Sarana Multigriya Finansial - A Secondary Mortgage Facility in Indonesia

I have been doing some research on mortgage backed securities and housing finance in Indonesia for last few years. I found that it's quite difficult to get information and data in English. Most of the articles were written in Bahasa Indonesia. Well, I have no idea from where to start, so here it is a brief story about the establishment of first secondary mortgage corporation in Indonesia.

The first concrete effort to seek alternative for housing finance was started in 1993 when the Ministry of Finance set up a working group involving participants from various institutions such as BTN as a mortgage bank, real estate association, consultant and also consultants from USAID. The objective is to conduct research on the feasibility of secondary mortgage market in Indonesia. The fund was partially provided by Municipal Finance Project from USAID.

The study was presented on several seminars in 1993 and 1994 with the objective to explain the result and to initiate the establishment of SMF in Indonesia. On August 1995, Finance Minister instructed the working group to prepare the framework for establishing SMF supported by consultant from Asian Development Bank. The study was finished on July 1996 with study report “Indonesian Secondary Market Facility: Assessment of Operational, Financial Management and Risk Management Proposal”.

On February 1998, Minister of Finance signed an instruction letter regarding the establishment of SMF. However, due to financial crisis during the years, these efforts were postponed. Through several changes and modifications, a new working group was set up in 2003. The objective is to finalize the establishment of secondary mortgage corporation in Indonesia.

Finally, on July 2005, through Presidential Decree No.19/2005, the first secondary mortgage facility was established under the name of PT. Sarana Multigriya Finansial. SMF was established in July to provide a market-driven approach in financing the development of low-cost housing, while also providing affordable mortgage loans for the purchase of low-cost housing. SMF can be utilized as an alternative source of house financing because under the house financing secondary market, investment portfolio of KPR deemed not liquid.

On December 2005, the Asian Development Bank and the Indonesian government signed a $600,000 technical assistance grant to support the establishment and initial operation of PT Sarana Multigriya Finansial (SMF) as Indonesia's secondary mortgage facility. The funds are provided by ADB's Japan Special Fund and would be used to develop the operating guidelines, standardize its documentation, and support its formulation of secondary mortgage facility proposals.

The institution serves as intermediary cum facilitating agency between creditor, banks and investors. Under the scheme, SMF will purchase qualified mortgages from financial institutions with proceeds of bond sales backed by these assets. The target market for its securities product would be long-term investors, such as insurance companies and pension fund managers.

Considering the quantity of qualifying mortgages may not yet be available, SMF will for the first three years firstly lend to the financial institutions, which will on-lend for qualifying mortgages. These loans will help financial institutions build qualified mortgage portfolios for later purchase by SMF, as well as track records.
The government has invested initial equity of IDR 1 trillion in the SMF, which will eventually be replaced by equity from the private sector up to a third of the total equity. However, after two years since the inception of secondary mortgage facility by the government, Sarana Multigriya Finansial has not launched any products yet because of legal and tax impediment.