The Role of Itfc in Indonesia Trade Finance.


Indonesia has demonstrated good performance of post-crisis economic recovery due to regulating prudent macroeconomics policies. However, in terms of international trade financing, there are still some issues to be solved: financing L/C, importing raw materials and providing pre-export credits. To overcome this problem, the Government of Indonesia, along with trade-partner countries, has begun to initiate programs for facilitating trade finance which are focused on the development of domestic industry while still considering open-trade policies and open-investment regime. One of the efforts is to strengthen trade financing schemes in order to encourage local exporters entering new markets, outside the United States and China, to keep growth rising amid weak global demand.

There are two main factors that play a very significant role in the supply of trade financing in Indonesia. The first factor is the exchange rate factor. The volatility in Rupiah brings trade financing activities to a very unsound environment. Moreover, with the currencies being depreciated overtime, financial institutions and their customers can be trapped into insolvency. The second factor is the scarcity of short-term trade financing facilities. Two policy approaches are often implemented in Indonesia to support the export sectors during economic downturns. The first set pays particular attention to ensuring the availability of trade financing. The second set of policies concentrates on areas that enhance the competitiveness of the sector. But the effectiveness of these two policies has been somewhat limited.

In line with the context above, the presence of the International Islamic Trade Finance Cooperation (ITFC) from the IDB is considered to support the Indonesian government’s effort in maintaining trade expansion. This is due to the intervention the ITFC made in terms of trade finance assistance to bolster Indonesia’s trade relation among OIC member countries. It is also Indonesia’s opportunity to increase its potential growth and global competitiveness.

Until 2015, ITFC had approved 27 cooperation agreements with eight beneficiaries which consists of companies and banks in Indonesia for six types of commodities. These cooperation agreements are made in the form of structured trade financing schemes. Under this scheme, ITFC helps finance strategic commodities such as raw sugar and refined sugar, livestock, soybeans, cotton and coal (exception for coffee, all commodities are imported to fulfill domestic demand). In terms of the amount of financing approved, the amount of trade credit ranges between US$ 1 million to US$ 60 million, which are accounted for US$ 28.7 million in average and US$ 25 million in median. These trade credits were conditional with tenor ranges between four to six months, depending on the nature of commodities and economic conditions. For the interest rate, ITFC applied various rates from 3.75% up to 13.3% with 5.67% on average.

The above facts have shed light on the growing importance of the ITFC trade finance in Indonesia. It was even more relevant during the global financial crises in 2008. Without ITFC intervention there might have been a certain proportion of small-scale companies in Indonesia that would have had difficulty in finding trade credits in that period. For example, in 2009 the ITFC helped the company which imports raw sugar. It should be appreciated because sugar is one of the most strategic commodities and is included in the basket of goods for calculating Consumer Price Index (CPI) in Indonesia. Moreover, the sugar company which was assisted by the ITFC comes from under-served clients who rarely glimpsed at foreign banks because they have high risk.

Having this in mind, the presence of ITFC will help to boost the government target in aiming the underserved clients. With the growing demand of the trade credits and the fact that the existing financiers are deemed as risk averse, ITFC intervention will certainly fill in the gap. There are also big players such as MDBs and international banks, but they only serve big clients and offer very low interest rates without any focus on the underserved clients. Among others, Small and Medium Enterprises (SME) in Indonesia play a very significant role for the economy. Unfortunately, only 15% can contribute to Indonesian export due to the limited financing access. In that case, ITFC can bring a very positive effect for the existing SMEs that are currently underserved.