asset securitization and the real sector performance: an ... securitization and the real sector...

221Asset Securitization and the Real Sector Performance: An Alternative Source of Financing for SME’s

Asset securitizAtion And the reAl sector PerformAnce: An AlternAtive source of

finAncing for sme’s

Wijoyo SantosoShinta R.I. Soekro

DarmansyahHilde D. Sihaloho1

This paper analyzes the asset securitization as a source of financing for small and medium scale

enterprise. We use field survey and focus group discussion in Jabodetabek, Bandung, Yogyakarta, Denpasar,

Medan, and Banjarmasin, covering 149 samples in total. This paper found the banks generally are in excess

liquidity condition, therefore face difficulty on obtaining the minimum of Loan to Deposit Ratio (LDR). For

this reason, those banks are not interested to sell the SME’s loan though they are quite interested on the

asset securitization concept. For the banks, the major motive to invest in asset securitization program is

a high yield. In addition, they expect this portfolio to increase the LDR. Prior the implementation of this

program, this paper underlines the necessity to overcome some obstacles including non-bankable SME’s,

liquidity and human resource of the banks, and limited information of the asset securitazion program

(EBA-UMKM).

Abstract

Keywords: asset securitization, SME’s, banking.

JEL Classification: D24, L6, E32

1 Researcher on Center for Central Banking Research and Education, Bank Indonesia. The views on this paper are soley of the authors and do not necessarily represent the views of Bank Indonesia. E-mail: [email protected], [email protected], [email protected], and [email protected].

First submission: April 2014/ Fist revision: September 2014/ Accepted: October 2014/ Revision: August 2015

222 Bulletin of Monetary, Economics and Banking, Volume 17, Number 2, October 2014

I. INTRODUCTION

The Government of Indonesia encourages the growth of micro, small and medium enterprises (SMEs). SMEs are considered the driving force of the economy to support economic growth and prosperity, as well as a major source of employment for communities. Data from 2010 shows that the contribution of SMEs to the GDP was 56.22%, which was higher than the contribution large businesses to GDP at 43.78%. In terms of employment, the SME sector absorbed almost the entire workforce in Indonesia (97.27%), of which micro enterprises amounted to 90.83% of the SME workforce. Despite a high absorptive capacity for employment, the contribution of SMEs to total exports was only 15.81% (Central Bureau of Statistics, 2010).

In a 2011 survey by Bank Indonesia on banking and related parties (commercial banks, regional development banks, rural banks, and investors) showed substantial interest in securitization / asset-backed securities. However, the understanding (awareness) about securitization varied among the relevant parties. Investors had a very inadequate understanding of aspects of securitization, while the understanding of most commercial banks and regional development banks as well as nearly half of rural banks was still lacking. The SME sector has the potential for securitization in the financial sector, trade, mining, and agriculture in the broadest of sense. For the implementation of SME asset securitization there is needed improvement or development of SMEs in terms of management and improved performance of Good Corporate Governance (GCG).

Financing for SMEs through the securitization of assets has been applied by some countries such as Italy, South Korea, Malaysia, Spain, Japan, and Germany. Commercial banks in German had success in running the securitization of SME loans, both individually and government assisted by agencies such as KfW’s PROMISE (Promotional Mitterland Securities Loan). Japan implemented policy for the purchasing of SME-related Asset-Backed Securities (ABS) as led by the Bank of Japan (BOJ). Direct purchases by the BOJ were intended to improve the monetary transmission mechanism by means of diversifying risk in the financial sector.

As in other countries such as Indonesia, securitization of assets has also been made in the form of the Home Ownership Loan (HOL). In 2008, the State Savings Bank (BTN2) for the first time embarked on the securitization market through schemes like the Asset-backed

Security Collective Investment Contract (CIC-ABS). By 2010, CIC-ABS total costs were Rp. 1.2 trillion. The purpose of BTN securitization of property assets was to push down interest rates on housing loans over the long term. In this case, PT. Sarana Multigriya Finansial (SMF) acted as a regulator (arranger).

2 Bank Tabungan Negara


This paper examines the conditions of the parties involved in the issuing and managing of ABS for SME loans. Explicitly, the first objective of this paper is to analyze the implementation of asset securitization as an alternative method of the real and financial sector, which is in line with Bank Indonesia’s efforts in financial deepening. The second objective, is to outline a development strategy of asset securitization financing for SMEs in Indonesia.

The first section of this paper introduces and outlines the objectives of this research. The second section reviews the theory and relevant literature. The third section outlines the data and methods used, while the fourth section presents the results and analysis. The fifth section of this paper presents the conclusions.

II. THEORY

Asset securitization is the transformation of illiquid assets into liquid, by way of purchase of financial assets from the original creditors and the issuers of the Asset-Backed Securities (ABS). The Bank Indonesia definition says, asset securitization is the issuance of securities by the issuer of the ABS which is based on the transfer of financial assets from the original creditor followed by a payment from the proceeds of sale of the asset-backed securities to investors. In addition, the Bank for International Settlement further adds that “securitization can transform a pool of ordinarily illiquid and risky assets into larger assets that can be more liquid, less risky, and more marketable”.

The Capital Market Supervisory Agency Regulation No. IX.K.1 states that the ABS are securities issued by an ABS collective investment contract (CIC-ABS) that consists of a portfolio of financial assets in the form of claims arising from commercial paper, credit card bills, bills which arise in the future (future receivables), lending including ownership of homes or apartments (mortgages), and debt securities guaranteed by the government. These securities are seen as a means for increase in credit (credit enhancement) / cash flow (cash flow enhancement), as well as equivalent financial assets and other related financial assets. CIC-ABS is an agreement between the investment manager (IM) and the bank custodian which binds holders of ABS. In this case IM is authorized to manage the collective investment portfolio and the bank custodian is authorized to carry out collective custody.

The principles of the Bank Indonesia Regulation Number 7/4/2005 concerning Housing Loan Asset Securitization are shown in more detail in Table 1:


��

��

��

��

��

��

��

��

��

� ��

� ��

��

��

� ��

��

��

��

��

��

��

��

��

��

�

�

��

��

��

��

��

��

��

��

��

� ��

��

��

��

��

��

��

��

��

��

��

��

To gain a deeper understanding of the securitization of assets, there are some things that need to be elaborated regarding the types and mechanisms of asset-backed securitization transactions (ABS). ABS’ are generally divided into ABS with the cash flow that is non-fixed, and the ABS with fixed cash flows. ABS’ with non-fixed cash flow are asset-backed securities that promises income to the holder that is uncertain, such as equity securities. Conversely, ABS’ with fixed cash flow are asset-backed securities that promises income to the holder that is certain, such as bonds.

The ABS mechanism in Indonesia includes four steps,

(i) a company transfers financial assets to the IM who registers it on behalf of the custodian bank for the benefit of the holders of the ABS;

(ii) the CIC-ABS portfolio is restructured by the IM then rated by a Rating Agency. It can be given a means for improving credit / cash flow if a public offering is done to investors. The IM should be assisted by an underwriter;


Diagram 1. Transaction mechanism of Asset-Backed Securities (ABS) in Indonesia

(iii) the sale of CIC-ABS can be carried out openly in the capital markets or directly to investors; and

(iv) the ABS cash flow repayment of the debtor to the servicer is forwarded to the holder in accordance the agreement (CIC-ABS), see Figure 1.

In addition, the form of the transaction in the securitization of financial assets can be divided into 3 groups:

1. Regular (collateral) - a company that has published the accounts on the basis of collateral securities accounts.

2. Pass through / true sale (change of hands) - receivables of a company is sold to another party who then issues securities, so that the ownership of the receivables switches from the initial lender to investors.

3. Pay through - the ownership of the receivables remain with the initial creditor, but any settlement of receivables are directly channeled to the investors.

��

��

��

��

��

��

��

��

��

��

��

��

��


From Table 2, the calculation of interest rates can be obtained as described below:

��

��

��

��

��

� � ��

��

� ��

��

��

��

��

� ��

� ��

��

� ��

��

��

��

Research conducted in 2011 showed that the securitization of assets to provide benefits to the relevant parties involved and to the economy. Banks can improve their Capital Adequacy Ratio (CAR) and increase liquidity, which in turn would increase their capacity to lend. Securitization of assets would also increase the money supply (M2) mainly through the process of doubling the money. Loans and purchases of assets by a Special Purpose Vehicle (SPV) has the potential to increase the money supply through increased liquidity so that banks can increase the credit granted.

When viewed from each of the parties involved, the benefits derived from the application of asset securitization is as follows:

Table 2 (below) illustrates the calculation of costs and returns in asset securitization transactions.


��

��

��

��

��

��

� ��

��

Based on the results of a 2011 study, SME asset securitization models are recommended to be applied in Indonesia as a model that has a guarantee. Guarantee given by the Government or external institutions is expected to increase the interest of investors to buy SME-ABS because of the guarantee of investment (safe investment). This is expected to accelerate the development of SME securitization of assets, because it would encourage banks to participate in the development of SME asset securitization.

This mechanism requires the government to provide funds in the event of default of payment by SMEs, as well as forming a guarantors using non-governmental organizations or empowering existing institutions of such guarantora, e.g. ASKRINDO and JAMKRINDO.


Diagram 2. Mechanism of guaranteed SME asset securitization

��

��

��

��

��

��

��

��

��

��

��

��

Referring again to the 2011 study, several things should be considered in the implementing the guaranteed models. These include:

1. The government does not need to provide special funds to implement asset securitization for SMEs in Indonesia.

2. The government may designate an existing guarantor to be a guarantor for SMEs securitized assets, and in addition to empowering the existing guarantor institutions, it can also accelerate the development of asset securitization in Indonesia.

3. The parties concerned (the originator and the investor) would be interested in performing securitization because of the guarantee, either directly or indirectly, by the Government.

A number empirical studies have been conducted either by academics, researchers and practitioners regarding securitization. A few studies have noted the apparent benefits and purpose of the securitization of assets, as well as the potential obstacles in the implementation of asset securitization. These studies are shown in Table 2.


��

��

�

�

�

�

�

��

��

��

��

��

��

��

��

��


The Capital Market Supervisory Agency and Financial Institution (BAPEPAM-LK) together with the Ministry of Finance in 2003 examined the level of stakeholder understanding of asset securitization in Indonesia. The findings from this study showed that most people (57.14% of respondents) quite understood asset-backed securities. Yet only a small percentage who had experience related to the securitization process conducted this abroad, i.e. only the securities rating and legal consultants. Potential investors in the process of asset securitization included companies involved in pension funds, insurance, banking, non-bank financial institutions, and mutual funds, among other large companies. It was argued that ABS could be used as a means of hedging. In the study, major constraints were presented in issuing ABS. Such constraints include:

a. A lack of understanding of the ABS instrument by the issuer and / or potential investors.

b. Disclosure obligations by candidate issuers were feared to lead to a misuse of information.

c. The relevant parties involved considered the existing legislation inadequate (ranging from accounting, taxation, and calculation methods)

d. The need for guidelines governing the accounting for CIC-ABS, such as expectations for granting tax exemption for CIC-ABS.

III. METHODOLGY

3.1. Data and Respondents

The data collection methods in this study used surveys and focus group discussions (FGD). A structured questionnaire was used for the survey and the sample of respondents was selected by purposive sampling. The survey was conducted in Greater Jakarta, Bandung, Yogyakarta, Denpasar, Medan, and Banjarmasin. The sample of respondents consisted of Commercial Banks (CB), Regional Development Banks (RDB), and Rural Banks (RB), all of which were categorized as ‘ABS Issuer’. Pension funds, insurers, and foundations were categorized as an ‘Investor’. SMEs, and the Guarantor Institution are the other categories. A total of 149 respondents were sampled. The following table shows the distribution of the respondent survey by city.

��

��

��

��

��


Respondents (issuers, investor and SMEs) who participated in the survey are noted in Table 5:

�

�

�

��

��

��

��

��

��

��

��

3.2. Data Processing

Surveys in this study used Maximum difference scaling (MaxDiff) technique (see Cohen and Markowitz, 2002). Selection of this method aimed to improve the validity of the data collected, especially data relating to the preferences or the use of this type of investment (asset securitization vs. other types of SME investments). Based on experience, measuring the level of preference or usage with the ranking of data would be difficult for respondents, especially in rating on large amounts of data (5 upwards). By using MaxDiff, the process was straight-forward in which respondents were only asked to choose from a small group of data that was ‘most needed’ and ‘not needed’. The MaxDiff measurement and analysis developed by Jourdan Louviere was used where each alternative had a certain probability to be selected.

Where i is the alternative choice while k is the total of all alternative choices.

Alternative j will be selected only after compared with other alternatives. The alternatives have the greatest value p. The approach taken to obtain the alleged parameter v is the Maximum Likelihood (ML) or with Hierarchical Bayes (HB). For this survey, the parameter estimation approach was based on the HB method. This method, according to Louviere, does not require a high number of samples, in contrast to the ML.


The advantages of the HB parameter estimation method is in guessing an individual result, where a segment estimate would “add up” data from each individual. This differs from the method in which each segment requires a different estimation process. The analysis results collected using the MaxDiff method was used to obtain conjectures related to demand for ABS investment to attract investors.

This paper also applied SWOT analysis. This analysis can be understood as a system to test an organization’s internal strengths, weaknesses and the external environment opportunities and threats to the organization. SWOT analysis is a method designed for use in the early stages of decisión-making and as a basis for strategic planning of the various situations (Johnson et al., 1989; Bartol et al., 1991).

Gap analysis was also used to examine ABS implementation in Indonesia. Gap analysis examines the differences between the current state and ideal condition, and how to address these differences to improve current state in moving towards the ideal condition/situation. More specifically for this research, gap analysis was used to examine the current situation of the relevant parties involved in asset securitization, including government policies, which were then compared to the expected conditions for the implementation of SME asset securitization.

IV. RESULTS AND ANALYSIS

To recap, the first section of this paper reviewed the dynamics of lending and business development especially SMEs in Indonesia. The actual conditions for lending will be analyzed more in depth based on the survey results and the SWOT and GAP analysis mentioned earlier.

From 2010 - 2012, the realization of increased lending growth among banks was quite encouraging, especially among RDBs. However RBs saw contraction in 2011 due to increasing competition among RBs in lending and the vigorous commercial bank offerings of credit to consumers. The commercial business sector and the manufacturing sector were the sectors most targeted by banks for lending.

Commercial bank (CB) lending increased by approximately 20%, while RDB lending saw a surge in average growth, from 16% in 2010 to 81% in 2011. In contrast, RB lending saw setbacks in growth, from an average of 27% in 2010 to an average of 8% in 2011. This was due to increased competition among RBs in lending.


Generally speaking, the loans extended by the RDB focused on SMEs, while loans extended by commercial banks focused on corporate clients, SMEs, and consumer loans with a balanced average proportion. In fact, there was an increasing trend orientating towards SMEs, with credit generally limited to small and medium loans (66%) over short and long term periods (69%). However, loans extended by RDB focused on consumer credit, which generally targeted public servants, and tended to be more focused to increase the allocation of funds for corporate loans than SME loans.

When viewed from the composition of the loan portfolio during 2011, commercial banks, on average extended loans to SMEs and corporate entities in a fairly balanced manner (33% and. 38%, respectively)( see Figure 2 and Figure 3). However, it appears that a large amount of funds in lending to the SME sector (38%) was the impact from a surge in growth of lending to the SME sector that occurred during the year 2011 (average 32%). This average growth rate was higher than the growth rate of corporate (15%) and consumer (22%) loans.

In the RDB, a majority of the amount of funds available for credit (60%) was distributed in the form of consumer credit, generally in the form of loans to civil servants. There were indications that RDB lending was orienting to enlarge the credit for the corporation clients considering that for the year 2011 the average growth in lending to corporations was quite high at 66%, while the average growth in lending to SMEs was only 23%.

For RBs, most of the funds disbursed were in the form of loans to SMEs (67%), which is consistent with RBs support to the SME sector. Unfortunately, RB business growth was not as fast as CBs and RDBs, which can be seen from its loan total of merely 8% in 2011.

Figure 1.Loan Portfolio Growth Rate

Commercial Bank(n=30)

RDB (n=6)

22%24%

16%

20102011

81%

27%

8%

RB (n=50)


Although SME were predominantly financed by the banks, the banks generally had difficulty in mentioning the type of businesses they financed. By triangulation of the date, it was found that a large portion of bank lending to SMEs was in retail trade enterprises, with the proportion varying fro 15% to 80% of the total amount of credit. After the retail trade sector, the SMEs sectors that received the most loans from banks were those engaged in the processing industry (75%), such as garment, furniture and food processing with the proportion of loans disbursed between 9% to 40%. The third largest was agriculture and plantations (51%) with a proportion of loans disbursed between 6% to 35%.

Figure 2.Composition of Loans Disbursed

Figure 3.Cross-scale User Credit Growth

31%

20% 20% 60%

33% 38% 28%

67%2%BPR (n=50)

BPD (n=6)

Bank Umum (n=30)

SME LoansKredit Korporasi Consumer Loans

Corporate LoansCorporate LoansCorporate Loans

Commercial Bank (n=30)

15%

32%

22%

66%

23%17% 17%

5% 7%

RDB (n=6) RB (n=50)

��

��

��

Examination of the credit plan and its realization showed that the respondents were not able to meet their targets. It is assumed that the main obstacle was intense competition between banks (59%) to the capture eligible customers as the size of the customer base


remained relatively unchanged with only minor variations from year to year. As for RBs, the competition was more difficult because the interest rate charged by RBs was higher than the rate set by conventional banks. Also, the business conditions of SMEs might have been seen as less favorable due to its low purchasing power since a) SMEs are often businesses of low- to middle-income communities, b) government protection against SME businesses tends to be minimal, and c) it is difficult for SMEs to expand their business.

4.1. Issuers

The survey results showed that issuers’ understanding of securitization varied. Commercial banks and regional development banks had a higher level of awareness than rural banks. Of the rural banks, 25% had never heard the term securitization. Overall understanding of securitization among the issuers was inadequate.

Although the concept of SME-ABS was considered quite attractive by the issuers, there were several factors that influenced interest for issuers to offer SME loans in the form low SME-ABS. For issuers, limitations in lending to SMEs was not because of a shortage of funds, although in the last few years commercial banks and RDBs typically experience excess liquidity. Barriers to increase lending to SMEs were more due to highly competitive conditions in a small less developed SME market. Despite a relatively stagnant market niche, SMEs were still bankable. Moreover, banks were likely to implement a vigorous acquisition strategy that included take-over offers of credit with low interest.

Furthermore, lending to SMEs required a labor force large enough and with adequate support technology. SME loans are big volume and low value which required adequate assistance to SME customers so that the level of NPLs can be maintained. These conditions led to a perception of SME-ABS, that although considered quite attractive, the interest to sell SME loans in the form SME-ABS was low.

The biggest concern for the issuer in implementing a SME-ABS is the risk of failing in the management. Lending to SMEs should be accompanied by good observation and coaching, such as regular visits or consultations. When the SME receivables are sold, then the focus of attention would shift to address new customers who are funded from the sale of these assets. So there was concern that they will not be able to guarantee or maintain the performance of the receivables sold.

Concerns were related to the unpreparedness of the human resources that have difficulties in handling the administration of a special nature. To be able to increase lending to SMEs a labor force large enough and adequate assistive technologies are needed since lending to SMEs are high volume and low value.


Another concern was the risk that SMEs make early payment while investors have chosen the payment system of fixed cash flows (pay through), especially considering that the practice of take-over SME loans in the banking sector is quite high. And in this regard it was feared that ultimately it would be an additional burden of having to replace the administrative work of SME receivables that have been securitized with other receivables.

The problem of legal uncertainty / rules were also a concern for others, especially with the pe-rating criteria as well as the performance of the agencies ‘pe-rating’ itself. Therefore, the issuer generally assumed that the securitization of SMEs receivables can not be done as easily as the securitization of housing loans. There is a growing niche market for housing loans commensurate with population growth, while the actual SME credit niche market is growing very slowly (due to the slow growth of bankable SMEs). Therefore, when the securitization is to be done, the majority of respondents (59%) were only willing to release the receivables of poor / very poor quality. Even for those banks willing to release the receivables of SMEs with good / very good quality, 33% of them stated that they would feel real disappointment in releasing these receivables for securitization in considering that the profits are not commensurate with the efforts that have been made and the risks involved in SME lending. Thus, the majority of respondents (65%) refused to buy the ABS. The whole concern is exacerbated by the lack of a clear understanding of SME-ABS due to inadequate education and awareness raising.

Indeed, the main attraction of the securitization concept of the SME-ABS product is (i) it can be used as an instrument to control credit risk, (ii) to address the shortage of funding,

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��


and (iii) that the return / yield can be obtained either from the service fee as well as from fund securitization sales that can be rolled back as a credit. In theory, the securitization of these assets tend to be quite interesting (see Table 9).

��

��

��

� ��

Although interesting, the motivation to carry out securitization of SMEs receivables tend to be low (mean score: 3.0); especially for the RDB (with a very low mean score 2.2). Of the commercial banks very keen to carry out the securitization of SME receivables are Bank Mitra Niaga and Bank Bukopin. Bank Rakyat Indonesia (BRI) had no interest in securitization markets because they still have excess liquidity and are reluctant to let go of SMEs receivables as they hold a position that in lending to SMEs coaching is also needed.

Some RDB and Commercial Bank (including BRI) respondents even claimed that in order to obtain additional funding, asset securitization of SMEs likely would not be an option. This is due to the belief that extending credit to SMEs requires efforts far more difficult than lending to corporate or consumer clients. To channel credit to SMEs requires long development, in addition to niche SMEs that have limited lending potential (given the competition between banks). These factors have led to difficulties in the sale of good SME assets.

��

��

��

��

��


For the implementation of SME-ABS, 21% of banks stated that asset securitization is feasible to run immediately within a period of one year to the next. Most RBs (75%) felt this way, and they in general had very inadequate knowledge about securitization of SME-ABS. Overall, 41% of respondents thought it was only feasible to carry out for 2-5 years, while 23% felt it was feasible after more than 5 years, and 16% gave no time of certainty.

4.2. Investor

There are various forms of investment made by the investor. Each investor generally allocates the investment in 2 to 4 forms. The allocation of investment funds is generally done at a maximum of 25%. The most commonly used investment are bonds (60% of respondents), Bank Indonesia Certificates (BIC) (52% of respondents, the majority commercial banks), and deposits (52% of respondents). In all three forms of investments, respondents invested more than 75% their investment funds.

In general, BIC seems to be the most preferred form of investment - especially by commercial banks, since 20% of the total of 25 respondents invested more than 75% of funds, while 12% of respondents invested between 51% - 75% of investment funds that are owned.

Assuming that there are nine (9) kinds of investments that can be made and the investor may only select one (1) type of investment, the share of preference for BIC is the highest (i.e. 21%, in other words, the average propensity to invest funds in BIC products amounted to 21% of the total funds held); while SME-ABS ranked second (19%), on condition of an 11% minimum interest rate, which is higher than the share of interest bonds or deposits that have always been a form of investment other than BIC. The preference for SME-ABS at 19% reinforces the findings that the amount of money available to invest in the SME-ABS product is equivalent to 10% - 15% of the total investment fund (Figure 6).

Figure 4.Preference of Funds Placement by Banks

2%Valas

Reksadana

Emas

Saham

Sukuk

Obligasi

Deposito

EBA

SBI

4%

4%

9%

11%

14%

n = 25

16%

19%

21%


Bonds are the second most popular form of investment, and owned by 60% of respondents. Of the total 25 respondents, 8% also has invested more than 75% of its investment funds, and another 8% invested between 51% - 75% of funds.

In determining the investment products that will be used, nearly all respondents focused on the problem of yield / return and risk level (96% and 92%), followed by the level of liquidity (72%). Investor respondents from banks particularly considered liquidity a factor that is as important as yield and risk levels. For investments in other forms, business prospects in the future would also be considered (52%). Also associated with the minimum rate of return that affected investment decisions, were interest-rate deposits (40%), BIC (28%) and interest rate coupon bonds (12%).

The term securitization of assets was recognized by the majority of investors (72%), although the understanding of the essence of the real product tended to be inadequate. The majority of investor respondents familiar with the term securitization of assets were the banks.

Ideally, the rate of return of SME-ABS products is 13%, or at least 11%. The majority of respondents expressed ‘interest / very interested’ in investing in the SME-ABS product and with an amount of investment equivalent to 10% - 15% of the total investment funds owned. With its rate of return, the SME-ABS products tended to be used as second choice of investment (19%) after BIC (21%). There were high expectations on the rate of return on SME-ABS, however the ABS products were considered less / illiquid due to the lack of formation of a secondary market.

The results from the sensitivity tests on the return of SME-ABS, show that the ideal minimum rate of return is 13% (X1) or 11% (X2). Thus, mutual funds interest rate of 9% is still below the expected level of interest by investors to be willing to buy the ABS. The magnitude of the expected rate of return is because investors generally assume that the ABS product is less / illiquid when compared to BIC or bonds. The ABS secondary market is yet to be established, so

��

��

��

��

��


it is feared it will be difficult to resell the ABS. Investors need to invest in a high compensation EBA with a low level of liquidity.

Preferable SME-ABS issuers are commercial banks, i.e. CB state-owned enterprises (92%), although only 68% of respondents were willing to invest in SME-ABS products issued by CB national private banks.

��

��

��

Three main criteria expected of a bank to became an ABS issuer include, i) the bank must have a good reputation in the eyes of the public or a bank that is actually healthy (56%), ii) has assets large enough (28%), and iii) experienced in the distribution SME loans (28%). The main business sector with a demand for ABS products is the trade and processing industry sectors. The preferred guarantor is a guarantor institution owned by the Government.

��

��

��

Most investors believe that when implemented within 3-4 years to come, SME-ABS will be able to run well. Based on the questions concerning the plan of ABS implementation, most respondents investors (56%) doubt that the securitization of SMEs receivables can be run properly implemented within 1-2 years, even 8% stated unequivocally that it cannot be implemented in 1- 2 years’ time. Only 36% were convinced that the securitization of receivables of SMEs could work well if implemented within 1-2 years.


It is interesting to observe that the respondents who doubted or firmly reject the implementation of SME-ABS were few, as it turns out the vast majority (75%) felt confident that when implemented within 3-4 years to come, it could run well. This reinforces the idea that in order for the SME-ABS interest, there should be an established secondary market developed.

Only 24% of respondents (6 of the total 25 respondents) felt very pessimistic about the successful implementation of SME-ABS, arguing that preparing the market and its supporting institutions would not be easy and requires hard work and a long time, at least 10 years. The important factors to be considered in the implementation of SME-ABS are noted in Table 16.

��

��

��

Most investors (56%) believe that the SME-ABS will be able to run properly if it is implemented in the medium term, i.e. 3-4 years to come. While most other investors (24%) are pessimistic towards the successful implementation of SME-ABS, by reason of preparing the market as well as supporting institutions that will be difficult and require hard work over a very long time. There are several important factors that must be considered when implementing SME-ABS, namely: (i) clear rules about the structure of the transaction and the parties involved in the transaction EBA (52%); (ii) government support through legislation (20%), (iii) the execution of a clear guarantee that is fully protected by law (16%); (iv) the existence of guarantor institutions that can be trusted (16%); (v) the ratification of proper rules (12%); fulfillment of legal regulations (8%), and (vi) the support of regulators such as BI and BAPEPAM LK.

4.3. Insurance / Insurance Agency

Guarantor institutions or insurance companies that provide guarantees on loans still do not seem to be sufficiently developed in Indonesia. This is evident from the difficulties faced to get target respondents from segments of guarantor institutions and credit company guarantee institutions, most of which are owned by the central government or local governments. But even so, there are indications of business growth of guarantor agencies, as seen from the growth


in the number of permanent employees absorbed in this industry to accompany the reduction in the number of contract employees.

The government gave attention to guarantor institution belonging to the central and local governments with a capital injection in 2011 between 5% -35%. Credit guarantors for SMEs are not a new thing for company guarantor institutions. In general, SME loans are considered more risky than corperate credit and mortgages. This can be seen from the higher fee charged by the guarantor institution and lower underwriting value. The level of risk and business prospects in the foreseeable future is the main thing to be considered in giving a guarantee for an investment product.

For a guarantee / insurance on corporate credit, the proportion recorded for a guarantee on corporate credit products ranged from 5% - 87% of the total business value. Loading costs were generally less than 4% and ranged from 1.5% - 3.8%. The guarantee covers between 75% - 100% of the value of the credit. While for other products including SME loans, the proportion of product guarantee loans ranged from 5% - 100% of the overall value of the business. The loading charge (fee) is the same which ranged from 1.5% - 3.8%, and the guarantee covered between 70% - 100% of the value of the credit.

Most institutional guarantor (6 of 8 respondents), expressed ‘interest / very interested’ to become a guarantor institution for SME-ABS products. Those less interested were ACA Insurance and Askrindo, because they thought SME NPLs were quite high, and they were not interested in any further information about the SME-ABS product with all the potential risks and benefits.

In offering insurance, there is general practice of reinsurance or company-backed by a guarantor institution / other insurance. Examples of companies that are commonly used for this purpose are Marein and ReINDO. In running the daily business and in expanding their reach, the main obstacles is the lack of capital and limited human resources, both for the purposes of marketing their products and expertise in the management of insurance.

SME-ABS are less known by most company guarantor institutions, and SME-ABS products are considered as an investment product with moderate to high level of risk. This assessment is based on the assumption that SMEs generally have more traditional business management with irregular management practices of a limited track record, and located in places susceptible to fire. There is also the presumption that SME NPL is high.

Nonetheless, most guarantor institutions were ‘interested / very interested’ to become a guarantor for SME-ABS products, in particular for SME-ABS issued / sold to the trade sector by the state-owned commercial banks with charges (fee) ranging from 2.5% - 5%. The next attractive sector was the the financial sector, real estate and business services, construction, manufacturing and tourism, and with charges greater than 1% with an average coverage guarantee to a maskimal of 73.8%.


Almost all respondents were more interested to become a guarantor for products SME-ABS issued / sold by the state-owned commercial banks in view that these products were considered to have a lower level of risk than the ABS products sold by non-state owned commercial banks. This is based on the perception that the state-owned commercial banks are more experienced in managing SME loans, have considerable assets, and that government bank capital is assured to be healthy.

Rating agencies are preferred as guarantors as they are owned by the government (38%) or Valuation (PT Securities Rating Indonesia) (38%). Factors considered to be important for preference are the type of SME, low NPL, collateral, the credibility of the business sector, and the quality of business ownership and profit growth.

Guarantor optimism about the SME-ABS program was higher than the optimism among investors. Most guarantors agencies were quite optimistic that SME-ABS can be implemented in the next 1-2 years. However, only 13% of guarantor institution respondents were familiar with the rules regarding securitization, while the remainder (87%) do not know.

Other products were widely used as a guarantee object of SME loans (6 respondents). The proportion of businesses with SME credit guarantee were also very diverse, ranging from 5% - 100% of the total value of their businesses. There was one company that makes credit guarantees for SMEs as a whole business. Fee charges were generally less than 4%, and fell in between 1.5% to 3.8%. While the guarantee covered between 70% s - 100% of credit value.

Figure 5.Guarante Products Sold

Kredit K

opera

si

Kredit U

MKM

Kredit P

ropert

i

Engin

eerin

g

Asuran

si Kary

awan

Perba

nkan

Multigu

na

Asuran

si Exp

ort

Marine

Cargo

Marine

HUU

Casualit

y

Motor C

ar

6 6

4

2

1 1 1 1 1 1 1 1

In conducting its daily business as a guarantor institution, there are number of problems to be faced, such as (i) lack of capital, (ii) collisions with BI regulation that the certificate guarantor of non-state-owned enterprises should be in-rating, (iii) contrary to Circular Letter No. 13 of


2011 regarding the ATM Care in circular: ATM Care point for the Bank is 20% while the rating is adjusted for private sector; (iv) the difficulty to convince the market about the importance of the guarantee, (v) lack of human resources in each area, (vi) lack of investment options from the regulator; (vii) the banks often include SMEs that are not qualified which sometimes runs a risk; (viii) enterprises have not been listed officially as a partner guarantor institution, so that the bank preference goes to SOEs; and (ix) risks of global trade, and competition between insurance agencies.

Meanwhile, to expand the range, the biggest obstacle is the perceived problem of capital as well as limited human resources, both for the purposes of marketing products and expertise in the management of insurance. In providing guarantee for an investment product, the most important consideration is the level of risk and future business prospects.

SME sectors with guarantors willing to guarantee ABS products, are the trade sector, followed by the financial sector, real estate and business services, construction, manufacturing and tourism with an average coverage of the guarantee willing to be borne at 73.8%. However, the desired fee was greater than 1%. With a fee of 1%, only part of the institution was willing to be a guarantor for SME-ABS products. This is understandable considering that the fee received is between 1.5% - 5%. The survey also showed that in general a guarantor for SME-ABS products expect a fee between 2.5% - 5%.

4.4. SMEs

SME business development has been quite good. In 2010 and 2011, all SMEs had fairly stable business turnover, which tended to increase in 2012. Over the years, some had increased profits. But even so, still quite a number of SMEs (with a business turnover of at least Rp. 300 million / year) did not have legal status and only the status of individual property (30%). Many operated only by relying on the Business License from the village. In fact, most SMEs (57%) still used manual financial records for financial management.

Loans obtained from the Bank were generally used for working capital and investment. But some SMEs were using it for the welfare of employees (3%), generally with medium credit period (1 s / d 3 years). BRI was of the most accessible banks (27%), followed by Bank Mandiri (17%) and rural banks (13%), with a common interest rate ranging between 12% - 14%. The SMEs generally assumed that a reasonable interest rate is 10% - 12%, or 2% lower than the prevailing interest rate.

Most SMEs (83%) said they never have problems meeting re-payment obligations on loans obtained from the Bank. Only 17% (or 5 SMEs) encountered some problems, which was generally caused by delays in payments made by the customer, the decreased number of customers, uncertain weather that inhibits the production processes, interest deemed too burdensome, stoppage of activity due to earthquake (as occurred in Jogjakarta). Banks turned


out to be quite aggressive in exploiting their customers for loans. This was evident from the findings of the survey as most SMEs (77%) often got an offer of additional bank loans in the last 3 years. Almost all respondents (93%) had made an offer to obtain new credit.

Of the 30 SMEs interviewed, most of them engaged in the sectors of trade, hotel and restaurant (43%). These sectors became the largest sectors in SME lending undertaken by the bank. In addition there were 7 SMEs (or 23%) engaged in the processing industry sector; while the remaining SMEs were engaged in other sectors. Of 30 SME, 8 of them proved to have a business in two different sectors. Most SMEs respondents (47%) had started business before 2000 (1971 - 2000), while others (53%) started business between 2001 - 2010.

In general, the main obstacle for SMEs in managing business is capital (63%), marketing (30%) and human resources (27%). Many SMEs generally are not a legal entity as well as having inadequate licensing and administration of financial records which is still done manually for most. As such, these SMEs are only able to access micro and supermicro credit through the bank. This credit is accessible usually if there is additional funding purposes, however the majority of SMEs rely on their own capital or capital obtained from family, friends, moneylenders, as well as loans from non-bank financial institutions.

To elaborate further, financial management for 575 SMEs is still done manually. Only 33% had used spreadsheets and 20% used a special software in recording financial records. So it is not surprising that only 13% of SMEs have had financial statements audited by public accountants.

Figure 6.Banks SMEs Accesed to Obtain Credit

27%

17%

13%10% 10%

7% 7%

33%

Bank BRI BankMandiri

BPR BPD BankSyariahMandiri

BankBNI

BankBCA

BankBCA


According to the SMEs, major considerations banks have in determining the provision of credit and making an offer for extending credit include, good payment history (83%), completed requirements (77%), businesses with good prospects (73%), and that proposed insurance has considerable value / higher (70%). Apparently, the majority of SMEs in the research sample (93%) had never experienced problems in applying for a loan. For those who had experienced problems in a credit application, the problem was due to the demand for additional collateral, as well as much lower appraisal guarantees than the market prices, hence SMEs were valued lower compared to the value of their proposed loans.

The second problem was associated with marketing. From 2010 - 2012, this issue showed an increasing trend. In 2010, marketing problems were experienced by only 30% of respondents; but in 2012, these problems were experienced by 37% of respondents.

The third problem was related to human resources, however this seemed to decline on comparing respondent responses of this problem from 2010 - 2012 at 27% to 20%, respectively. Similarly, the production process was seen as a problem. Where 17% of respondents experienced problems with the production process in 2010, only 7% of respondents encountered this problem in 2012. The issue of transportation and availability of raw materials affected approximately 7% of respondents each year for the last 3 years.

Figure 7.Problems facing SMEs

Transportasi

SDM

Permodalan

Proses produksi

Pemasaran/penjualan

Ketersediaan bahan baku

7%7%7%

7%7%7%

7%7%

17%

57%53%

63%

20%20%

27%

37%30%30%

201220112010

4.5. SWOT and Gap Analysis

In this study, a SWOT Analysis and Gap Analysis were used to assist in achieving the research objectives. SWOT analysis is a tool that was applied in the process of decision making by looking at the issues from four perspectives, namely maximizing the power factor, take advantage of existing opportunities, minimize weaknesses, as well as to reduce the impact of threats arising and must be faced. The figure below illustrates the SWOT analysis in the utilization of the asset securitization as a financing alternative for SMEs in order to encourage the real sector.


Figure 8.SWOT Analysis of ABS in Indonesia

Gap analysis, according to businessdictionary.com3, as applied to businesses is a technique to “determine what steps are need to be taken in order to move from its current state to its desired, future state. It is also called need-gap analysis, needs analysis, and needs assessment.” For this research, gap analysis was used to examine the current situation of the relevant parties involved in the securitization of assets, including the policies of the government, which was then compared to the expected conditions for SME asset securitization to idenitify gaps to be filled or addressed. Figure 9 shows the gap analysis approach for SME-ABS in Indonesia.

��

��

��

��

��

��

��

��

��

��

��

3 http://www.businessdictionary.com/definition/gap-analysis.html


Figure 9.Implementation SME-ABS Gap Analysis in Indonesia

From the Figure 9, it appears that in order to close the gaps between the current state and ideal state, there are five things that must be done SME-ABS to be more effectively implemented in Indonesia:

1. As the understanding of SME-ABS is relatively low amongst the relevant parties, it is necessary to increase the understanding of SME-ABS mechanisms and processes through improved the education and dissemination of information to the relevant parties, namely: issuer, investor, and the guarantor institution.

2. There is a need to strengthen the capacity of SMEs which can be done through the support by technical ministries and agencies for effective SME management and good corporate governance (GCG).

3. The provision of supporting regulations followed by its socialization would assist in the implementation of SME asset securitization.

4. There is a need to provide incentives to banks (issuers) for implementing SME asset securitization as the banks have not been keen to securitize SME assets due to the high liquidity of banks.

5. Strengthen and improve the quality of human resources in the banking management of SME loans and credit asset securitization for more effective SME asset securitization.

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��


V. CONCLUSIONS

The research outlined in this paper involved an array of respondents over a wide scope with focus on the parties involved in securitization as a financing alternative for SMEs. The study concluded that based on the results of surveys and focus group discussions, the implementation of asset securitization as an alternative financing for the real sector and SMEs is not likely to occur in the near future.

Some of the reasons behind this conclusion include among others;

(i) An understanding of the asset securitization businesses of SMEs in Indonesia is not maximized;

(ii) Most of the banks are still not interested in becoming an issuer (original creditor) because a. Liquidity would be in excess, the LDR would still be low;b. There is relative difficulty of finding new SMEs customers;c. The general lack of information and dissemination about the concept of SME asset

securitization; andd. Most banks tend to want to be an investor rather than be an issuer;

(iii) A strong legal basis regarding the preparation of SME asset securitization is still needed, in addition to the need for further integration with provisions concerning CIC-ABS that already exist today;

(iv) The need for incentives for banks when acting as an issuers, such as benefits/reward in taking on risk-weighted assets;

(v) SME asset securitization schemes should be supported by a rating agency in charge of rating SMEs;

(vi) Implementing the model for SME-ABS in the context of Indonesia requires strengthen coordination with relevant agencies; and

(vii) Needed improvements / strengthening of SMEs in terms of management to improve overall performance for good corporate governance.


references

Bartol, K. M. dan Martin, D. C. 1991, Management, international edition, McGraw-Hill, New York.

Cohen, Steven H. and Paul Markowitz (2002) “Renewing market segmentation: Some new tools to correct old problems.” ESOMAR 2002 Congress Proceedings, 595-612, ESOMAR: Amsterdam, The Netherlands.

Tim Studi Perdagangan Efek Beragun Aset, 2003, Studi tentang Perdagangan Efek Beragun Efek, Departemen Keuangan RI dan Badan Pengawas Pasar Modal, tidak dipublikasikan.

Gan, Yingjin Hila dan Christopher Mayer, 2006, Agency Conflict, Asset Substitution, and Securitization, National Bureau of Economic Research, Cambridge.

Johnson, G., Scholes, K., & Sexty, R. W. (1989). Exploring strategic management. Scarborough, Ontario: Prentice Hall.

Joseph Norton J, et.al., (1993), International Finance in the 1990s. USA: Blackwell Publisher.

Kimborough, Robert T., (1974), Summary of American Law. Lederman Jass 1996, The Hand Book of Asset Backed Securities. Cleveland Ohio., pada Syafaruddin Harahap (2010), Tinjauan Yuridis Kontrak Investasi Kolektif Efek Beragun Aset di Bank BTN, Tesis, Program Studi Magister Kenotariatan, Program Pascasarjana Universitas Diponegoro.

asset securitization and the real sector performance: an ... securitization and the real sector...

Documents