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Indonesia imposes strict regulation to control bad loans in Islamic Finance

Published: 12/01/2013 07:55:00 PM GMT
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Jakarta: The Finance Ministry of Indonesia is alert to curb the growth of consumer financing in the country as it has taken a move and set stricter down payment requirements on Islamic financing for automotive purchases.

By Farhan Iqbal


Jakarta: The Finance Ministry of Indonesia is alert to curb the growth of consumer financing in the country as it has taken a move and set stricter down payment requirements on Islamic financing for automotive purchases.

The new regulation, which will apply to all non-bank Islamic financing institutions, requires a down payment of 20 percent for two-wheeled vehicle purchases and a 25 percent down payment for four-wheeled vehicles. The purchase of commercial four-wheeled vehicles — such as trucks or buses — requires a 20 percent down payment.

Previously, down payment requirements were not regulated for Islamic financing companies, with firms typically requiring either no down payment or a down payment of no more than 10 percent.

The Finance Ministry has since June imposed similar down payment requirements for conventional financing of automotive purchases.

However, the failure to regulate Islamic financing left a loophole that allowed customers to take advantage of lower and unregulated rates.

“This regulation is aimed to prevent such regulatory arbitrage between conventional and Islamic financing companies,” said Yudi Pramadi, the Finance Ministry spokesman, in a statement issued on Friday.

“It will create a level playing field for all financing companies,” he added.

The new regulation will go into effect from January 1, 2013, the same day the new Financial Service Supervisory Agency (OJK) will take over the job of supervising non-bank financial institutions.

This responsibility had previously been handled by the Finance Ministry’s Financial Institution Supervisory Agency (Bapepam-LK).

Bank Indonesia, the central bank, issued down payment regulations for Islamic banks in November, requiring a 25 percent down payment for two-wheeled vehicle purchases and a 30 percent down payment for four-wheeled vehicles, bringing the Islamic banking requirements in line with automotive down payment requirements implemented by their commercial counterparts since June.

The central bank’s new regulation, however, will not go into effect until April 1. The central bank will not hand their supervisory authority over banks to the OJK until January 2014.

Financial authorities hoped to reign in automotive loans and financing — as well as mortgage financing — due to fears that such loans would create a bubble and increase the number of bad loans at banks, which in turn will harm the country’s financial system.



Yudi Pramadi

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