Trade and Project Financing

Methods of Payment

U.S. firms exporting to Indonesia use a variety of payment methods depending on their relationship with the purchaser. Payment options for export transactions include letters of credit (L/C), cash in advance, wire transfer, cash on delivery and open account. Confirmed, irrevocable letters of credit, while imposing additional costs, minimize risks faced by the exporter. On June 24, 2010, the Ministry of Trade issued 27/MDAG/PER/6/2010, cancelling regulation No.1/M-DAG/PER/1/2009, which required the use of a letter of credit through a domestic foreign exchange bank for exports of specified commodity exports, including coffee, CPO, cocoa, rubber, and mining products.

Banking System Operate

The Indonesian banking system has consolidated significantly in the wake of the Asian financial crisis. As of end-2010, Indonesia had 122 commercial banks and 1,706 rural banks. Banks continue to dominate Indonesia’s financial system and as of end-2010, banks held 80 percent of total financial system assets. The largest 10 banks contain almost 65 percent of bank assets. There are four state-owned banks: Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia and Bank Tabungan Negara. Bank Indonesia (BI), the central bank of Indonesia and an independent state institution, regulates key aspects of the banking and financial system, including bank regulation and supervision. Indonesia is encouraging the development of Islamic banking and seeks to increase its share of total banking assets to over five percent. As of December 2010, Islamic banking institutions in Indonesia comprised about 3.3 percent of total banking system assets. In October 2008, the government raised the Deposit Insurance Corp. (LPS) guarantee on bank deposits to Rp.2 billion (about US$225,300) from Rp.100 million. Only those accounts carrying interest rates equal to or below LPS maximum guaranteed reference rates are deemed eligible for LPS deposit guarantees. As of February 9, 2011, those rates were 7.25 percent on rupiah deposits and 2.75 percent on foreign currency deposits.

In December 2008, Indonesia’s legislature approved a law to establish an Indonesian Export Financing Agency (LPEI), which will operate under the name of Indonesia Ex-Im Bank. The Indonesia Ex-Im Bank was officially inaugurated on September 1, 2009. LPEI provides competitive export financing and advisory and other exported related services.

The export credit agency’s goal is to help promote access to worldwide markets for Indonesia’s export-related commodities, support Indonesia’s international trade, and improve Indonesian exporter competitiveness in global markets. LPEI services include:

  • Export Working Capital Loan Guarantees: LPEI provides Export Working Capital Loan Guarantees facility to a commercial bank on risks related to the financial default of the Exporter that has been issued the EWCL Guarantee from said Commercial Bank;
  • Letters of Credit (L/C): LPEI provides L/C facility to Indonesians who import raw materials, spare-parts, and machinery for export production;
  • Standby Letters of Credit: LPEI provides the Standby L/C facility to the Exporter in the form of guarantees that are issued to cover the risk faced by the Beneficiary should the Exporter fail to meet its contract/obligation that forms the basis for the issuance of the Standby L/C;
  • Export Bills or Receivables Discounting: LPEI provides a financing scheme facility allowing exporters to receive immediate payment for their export-related receivables;
  • Export Investment Loan: LPEI provides the Export Investment Loan facility to Exporters in order to finance investments that are undertaken to create and/or boost production capacity for exports;
  • Export Working Capital Loans: The Export Working Capital Loan (EWCL) is a financing facility that provides working capital need to Exporter in connection with the export of goods and services;
  • Warehouse Receipt Financing: The Warehouse Receipt Financing is a working capital financing facility that is provided by Indonesia Eximbank to Exporter, the underwriting of which is tied to the value of goods/commodities that are stored in warehouses that are operated by the Warehouse Manager;
  • Trust Receipts: The Trust Receipt is part of the import financing facility provided by Indonesia Eximbank to Exporters for the purpose of retrieving imported goods (raw materials) from ships or ports to be processed, sold, and parts of the proceeds of which will be used to settle all liabilities related to the import;
  • Advisory Services: in addition to providing export/import financing, LPEI also provides advisory services to exporters. These services include: trade finance training for the banking sector and exporters; provision of technical assistance in setting up trade finance systems; policy and procedures training for the banking sector and other related export players; consultations on international trade rules; and provision of international trade policy advice to policy makers.

Foreign-Exchange Controls

Indonesia maintains an open capital account, but with some transaction limitations. Only authorized banks may carry out foreign trade related exchange operations. In November 2008, BI imposed a new requirement for the submission of evidence of underlying transactions to support the purchase of a foreign currency against the rupiah through banks exceeding $100,000 per month (regulation 10/28/PBI/2008). For foreign parties (foreign citizens and foreign legal entities), this regulation governed the purchase of foreign currency against the rupiah in spot transactions. BI regulation No.

7/14/PBI/2005, dated June 14, 2005 describes prohibitions and restrictions in conducting foreign exchange transactions with foreign counterparts. The limit on transaction amounts for commercial banks engaging in derivative transactions with foreign counterparts was lowered from $3 million to $1 million. This limit covers all types of transactions involving foreign exchange selling and purchasing against the rupiah, previously unrestricted. However, the restrictions will not apply if the derivative transactions are conducted for hedging purposes within the framework of an investment in Indonesia that will last for at least three months. The regulation also requires foreign or domestic currency lending to foreign counterparts to be conducted in the form of a syndicated loan that engages a prime bank (that is, commercial banks with a certain investment rating from a well know rating agency) as lead bank for the purpose of project financing in the real estate sector in Indonesia. The regulation fines a flat rate of 10 percent of the amount of the violating transaction. This is more stringent than under the previous regulation, which provided a fluctuating rate. BI hopes that the regulation will reduce foreign exchange movement that is not related to a genuine underlying purpose.

In line with anti-money laundering laws, Indonesia tightened its restrictions on the amount of cash that may be carried across its borders. Carrying more than Rp100 million (approx. US $11,265) in or out of Indonesia now requires prior approval from BI, and must be reported to the Director General of Customs and Excise (DGCE).

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