T

he Financial Services Authority (OJK) will issue a new regulation to boost the financing capacity of the country'€™s venture capital industry in providing funds for small companies, especially start-ups.

OJK chairman Muliaman D. Hadad said in Jakarta on Monday that the regulation and other supporting rulings would be issued within the next two weeks as part of the agency'€™s program to revitalize venture capital businesses in the country.

He said the regulation would outline strategies for promoting venture capital businesses, not only for the improvement of their management and operation, but, more importantly, for the establishment of new funding sources.

Muliaman said the establishment of an alternative source of funding would mean setting up a pool of funds involving insurance companies, pension funds, or the government.

 '€œOur venture capital industries need support not only from private investors, but also from the government,'€ he said during a seminar on the revitalization of Indonesia'€™s venture capital industry.

According to the Finance Minister Regulation No. 18/2012, Indonesian venture capital companies are able to provide equity or buy convertible funds to help start-up companies conduct their business. Venture capital companies can also base their partnership on a profit-sharing scheme.

According to the OJK, about 70 percent of the country'€™s capital venture business is based on revenue sharing, 20 percent on equity participation and the remainder on purchases of convertible bonds.

Firdaus Djaelani, the OJK'€™s executive head for non-banking financial institutions, said the financial super-body would also allow venture capitalists to provide fee-based services, such as holding seminars and trainings for small and medium enterprises (SMEs) or start-up businesses.

Firdaus said the issuance of the new regulation was needed because most active venture capital companies in the country had violated their business licenses. According to him, many venture capital companies operated like banks by providing loans with high interest rates rather than providing equity funds as they were supposed to do.

'€œThey are not banks. That'€™s why they are not allowed to provide loans,'€ he said, adding that most venture capital firms set high returns of investment, high interest rates, as and short tenure, hurting venture capital recipients.

'€œThey provide funding only for the short term. So, how can start-up business survive if they have to return the funds they receive within a year?'€ he added.

Venture capitalist businesses are one of the non-banking financial institutions providing money for start ups and SME with perceived long-term growth potential. It acts as an important source of funding for startups or SMEs that do not have access to capital markets.

The venture capital industry has existed in Indonesia since 1973, starting with the establishment of state owned PT Bahana Pembinaan Usaha Indonesia, which aimed to help develop micro, small and medium enterprises by providing capital.

According to OJK data, through 2014, total assets of venture capital firms grew 9.1 percent to Rp 9 trillion from Rp 8.24 trillion in 2013. However, they contributed just 0.67 percent of the total financing provided by non-banking financial institutions.

'€œIt is urgent now to revitalize and improve venture-capital industries in Indonesia so that they are not left behind by other financial industries,'€ said Firdaus.

According to Kadin'€™s deputy chairman for banking and finance, Rosan P. Roeslani, most financial experts acknowledge the importance of venture capitalists in supporting start ups.

He cited data showing the number of entrepreneurs in Indonesia was still very low, around 1.6 percent of 65 million productive-aged people. It has yet to reach the international standard of 2 percent.

'€œIndonesia has very high business opportunities, especially in the e-commerce era. All they need is a financing system that can really accommodate them in the beginning and provide them with long-term investment,'€ Rosan said. (foy)