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Indonesia’s multi-finance sector has been receiving increased attention from both market players and the Financial Services Authority (Otoritas Jasa Keuangan, or “OJK”). Operators of peer-to-peer lending platforms, which are currently prohibited to provide on-balance sheet loans, are expected to lead expansion in this sector by taking over multi-finance companies (“MFCs”). By adding an MFC to their group, they will be able to both extend loans directly and act as intermediaries for loans, generating more revenue.
For its part, OJK appears keen to revive and develop the multi-finance sector, which has largely struggled to grow. According to OJK’s January 2019 monthly report on multi-finance companies, there are currently 187 licensed MFCs in Indonesia. However, many of these MFCs are either dormant or facing financial difficulties. OJK has begun monitoring them more closely, resulting in more administrative sanctions and licence revocations in recent times. Given the current state of the sector, it is unlikely that OJK will issue any new multi-finance licenses, preferring instead that existing dormant or non-performing MFCs are acquired and revitalised. To our knowledge, OJK has issued only a few multi-finance licenses since 2015.
This is all likely to lead to increased acquisition activities in Indonesia’s multi-finance sector, especially following the issuance of a new multi-finance regulation by OJK in December 2018.
Key regulatory changes
OJK Regulation No. 35/POJK.05/2018 regarding Conduct of Multi-Finance Business (“POJK 35”) has introduced several significant changes to make the Indonesian multi-finance sector more attractive to potential entrants, including removing the restriction on providing cash loans. At the same time, it has put pressure on existing MFC players to seek additional funding to increase their minimum equity by the end of 2019. Six key changes introduced by POJK 35 are summarised here.
- Cash loans – MFCs may now provide cash loans directly to debtors, either as business capital or to purchase goods and services for non-business purposes, with the restriction that they can only provide secured loans of up to 500 million rupiah (US$36,000) per debtor and that the aggregate amount of these cash loans must not exceed 25% of the MFC’s total financing.
- Cooperation with third parties – MFCs may cooperate with third parties, which now expressly include peer-to-peer lending companies registered with or licensed by OJK, in conducting channelling and joint financing activities. Today, most of these MFC co-operations are with banks. In the case of channelling, one party provides the funds and bears the risks, while in joint financing, both parties provide the funds and share the risks proportionately.
- Equity increase – All MFCs are required to increase their equity to at least 100 billion rupiah (US$7 million) by 31 December 2019. Certain types of financing, including the financing of infrastructure projects, are subject to additional equity requirements.
- Factoring – MFCs are not permitted to engage in (a) factoring with recourse with a term of more than ten years or (b) factoring without recourse with a term of more than two years. MFCs are also prohibited from entering into a factoring with recourse transaction with another MFC as the debtor.
- Financing ratio – In addition to being required to maintain a financing-to-asset ratio of at least 40%, MFCs are now required to maintain at least 10% of their financing as investment and working capital financing. POJK 35 gives MFCs a three-year transition period in which to achieve a minimum ratio of 5% and six years to achieve a minimum ratio of 10%.
Annual fit-and-proper sustainability requirement for MFC management – Directors and commissioners of MFCs who have passed fit-and-proper tests are required to fulfil at least one of the prescribed sustainability requirements, namely (i) participating in a workshop or training, (ii) writing a publication, or (iii) sharing their professional knowledge by being a speaker or instructor in training sessions, all of which must be within the financial sector.
In addition to these changes, POJK 35 also introduces further operational requirements, including (i) ensuring financing agreements fulfil the minimum elements set out in POJK 35, (ii) document keeping protocols, and (iii) fraud management strategy. The regulation gives MFCs between six months and three years to comply, depending on the particular requirement.
Foreign ownership and investment restrictions unchanged
Other major regulatory requirements under OJK Regulation No. 28/POJK.05/2014 on Multi-Finance Company Institutions and Business Licences (“POJK 28”) remain in force. POJK 28 limits foreign equity ownership of MFCs to 85% of issued share capital. MFCs that are publicly listed may trade up to 85% of their total issued shares on the stock exchange. The other 15% of their shares must be directly or indirectly owned by an Indonesian individual or governmental institution.
The restrictions on investments by MFCs are also unchanged. MFCs may only invest in the financial sector in Indonesia or in companies engaging in activities related to MFCs. The maximum direct investment that MFCs are permitted to make is 20% of their equity, of which no more than half can be invested in a single company group.