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Indonesia: Finance & Leasing Landscape

By Hidenori Kuroki, Senior Advisor

Indonesia: Finance & Leasing Landscape

By Hidenori Kuroki, Senior Advisor on 28-05-2019

Indonesia braved the financial crises better than any of its neighbours and managed, against all odds, to post growth along with two other G20 countries, namely India and China. Indonesia braved the financial crises better than any of its neighbours and managed, against all odds, to post growth along with two other G20 countries, namely India and China. The economy dipped considerably from the 6% growth rates in the years leading up to the financial crisis, to around 4% in 2009.

This has been particularly noteworthy as Indonesia is a commodity exporting country yet it was able to do well even as the world economy depressed and affected global trade, making countries become conservative about commerce. The primary industries driving the economy are mining, oil and gas and teak and palm oil plantations.

Indonesia is a fast emerging economy with an expanding Financial Services Segment (FSS). Outlined in this article are factors that are driving the finance and leasing industry and economic growth of Indonesia along with some potential roadblocks.

While Indonesia has a strong exporting history, the country is increasingly relying on internal consumption. The country has a rapidly growing middle/consuming class, which is estimated to boost the GDP by nearly 7%. This class has increasing disposable income, promoting consumption within the country and in turn increasing commerce and revenue to the government in taxes. This is also creating demand for lease products as people can afford higher value goods and can pay larger monthly installments.

Indonesia is fast becoming the business center of the ASEAN region. New businesses are opening up in the country, with foreign companies &minus especially US companies &minus picking Indonesia as the preferred country in the ASEAN region to set up operations. This shows that Indonesia is not only a big enough market to encourage companies to locate there, but neighboring markets are lucrative as well.

In 2015, the Indonesian government boosted the mining sector by disallowing the export of unprocessed resources, which included copper, manganese, zinc, lead and titanium. This move was aimed at increasing activity within the mining industry and by doing so, generate more taxes, local jobs and increase revenue within Indonesia from the export of end products. However, the long&minusterm impact of this strategy is yet to be seen, as the mining industry has only seen short&minusterm improvements.

The Leasing and Finance Landscape of Indonesia

Leasing plays a notable role in the Indonesian economy and is growing rapidly. However, like in most emerging economies, it has a long way to go in terms of new product development and being widely accepted by the end user. The country has an 87.2% Muslim population, therefore, the predominant form of financing in the country is Islamic financing with 44 companies actively providing products and services in the domain. The overwhelming focus of these companies &minus nearly 90% &minus is on light to medium vehicles while the rest is on heavy equipment. Islamic finance is expected to play a large part in the emergence of leasing in the days to come.

Islamic Finance in Indonesia

The Islamic finance industry of Indonesia registered a profit of IDR693bn for a period of one year ending July 2016. This figure saw an increase of 128% from the same period in 2015 amounting to Rupiah IDR304bn. The surge in profit was due to an increase in revenue of 42.3% year over year from IDR2.6 trillion to IDR3.7 trillion in July 2016. However, while Indonesia may lead the ASEAN region in Islamic finance, it is only just catching up to the Arab nations.

Equipment leasing in Indonesia

Equipment leasing currently contributes US$5bn (e3.8bn) to the Indonesian economy, the primary engine of growth for which is the mining and plantation industry. Tin, gold, coal, copper and bauxite are the main mined resources in the country and palm oil, timber and rubber being the main plantations. These all rely on heavy equipment, propelling the demand for lease products and therefore directly driving the leasing industry.

For the leasing sector to grow into a fully mature industry, the financial institutions operating in Indonesia need to develop products for not only the auto industry, but focus their efforts on rising segments. There are some funding options for the mining equipment and, to a lesser degree, the technology equipment segment.

However, the majority of the manufacturing and infrastructure equipment industry remains without any significant leasing products.

Sub & Minussectors of the Financial Services Segment in Indonesia

Indonesia's financial services sector has three primary sub & minussectors:

  • Non&minusBank Financial Industry (NBFI)
  • Capital Market
  • Banking Industry Banking reigns supreme with a 74% share of national asset division.

Conversely, multi&minusfinance and pension fund companies along with the mutual funds industry are comparatively small and have not grown over the past half&minusdecade as the banks have. Roughly there are 130 commercial banks in Indonesia, of which 10 are foreign owned and nearly 30 are joint ventures. The leasing industry is served by several companies which are mainly joint venture companies. The shareholders of these companies are equipment vendors, distributors and consortiums. Even with the banking sector dominating, there is low financial sector utilization of GDP which is primarily due to lack of access to financial products and services and financial literacy and secondly because of social and cultural factors.

Finance and leasing Products in Indonesia: Finance Lease vs. Operating Lease

In terms of products, conventional finance lease is much more widely used as compared to operating lease.

The volume of big&minusticket items is low and the majority of assets leased are vehicles. Therefore, assets usually have low residual value, discouraging companies from offering operating lease unless vendors use 'blind discounting'. Therefore, the bulk of operating leases are usually fully amortised over the term combined with an inflated discount rate to adhere to the International Accounting Standard guidelines to make it an off&minusbalance&minussheet transaction.


Factoring is quite popular in Indonesia for equipment leasing. It is used for immediate realisation of money (not full amount of contract), offering liquidity to the leasing companies allowing them to finance further inventory, which they can then lease out and manage their cash cycle.

Islamic finance

Islamic finance is a rapidly growing segment in Indonesia. Out of the 1.6 billion Muslims in the world today, 62% of them live in Asia and Indonesia leads this region in Islamic finance. Other countries will follow Indonesia as the country pioneers and develops new products and practices within the Islamic finance domain

The Future of Finance and Leasing in Indonesia

The future of leasing in Indonesia will be dominated by foreign vendors and joint ventures that bring into the country the necessary international experience and an injection of investment to boost the sector in general. This trend is already prevalent in Indonesia and the country is well ahead of others in Asia, such as Korea, Thailand, Greater China and even Singapore.

Potential Roadblocks: Human Development

Emerging economies that gradually develop human resource and expertise, internally, take much longer to develop fully as opposed to developing markets that import foreign human resource and with them knowledgebase and expert practices. The United Nations Development Program`s Human Development Index indicates that Indonesia needs to improve and increase not only formal education, but vocational training.

Income Inequality

Income and inter&minusregional income inequality in Indonesia is growing, which poses the risk of the economy becoming a plutonomy, where wealth is concentrated and confined to a small group which drives economic growth and in turn consumes it exclusively. Inter&minusregional income inequality is such that the archipelago economy is driven by the island of Java, which only accounts for 6.8% of the total land area of Indonesia. Java generates 58% of domestic GDP.

The income distribution of Indonesia, measured by the Gini coefficient, shows a serious inequality and a broadening income gap.

In conclusion, a stronger and more positive investor sentiment along with more public investments is expected to pull Indonesia's economy out of the persisting slowdown in the near future. The government has already increased infrastructure spending and disclosed new policy reforms to stimulate private investment. Lower interest rates will dissuade investors from banking their capital and inflation is estimated to decelerate by nearly two percentage points in 2016. These two factors combined are expected to encourage private investment (foreign and local) within the country. Islamic finance is projected to continue to grow and advance into a mature industry, soon to rival the Arab Islamic finance industries. Moreover, Indonesia is expected to lead growth in South East Asia as it ramps up infrastructure investment and policy reforms.

Written By:
Hidenori Kuroki, Senior Advisor

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