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mid growing concerns over deindustrialization, the Indonesian Chamber of Commerce and Industry (Kadin) has proposed the establishment of a special financing institution to support the manufacturing industry.

The existence of such an institution is necessary to help revitalize the country'€™s struggling industry and boost the competitiveness of domestic business players amid rising challenges, particularly with the creation of the ASEAN single market, according to the business group.

Indonesia'€™s manufacturing industry has been picking up pace in recent years, surging by around 6 percent on huge domestic consumption. However, a variety of issues, including high interest rates, have curbed its growth and prevented it from regaining its peak of 12 percent seen between 1990 and 1996.

The proposed financing institution, which would have a less commercial orientation as indicated by lower lending rates than normal banks, would allow local industrial firms leverage in running their business, Kadin deputy chair for finance and banking Rosan P. Roeslani said on Tuesday.

'€œThe foundation of a financial body should go ahead as soon as possible. Our current account deficit has been largely driven by the weak manufacturing industry,'€ he said on the sidelines of a seminar on investment financing hosted by Kadin.

At present, Indonesia'€™s commercial banking industry is a lucrative business, with banks enjoying high aggregate net interest margins of 4.2 percent, making them much profitable than their peers in other parts of Southeast Asia.

Commercial banks now charge double-digit interest on loans, resulting in high cost of funds for Indonesian businesses.

The acceptable interest rate to be provided by the special financing institution would stay at 9 percent, which would give an edge to industrial players, Rosan said. While the creation of such an institution would take much time, he added, the government might consider adding a new arm specializing in industrial financing to the existing Exim Bank, which now held Rp 60 trillion (US$4.6 billion) in assets.

'€œHowever, to allow the institution to work properly, we need a clear industrial road map so that its goal will be in line with planning,'€ Rosan said, citing industrial development planning in South Korea, Japan and China as models.

Talk of the development of a less commercial financial institution began last year with the issuance of the industry law, which mandates a special financing body to help spur industrial expansion in Southeast Asia'€™s largest economy.

The Industry Ministry is now working on a draft regulation for a new funding body provisionally called '€œthe financing institution for industrial development'€.

The director of the Industry Ministry'€™s industry climate and quality policy research center (BPKIMI), Haris Munandar, said that the financing body would have at least Rp 15 trillion in initial capital when it commenced operation and could source funds from several sources, including bond issuance and grants and loans from the Indonesian and foreign governments, multilateral financial bodies, banks and other financing institutions.

'€œWe hope the draft bill can be deliberated as part of the National Legislation Program at the House of Representatives next year,'€ Haris said.

In response to Kadin'€™s proposal, Haris said that he approved of the idea of the insertion of a new arm to Exim Bank specifically to address industrial issues, adding that the institution could work in synergy with the planned government-backed funding institution.