CHAPTER VI
LAW OF FINANCIAL SITUATION
A. Definition of Financial Institution
According to Article 1 Point (2) of Presidential Decree No. 61 of 1988, jo. Article 1 letter (b)
of Decree of the Minister of Finance No.1251/KMK. 012/1988, what is meant by a financing
institution is a business entity that carries out financing activities in the form of providing funds
or capital goods by not withdrawing funds directly from the public.
Other provisions regarding financing institutions can be found in Presidential Regulation No.
9/1999, which defines financing institutions as corporate institutions that are active in financing
activities in the form of procurement of funds or capital goods.
The elements contained in a financing institution are as follows.
• Business Entity, a financing company specifically established to carry out activities.
• Financing Activities, doing work or activities by financing parties or business sectors.
• Provision of funds, the act of providing money for a purpose.
• Capital goods are used to produce something or other interests, such as machinery,
factory equipment, etc.
• Not withdrawing funds directly (non-deposit taking), which means not taking money
now in the form of deposits, savings, and promissory notes except only to be used as
collateral for debt to banks that are creditors.
• Society is some people living together in a place bound by a culture they consider their
own.
Financing institutions are, in principle, other suggestions besides banks that the public can use
as a funding solution. The difference between financing institutions and banks is that financing
institutions cannot carry out activities to raise funds from the people in the form of deposits or
other conditions similar to warranties.
Financing institutions have developed in the last 20 years. Now, there are more types of
financing institutions, and there are still potential types of financing institutions that exist today,
among others:
• Leasing
• Consumer Financing
• Venture Capital
• Factoring
• Infrastructure financing
• Export Financing
B. Leasing
Leasing is a legal rental relationship. What is rented is capital goods. These capital
goods are then used to run the business.
Parties in a Business Lease:
1. Lessor
Lessor is a party that provides financing services for procuring capital goods to parties
who need them.
2. Lessee
The lessee is the party who obtains financing from the lessor in the form of capital
goods.
3. Supplier
Supplier is a company or manufacturer as the party that provides or sells capital goods
required by the Lessee.
4. Banks
The bank or creditor is not directly involved in the agreement, but the bank plays a role
in providing funds to the Lessor, especially in the Leverage Lease mechanism.
5. Insurance
Insurance is an insurance institution as a company that will bear the risks of matters
agreed between the Lessor and the Lessee.
There are two types of Leasing:
1. Finance Lease
Finance Lease is a type of leasing that is more often applied in practice.
2. Operating Lease
Operating Lease is a type of leasing where the Lessor only provides capital goods to be
rented by the Lessee without any option rights at the end of the contract period.
C. Consumer Financing
Consumer financing is an alternative source of financing that can be utilized by the
public (consumers) to meet their needs for desired consumer goods. Through this consumer
financing, low-income people who previously had difficulty buying goods in cash can
overcome this easily and quickly. What is meant by consumer financing according to Article 1
Number (6) of Presidential Decree No. 61 of 1988 jo. Article 1 letter (p) Minister of Finance
Decree No. 1251/KMK.013/1988 concerning Financing Institutions are financing activities in
the form of funds for the procurement of goods based on consumer needs with an installment
or periodic payment system by consumers. Consumer financing transactions are based on an
agreement, namely a consumer financing agreement between the consumer financing company
and the consumer, as well as a sales and purchase agreement between the supplier and consumer.
In consumer financing activities, there are 3 (three) parties involved, namely consumer
financing companies, consumers, and suppliers. The consumer financing transaction
mechanism is relatively easy as long as the requirements determined by the consumer financing
company have been met. Consumer financing provides funds for consumptive goods or needs,
such as private vehicles, or other purposes, such as personal necessities or education. Consumer
financing is provided for consumption, or something enjoyed or used for individual needs or
interests.
D. Venture Capital
Venture capital is a form of long-term investment that involves providing capital with a high
degree of risk. Fund providers, called venture capitalists, focus more on potential capital gains
rather than interest or dividend income. In Indonesia, venture capital activities are regulated by
Presidential Decree No. 61 of 1988 and Minister of Finance Decree No. 1251/KMK.013/1988,
which governs its operational regulations.
Venture capital is also an essential source of funds for companies looking to develop new
business ideas, technologies, or innovations, albeit at high risk. Venture capital investment can
support economic growth but also requires good risk management by the venture capital and
partner companies.
The benefit of venture capital is that it can be a vital source for the growth and development of
companies or individuals that require additional funding. It provides financial support,
experience, and connections that can help companies achieve their goals more quickly and
efficiently. For investors, venture capital can be a way to diversify portfolios and benefit from
the success of the companies they back. However, it is crucial to understand that using venture
capital can also result in some compromises, such as loss of control and possible exit
requirements. Therefore, the decision to use venture capital should be carefully considered, and
a good agreement between both parties should be drafted to ensure mutual interests and avoid
potential conflicts in the future.
Characteristics of Venture Capital:
1. Equity Nature: Venture capital is a form of equity investment, which means investors
acquire an ownership stake or share in the company they are backing.
2. High Risk: Venture capital investments usually involve high risk, as many startup
companies or innovative projects have a high failure rate.
3. Growth Objectives: Venture capital supports company growth, expansion, product
development, or broader marketing.
4. Investor Involvement: Venture capital investors are often actively involved in the
management and decision-making of the companies they support.
5. Long-term Orientation: Venture capital investors usually have a long-term view and expect
to get a return on investment in the next few years.
Types of Venture Capital:
1. Seed Capital: Given in the early stages of a company or project's development.
2. Early-Stage Venture Capital: Given to startups that have passed the early stage and have a
market-ready product or service.
3. Mid-Stage Venture Capital: Given to companies that have entered the market and have stable
revenue but still need funds for further growth.
4. Late-Stage Venture Capital: Granted to well-established companies looking to expand
significantly.
5. Industry-Specific Venture Capital: Focuses on specific industries such as medical technology,
renewable energy, or biotechnology.
6. Social Venture Capital: Used to support projects or companies with social or environmental
objectives.
7. Corporate Venture Capital: Given by large companies to potential startups to support or
innovate in their core business.
8. Government Venture Capital: Government-backed venture capital programs for economic
or innovation purposes.
9. Integrated Venture Capital: Involves investing in various stages of a company's development,
from start-up to follow-on.
There are two types of venture capital participation:
1. Direct Investment: This involves venture capital investment in the form of shares or equity
ownership in the venture partner company. There are two common forms, i.e., setting up a joint
venture as a limited liability company or buying shares in an existing portfolio of venture
partner companies.
2. Indirect Investment: This involves venture capital investment in other forms than shares or
direct equity in the venture partner company. This can include convertible bonds, where the
bonds can be converted into shares in the future, as well as limited participation or profit
sharing, where the venture capital may share profits with the venture partner company.
The choice between direct and indirect participation in venture capital will depend on the
situation and needs of the venture capital firm and the venture partner company they are
supporting.
E. Factoring
Factoring is a term that comes from a combination of the words 'factoring,' which means
to move or transfer, and 'receivables,' which means a bill for a sum of money. Based on these
words' meaning, factoring implies the transfer of receivables from the owner to another party.
125 From the provisions of Article 1 Paragraph (8) of Presidential Decree Number 61 of 1988
concerning Financing Institutions, we will get a reference regarding the meaning of factoring.
Factoring is a business that carries out financing in the form of purchasing, transferring, and
managing short-term receivables or bills of a company from domestic or foreign trade
transactions.
Factoring service products can be divided into two main parts, namely:
1. Non-financing services
a. Credit investigation has the same function as credit assessment.
b. Sales ledger administration, whose function is the same as sales accounting, includes
multicurrency sales lingering in terms of factoring and exports, which allows clients to follow
the development of their exports in various foreign currencies.
c. Credit control includes billing, whose function is the same as the two credit management
above.
d. Protection against credit risk, the risk of bad debt being taken over by the factoring company.
2. Financing services
Through transactions (contracts), factor companies can provide prefinancing of up to 80% or
even up to 90% of the trade receivables.
Subject of receivables :
1. Factoring Companies
A factoring company is a business entity that carries out financing business in the form of
purchases
2. Client
The client is the party who receives financing services from the factoring company.
3. Customer (customer)
A customer is a party who purchases goods from a client whose payment is made on credit.
Based on the factoring limitations, it can be seen that the object of the factoring
agreement is receivables or bills. Even though the factoring thing is receivables/bills, not all
types of receivables can be factored.
F. Credit Card
Based on Article 1 Point 4 of Bank Indonesia Regulation Number 7/52/PBI/2005 about
the Implementation of Payment Instrument activities using cards, Credit Cards are payment
instruments that can be used for economic activities, including shopping transactions and
making cash withdrawals where the cardholder's payment obligations are fulfilled in advance
by the acquirer or issuer. The cardholder must repay the payment obligation at the agreed time,
either in whole (charge card) or in installments.
According to the payment method, credit card types consist of:
1. Charge Card
A type of card used as payment with a repayment system in its whole when the time comes.
Cardholders have no usage limit (no limit) but are limited in repayment time. If the card user
can’t repay within a particular time, there will be a penalty, but it still needs to be repaid, and
if it is not immediately refunded, it will be included in the blacklist.
2. Credit Card
A type of card that is used as a payment with an installment repayment system. Cardholders
are given a limited of credit. The credit limit usually varies depending on the cardholder's
financial capability and the issuer's trust. The use of credit cards is local and international in
the sense that usage is limited to the country where the card is issued.
With a credit card, the issuer first covers the expenses of the cardholder for the financing
received. The cardholder is then obligated to pay following the minimum payment terms and
other terms agreed in the credit card agreement.
Parties in the Credit Card mechanism.
1. Issuer
Credit Card Issuer is a party that manages and issues credit cards. It can be a bank or finance
company. If the issuer is a bank, it must follow regulations from Bank Indonesia.
2. Card Holder
The cardholder is the party or person whose name is listed in the credit card agreement. The
owner has fulfilled the requirements and procedures set by the issuer, so he is entitled to use a
credit card in transactions. The primary need for cardholders is the minimum amount of income
per year.
3. Merchant
The party that receives payment from trading goods or services using a credit card. The party
in question is a merchant based on a credit card usage agreement appointed by the issuer.
4. Acquirer
An intermediary party in credit card management, especially in billing and payments between
merchants and issuers.
5. Project Finance
Project finance involves large-scale mining, oil drilling, and ports/airports. The uniqueness of
this project financing is that the source of repayment comes from the cash flow of the company
or the project financed by the finance company itself.