Could you provide a brief journey of how you arrived where you are today?
The Indonesian government started to promote home ownership in 1976 by establishing a bank dedicated to providing housing loans for the low-income segment. For the mid-income segment, the Central Bank and IFC established a non-bank financial institution.
In 1993 the government found that the growth of home ownership was very slow, and so with the assistance of USAID it conducted a series of studies to assess the situation. This concluded that the maturity mismatch of funding sources was the main problem, and the establishment of a liquidity facility institution was recommended.
Due to the Asian financial crisis in 1997, the establishment of the institution was delayed. SMF was established on the 22nd July 2005, 100% owned by the Indonesian government, as a secondary mortgage institution with the special mission of making affordable home ownership possible for Indonesian families through the development of the secondary mortgage market.
What does your role involve?
Explicitly, the mission promotes the changing of the role of players and products, to be shifted into the mortgage financing framework. The short-term funding source has to be shifted to mid/long-term bonds, and the bank income must be shifted from interest-spread to fee-based income.
Strengthening the primary market is the foundation of the secondary mortgage market in Indonesia. SMF offers loans with a source of funds from debt instrument issuance. It is expected that gradually there will be more ‘sound’ mortgage portfolios ready to become underlying assets of mortgage related securities. As part of the effort towards market creation, SMF also develops mortgage-related securities and facilitates market players in making transactions.
In this early stage, SMF participates as a party in the transactions. Later on, when the transaction volume has increased, indicating that a market has emerged, SMF will gradually reduce its role as a party in the transactions themselves and instead position itself as a guarantor.
What is your greatest achievement to date?
SMF successfully facilitated the first issuance of mortgage-backed securities for the amount of IDR500 billion (US$352.8 billion) in 2009. This year, a fourth securitization of IDR1 trillion (US$705.7 billion) will be issued.
SMF’s main program is to strengthen the primary market by providing liquidity. From 2006 up until today, SMF has financed mortgage lenders with sums amounting to IDR3 trillion (US$2.1 trillion). Thus the total funds flowing to the housing sector are IDR5 trillion (US$3.5 trillion), which is 3.1% of the nationwide mortgage portfolio.
Which of your products/services deliver the best results?
a) Repo Program: SMF purchases mortgage loans from mortgage lenders with recourse and based on agreed terms: whereby at the end of the period the mortgage lenders have the option to repurchase the loans.
b) Shariah Financing: SMF grants financing to Shariah mortgage lenders collateralized with a pool of mortgages to produce new mortgages. To fund these programs, SMF raises funds from the capital market by issuing bonds.
c) Securitization: SMF facilitates securitization transactions as an arranger and credit enhancer.
What are the strengths of your business?
a) The only secondary mortgage institution in Indonesia.
b) Fully owned by the government.
c) An experienced management team in the mortgage industry.
What are the factors contributing to the success of your company?
a) The strong commitment of the management team.
b) Regulation and government support.
What are the obstacles faced in running your business today?
Market readiness: including sellers, buyers and investment grade portfolios.
Where do you see the Islamic finance industry in the next five years?
The Islamic finance industry is expected to grow rapidly in the next five years. The national target is to grow from 2% to 5% of the banking industry. In mortgage financing, SMF promotes the development of Musharakah Mutanaqishah which later on could be securitized.
Name one thing you would like to see change in the world of Islamic finance.
I would like to see some changes in the regulation of Islamic securitization.