies (in general, more than 10 per cent). In relation to the lending transactions and activities in Indonesia, this information includes the income received by US citizens or related companies in the form of interest, including premiums, discounts and fees, from providing guarantees in relation to loan transactions.

To support the tax avoidance and tax evasion prevention programmes, the government issued the Minister of Finance Regulation No. 125/PMK.010/2015, dated 7 July 2015, which has recently been amended and replaced by the Minister of Finance Regulation No. 39/PMK.03/2017 on the Procedure of Exchange of Information based on International Agreement. The OJK has also issued Regulation No. 25/POJK.03/2015 on the Information Disclosure of Foreign Customers related to Taxes to State or Jurisdiction Partners. These regulations have become the legal basis for Indonesian financial institutions for reporting on their customers' data and information to the tax authority of the state or jurisdiction partner.

In the data and information reporting process that relates to FATCA, the OJK provides a reporting system for US customers that can be used by Indonesian financial institutions to submit a report to the OJK and then forward it to the Directorate General of Taxes (DGT) as the tax authority in Indonesia. Further, the report will be submitted by the DGT to the Internal Revenue Service.

In relation to the provisions on the Indonesian Banking Law, which regulates bank secrecy and customer accounts confidentiality, the government is now in discussions to revise these provisions to be in line with the implementation of FATCA in Indonesian banking and financial institutions activities.

iv Convention on Mutual Administrative Assistance in Tax Matters

Indonesia signed the Convention on Mutual Administrative Assistance in Tax Matters on 3 November 2011, which was ratified on 17 October 2014 through presidential Regulation No. 159 of 2014 on the Ratification of Convention on Mutual Administrative Assistance in Tax Matters. Further to implementing this policy, the OJK has prepared a number of regulations in relation to the application of automatic exchange of tax information, which were implemented in September 2018.16

In furtherance of this ratification, the government of Indonesia has also signed a Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. The government is committed to implementing this agreement by using the Common Reporting Standard issued by the Organisation for Economic Co-operation and Development. Indonesia conducted the first reporting in 2018 and, in preparation for the exchange of information, the government issued a regulation as a basis to implement this policy as regulated under government regulation in lieu of Law No. 1 of 2017 on the Financial Information Access for the Interest of Taxes and several implementing regulations, among others – the Minister of Finance Regulations No. 39/PMK.03/2017 on the Procedures on Exchange of Information based on International Agreements.

Credit support and subordination

i Security

The most common forms of securities under Indonesian law are described below.

Real estate (land)

Security rights over land may also be understood as mortgage in other jurisdictions. A security right over land is commonly taken to secure land with land titles and all fixtures attached to it for the purpose of securing the repayment of loans.

Security rights over land are governed by Law No. 4 of 1996 on Security Rights Over Land Including Objects Related to the Land (Law 4). Under Law 4, security rights over land will not entitle the security rights holder to ownership of the land title upon the borrower's default. It does, however, grant the security rights holder the right with executorial force to sell the land when the borrower is in default, either privately or through public auction, to satisfy loan repayments from proceeds of the sale. The security rights holder will be entitled to the preferential right for the debt settlement over the other creditors.

A deed of grant of security rights over land must be drawn up by and signed before the land deed officer of the jurisdiction where the secured land is located. The deed must be drawn up in the official Indonesian language, Bahasa Indonesia, and in the form provided by the land deed officer. Subsequently, the deed of grant of security rights over land must be registered at the relevant land registration office of the National Land Agency. The security rights over land are effective on the date of registration in the land register maintained by the relevant land registration office. Upon registration of the security rights, the land registration office will issue a certificate of security rights over land to the security holder.

Fiduciary security

Fiduciary security is the common form of security over movable assets, either tangible or intangible, and certain immovable assets such as buildings that cannot be the subject of security rights over land under Law 4. Movable assets that can be taken as fiduciary security include machinery, raw materials, inventory and vehicles. Receivables can also be taken as fiduciary security.

Fiduciary security is governed under Law No. 42 of 1999 on Fiduciary Transfer (Law 42). As with security rights over land, fiduciary security grants the fiduciary security holder the right with executorial force to sell the secured assets, either privately or through public auction, when the borrower is in default. The fiduciary security holder is also entitled to the preferential right to debt settlement over other creditors.

A deed of fiduciary transfer agreement must be drawn up by and signed before a notary. This fiduciary deed must be in Bahasa Indonesia and is to be the accessory contract to the underlying loan agreement between the lender and the borrower. Under this deed, the borrower (transferor) transfers the legal title over the secured assets to the lender (transferee) for so long as the debt remains outstanding. The fiduciary deed must be registered at the relevant fiduciary registration office. The fiduciary deed is perfected on the date of registration in the fiduciary register maintained by the fiduciary registration office. Upon registration, the fiduciary registration office will issue a certificate of fiduciary security to the security holder.


A pledge is a form of security that can only be taken over movable assets, either tangible assets (such as machinery, equipment and vehicles) or intangible assets (such as shares, account receivables, bonds, debentures and patent rights), to secure a specified loan.

Pledge security is governed under Articles 1150 to 1160 of the Indonesian Civil Code (ICC). Under the ICC, a pledge must be made by agreement between the debtor or the borrower (pledgor) and the creditor or the lender (pledgee). Indonesian law does not require the pledge agreement to be made as a notarial deed or as a private agreement. However, in practice, pledge agreements are normally made in the form of notarial deeds for the purpose of evidencing in court and execution. In addition, pledge agreements may be attached with a power of attorney to sell the pledged assets, providing the pledgee to sell the pledged assets privately without using a public auction mechanism.

Pledges entitle the pledgee to the preferential right over other creditors to satisfy loan repayments from proceeds of the sale of the pledged assets. The perfection of pledge security may be different depending on the form of the pledged assets. The establishment of a pledge can be described as follows:

  1. A pledge over tangible movable assets will be effective on the deliverance of the goods to the pledgee. The pledged assets must be in the possession of the pledgee.
  2. A pledge over intangible movable assets will be perfected upon the notification of the pledge to the concerned party, by which the right of pledge will be enforced against the concerned party.
  3. A pledge over shares will be effective upon the notification and recording of the pledge in the share register of the relevant company. If the shares are in certificated form, the original certificate of shares must be delivered to the pledgee. For shares listed on the Indonesia Stock Exchange, the pledge can be established upon the notification of the pledged shares to the company and the recording of the shares by the Stock Administration Bureau appointed by the company in the company's share register. If the shares are listed in scriptless form, the pledgor must also notify the Indonesian Central Securities Depository, and it will certify the pledged shares.


With the enactment of Law 42, land can only be taken as security under security rights over land and not under a hypothec. A hypothec is a form of security that can be taken over immovable assets that cannot be secured by security rights over land. A hypothec can be taken to secure the borrower's assets in the form of vessels and aircraft. Further, the ICC stipulates that only vessels with a gross weight of 20 cubic metres or more can be encumbered by a hypothec. Vessels below this weight may be taken as security under fiduciary security or a pledge.

In general, hypothecs are regulated under ICC Articles 1162 to 1232. Under the ICC, a hypothec must be made by a deed of hypothec agreement between the creditor and the borrower, and the deed must be registered in the public registry. More specific procedure is applicable for the encumbrance of a hypothec over a vessel. Minister of Transportation Regulation No. 39 of 2017 on Registration and Nationality of Ships requires the placement of a hypothec to be documented in a deed of hypothec made before the Official for the Registration and Recording of Ship Transfers of Title (the Ship Registration Official) at the place where the ship is registered. The hypothec shall be in effect once it has been registered and recorded in the Main Register of Ship Registration by the Ship Registration Official.

Although Indonesian shipping law provides that a hypothec deed shall have executorial power – meaning it can be enforced as though a final court decision – it falls short of setting a clear procedure for enforcement. Thus, in practice, a hypothec is enforced by filing a motion to foreclose to the district court. Upon receipt of the court order, a public action will be conducted by the State Auction Office.

Indonesia's shipping industry is of the view that the lack of a comprehensive law on shipping hypothecs, including their enforcement, raises challenges to realising Indonesia's aim to be a leading country in the maritime industry. Government action is, therefore, sought and urgently needed to improve the regulatory framework, particularly in financing Indonesia's shipping industry.

ii Guarantees and other forms of credit support


Guarantees are commonly used under the Indonesian jurisdiction. Based on ICC Article 1820, a third party (either a personal or corporate guarantor) may guarantee the fulfilment of the borrower's debt to the lender by the consent of such guarantor. A guarantee can be established by a written agreement made by the guarantor and the beneficiary, in the form of either a notarial deed or a private agreement. Indonesian law does not require that the guarantee agreement must be registered for it to be perfected.

The legal capacity to act as a guarantor is subject to the guarantor's incorporation documents (if the guarantor is in the form of a corporation or a limited liability company). The guarantor must be permitted by its incorporation documents to act as a guarantor for the other party's (borrower's) debts. The guarantor must also obtain relevant internal approval, if any, as governed under its incorporation documents.

The lenders, therefore, are recommended to check whether the requirements mentioned above are satisfied under the relevant incorporation documents. If the requirements are not met, the guarantor would be considered as having no legal capacity to act as a guarantor, and, therefore, the guarantee cannot be enforced against the guarantor. In this case, the director of the company who acted and conducted the execution of the guarantee agreement on behalf of the company without complying with its incorporation documents would be held personally liable for the guarantee.

Other forms of credit support

Forms of credit support such as quasi-security structures are uncommon in Indonesia. With respect to enhancing a creditor's protection against a debtor, the parties may enter into any agreements that can bring benefits to supporting the loan transactions, such as indemnity, performance bonds, bank guarantees, standby letters of credit or negative pledge undertakings as a clause in an agreement. Based on ICC Article 1338, stipulating the principle of freedom of contract, parties having legal capacity may enter into an agreement, and the agreement will apply to the parties as statute (provided that the contract has no illegal purpose or duress). However, the execution of certain agreements as a form of credit support will not be recognised as security rights under Indonesian law, and will only bind the parties as contractual obligations and will not grant preferential rights to debt settlement over other creditors as a security right.

iii Priorities and subordination

Priorities of creditors

Under the ICC, creditors who hold security rights will have a higher rank and are entitled to preferential rights over unsecured creditors. Therefore, creditors who hold security rights over land, fiduciary security, hypothec or pledge will have the highest rank, unless privileged rights are attached to the secured assets, such as unpaid taxes attached to the assets, court charges resulting from the disposal of the assets, or legal charges caused by the sale and saving of the assets. Proceeds from the sale of the secured assets must be made available first to the party that holds privileged rights, then the remainder shall be made to the secured creditors.

Priorities of competing security interests

Under Indonesian law, the priority of competing security interests will be determined by the time of registration of the security with the relevant public registry or relevant authorities. The first lender to register security rights over the secured assets will hold first priority to the security, and the second lender to register the security rights over the competing secured assets will hold second priority to the security. On enforcement of the security, the lender who holds the first priority will have a preferential right to receive the proceeds of the sale of the secured assets. The remaining proceeds of the sale will be given to the lender holding the second priority ranking.

This priority ranking of competing security interests is only applicable to security over land and a hypothec as permissible under the ICC. Other forms of securities, such as fiduciary security and pledge, are not applicable for any ranking, as the security asset cannot be granted to more than one holder.

Subordination of debts

Subordination of debts within lenders is possible to be conducted in Indonesia through contractual arrangements. This can be effected through intercreditor agreements between the lenders and, if required, the borrower. This agreement may set out priority ranking among the lenders over the secured assets.

Legal reservations and opinions practice

i Validity and enforceability of lending and securities

Validity of transactions

In doing transactions in Indonesia, the Indonesian Company Law and the articles of incorporation of an Indonesian company normally stipulate certain requirements to obtain corporate approval from the company organs, such as shareholders or the board of commissioners.

Under the Company Law, the board of directors must obtain shareholder approval to encumber the company assets having a value of more than 50 per cent of net assets in one transaction or more, either related to each other or not. The absence of corporate approval, when it is required, would legally affect the validity of the transaction documents, including, in this context, loan agreements, securities or guarantee agreements, and they might then become unenforceable. This will cause the directors to be held personally liable for any loss in relation to the provision of the agreement, guarantee or security.

Therefore, it is important for lenders to take into account the provisions of incorporation documents to make sure any requirement of corporate approval is satisfied, so the security or guarantee securing the loans would be valid and enforceable. In practice, lenders would typically require the borrower to provide written confirmation on the fulfilment of such internal corporate requirements.

Enforcement of securities

In the case of a default, securities that grant executorial rights to the security holder can be enforced without a court judgment or court order. However, in practice, for legal certainty in the security enforcement and to avoid any challenges from other parties, a court order would be necessary.

The sale of security assets can be made through public auction. However, a private sale would be permitted if the private sale would generate a higher sale price for the creditor and the owner of the assets has consented to the private sale.

In bankruptcy proceedings, the creditors may enforce security rights against the secured assets as if there were no bankruptcy. In the case of insolvency, the lender is given time to enforce security within two months of the time the borrower is declared insolvent. If the security is not enforced after two months, the curator or receiver of bankruptcy will take over the enforcement of the security.

Financial assistance

In the Indonesian jurisdiction, no prohibitions or restrictions exist on conducting lending arrangements, in particular to provide financial assistance by guarantee or security to secure the loan of a party in connection with the purchase of its shares, its subsidiary or affiliate shares, provided that it is conducted within the law and its articles of incorporation. It must also be conducted with respect to the ultra vires doctrine, whereby the action must be conducted within the purposes and objectives of the company, and in the interests of the company. The director's fiduciary duty must also be taken into account by ensuring that all necessary corporate approval is obtained to enable the director to conduct the transactions.

ii Legal opinions practice

In loan transactions in Indonesia, legal opinions are typically made to the lenders on the legal capacity of the borrower, and the validity and enforceability of transaction documents and security interests. Legal opinions are normally addressed and made available only to the lenders, and the disclosure of the opinion is typically limited to the counsel and the lenders.

iii Choice of foreign governing law

Choice of foreign law as the governing law is recognised by Indonesian courts as a valid choice of law in an agreement. In financing agreements, a choice of foreign governing law is not permitted for securities or guarantee agreements. These agreements must be governed by Indonesian law so that they are able to be enforced by Indonesian courts.

Foreign judgments cannot be enforced by Indonesian courts on the basis of territorial sovereignty under the Indonesian Code of Civil Procedure. To be enforced in Indonesia, cases with a foreign judgment must be re-examined at the relevant Indonesian court. The foreign judgments may be treated as evidentiary documents; however, Indonesian courts will not be bound by the findings of the foreign court in the foreign judgments.

Loan trading

Loan trading is commonly effected in Indonesia by an assignment. The assignment can be perfected by the acknowledgement of the debtor on the assignment, therefore binding the debtor to fulfil its obligation to the new creditor who receives the assignment (assignee). The absence of debtor acknowledgement on the assignment will not affect the debtor's obligation to perform its loan repayment to the first creditor, even if the assignment agreement has been executed. The debtor is entitled to choose to continue performing its obligation to the first creditor.

The assignment of debt that is secured by security interests, such as security rights over land, fiduciary security or pledges, will include its security to be assigned together with the secured debt. The assignee of the debt would benefit from receiving security rights along with the debt. For the perfection of the security rights, the assignee must notify and register the debt assignment and its security rights with the relevant public registry.

Outlook and conclusions

The government is prioritising infrastructure development in Indonesia, but so far it has been dependent mostly on the state budget and state-owned enterprises to deliver the projects. This is more than likely to change in the near future, as the government has made efforts by introducing regulatory reforms to establish a more attractive and conducive atmosphere in the coming years for international agencies and private sector finance participants in infrastructure.



1 Sri H Rahayu is a partner, and Indra Prawira and Indriana Pramesti are associates at Rahayu & Partners in association with HFW. The information in this chapter was accurate as of June 2019.

2 PWC's, Exploring Alternative Solutions to Infrastructure Financing, 2017.

4 ibid.

5 ibid.

6 ibid.

8 RambuEnergy, 'Medco Power Indonesia bags $222 mln loan from ADB, IFC, MUFG, Sumitomo',

9 OJK press release dated 10 January 2017, 'OJK Issues Regulation on IT-Based Lending Services',­Lending-Services.aspx.

10 OJK Regulation No. 42/POJK.03/2015, dated 23 December 2015, regarding the Obligation on the Fulfilment of the Liquidity Coverage Ratio for Commercial Banks.

11 OJK Regulation No. 50/POJK.03/2017, dated 12 July 2017, regarding Mandatory Fulfilment of Net Stable Funding Ratio for Commercial Banks.

12 Law No. 7 of 1983 concerning income tax as last amended by Law No. 36 of 2008 on the Fourth Amendment of Law No. 7 of 1983.

13 Government Regulation No. 21 of 2015, dated 6 April 2015, on the Procedures for Registering Fiduciary Security Rights and the Fees for Preparing Fiduciary Transfer Deeds.

14 Resource Center of the US Treasury Department website,

15 OJK Quarterly Report 2016 (Quarter I).

16 OJK Press Release No. SP16/DKNS/OJK/III/2017, dated 3 March 2017, 'OJK Issues Regulations to Support Automatic Exchange of Tax Information'.

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