LAW NO. 1 OF 2016 “REGARDING ENCUMBRANCE OF SECURITY”

Guarantee Law No. 1 of 2016 regulates guarantee institutions in granting guarantee to the party which has received credit facility. It is created by financial institution or non-financial institution.

Prior to the enactment of Guarantee Law, the provision regarding Guarantee Institution is stipulated under the Minister of Finance Decision Number 486/KMK.017/1996 regarding Guarantee Institution, Presidential Regulation Number 2 of 2008 regarding Guarantee Institution and Presidential Regulation Number 9 of 2009 regarding Financing Institution. After the issuance of Law Number 21 of 2011 regarding Financial Services Authority, the supervision of guarantee institution is transferred from the Minister of Finance to the Financial Services Authority (Otoritas Jasa Keuangan – OJK).

Now, guarantee institution refers to (i) Regulation of OJK No. 4/POJK.05/2013 of 2013 regarding the Fit and Proper Test for Main Party in Insurance Company, Pension Fund, Financing Company and Guarantee Institution, (ii) Regulation of OJK Number 5/POJK.05/2014 of 2014 regarding Business License and the Corporate Structure of Guarantee Institution, and (iii) Regulation of OJK Number 6/POJK.05/2014 of 2014 regarding Business Operation of Guarantee Institution (OJK Regulations). The Guarantee Law stipulates the Guarantee Business which covers (i) Credit Security, Financing or Sharia Financing granted by financial institution, (ii) Guarantee for a Loan distributed through loan cooperative (koperasi simpan pinjam) or cooperative which has loan division to its members and (iii) Guarantee Credit and/or loan for partnership program distributed by state owned enterprise within the program of partnership and environment building.

In addition, the Guarantee Law adds the businesses that can be conducted by guarantee institution, other than the ones mentioned in the OJK Regulations being (i) guarantee for purchase of goods in instalment, (ii) guarantee for trade transaction, (iii) guarantee for duty, and (iv) other business activities after obtaining an approval from the OJK. The Guarantee Law also stipulates foreign ownership in a Guarantee Institution in the form of a limited liability company to become 30% (thirty per cent). Previously, based on OJK Regulation foreign party can own 49% (forty nine per cent) of the subscribed capital.

In more details, the Guarantee Law stipulates the subscribed capital or subscribed principal and capital certificate of Guarantee Institution and Sharia Guarantee Institution at the minimum of (i) Rp. 100,000,000,000 (one hundred billion Rupiah) for national coverage or (ii) Rp. 25,000,000,000 (twenty five billion Rupiah) for provincial coverage and (iii) Rp. 200,000,000,000 (two hundred billion Rupiah) for Re-Guarantee Institution and Sharia Re-Guarantee Institution.

Sanction for the Guarantee Institution which does not fulfil the provisions under the Guarantee Law is only administrative sanction which provided under the Guarantee Law. In addition to administrative sanction, there is an administrative penalty, which was not provided under the OJK Regulation.

-TWK-