Ship Financing in Indonesia

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Ship Financing is a crucial part of the commercial and business in the shipping and maritime world. In essence, Ship Finance is a broad understanding that involves corporate financial management of shipping companies as well as new-building ships in the shipyard. From a financing perspective, ship finance is generally categorized as asset-based lending, meaning that the vessel itself serves as collateral for the loan. This structure allows lenders to secure their exposure against the underlying value of the ship while enabling shipowners to access substantial capital for their operations or fleet expansion.

In today’s globalized economy, marked by increasingly complex cross-border trade, ship financing has become inevitable. It serves not only as a means to fund shipping activities but also as a strategic instrument to strengthen and expand the capacity of shipping industry actors worldwide.

Ship Financing in Indonesia

Initially, Indonesia recognized the Indonesian Commercial Code (Kitab Undang-Undang Hukum Dagang– “KUHD”), inherited from the Dutch colonial legal system, which regulates the mortgages, rights and obligations. Additionally, in 2005 Indonesia entered the International Convention on Maritime Liens and Mortgages, which adopts international standards in recognizing the role of maritime claims and security interests in ships. However, the KUHD does not explicitly provide a comprehensive regulatory framework on ship financing as an integral part of the shipping industry.

It was only later, through the renowned umbrella regulation for the Indonesian Shipping Activities, namely the Law No. 17 of 2008 regarding Shipping as lastly amended by Law No. 66 of 2024 on the Third Amendment to the Shipping Law (“Shipping Law”), the use of ship financing was essentially encouraged. The objective was to strengthen national sea transportation and reinforce the domestic shipbuilding industry in an integrated, planned, measurable manner, supported by all relevant sectors and properly socialized to ensure the advancement of the maritime transport industry and shipbuilding industry. This initiative also aligns with Indonesia’s commitment to the cabotage principle, which prioritizes the use of Indonesian-flagged vessels for domestic shipping routes.

Through the Shipping Law, the existence of ship financing is expressly recognized and regulated in a more comprehensive manner, as it also governs the granting of ship mortgages and its relevant technicalities.

Keypoints of Ship Financing under Indonesian Legal Framework

1. Ship financing projects may involve:
   1. The acquisition of newbuild vessels from shipyards, where financing is typically disbursed progressively in accordance with construction milestones; or
   2. The purchase of second-hand vessels, where financing is often structured around the purchase price and delivery schedule.

   In both cases, the financing falls within the ambit of ship financing and is subject to the Shipping Law and financial services regulations.

2. In Indonesia, ship financing is principally facilitated through two types of financial institutions, namely the banks and non-bank financing companies. Both types of institutions fall under the supervision of the Financial Services Authority (Otoritas Jasa Keuangan – “OJK”), which imposes strict regulatory and compliance requirements. Consequently, any ship financing transaction must adhere to key financial principles, including but not limited to:
   1. Know Your Customer (KYC) requirements, aimed at ensuring proper identification and transparency of the parties involved;
   2. The Prudential Principle, which obliges lenders to conduct thorough due diligence, risk analysis, and creditworthiness assessments; and
   3. The Legal Lending Limit (Batas Maksimum Pemberian Kredit – “BMPK”), which restricts the maximum amount of credit exposure that a financial institution may extend to a single borrower or group of borrowers.¹
3. Given that ship financing is inherently structured as an asset-based loan, the establishment of security rights over the financed vessel is paramount. Under the Shipping Law, only vessels duly registered in the Indonesian Ship Registry and sailing under the Indonesian flag may be used as collateral for debt through the imposition of a ship mortgage (hipotek kapal). The creation of a mortgage requires the execution of a Mortgage Deed (Akta Hipotek) before the Vessel Registrar and Title Transfer Officer (Pejabat Pendaftar dan Pencatat Balik Nama Kapal) at the port of registry where the vessel was being registred. Once registered, the mortgage is binding on third parties and grants the creditor a preferred right over the vessel.
4. The Shipping Law further recognizes that a vessel may be encumbered by multiple mortgages. In such cases, the priority of claims is determined by the chronological order of registration, with each mortgage assigned a ranking. This principle is particularly relevant in the context of syndicated loan structures, where multiple creditors may extend financing secured by the same vessel, with each creditor’s security interest allocated a ranking under the law.
5. The granting of a ship mortgage not only secures the financial interests of creditors but also formalizes the legal relationship between creditor and debtor within the framework of Indonesian maritime law. Importantly, the Mortgage Deed (Grosse Akta Hipotek) possesses executorial force equivalent to a final and binding court judgment (putusan pengadilan yang telah memperoleh kekuatan hukum tetap). It means that, in the event of default, creditors may proceed directly to enforcement by submitting an execution petition (permohonan eksekusi) to the competent court, without the need to initiate separate litigation. At the same time, the Shipping Law introduces a layered ranking of claims. Although a registered mortgage is generally categorized as a preferred maritime claim (piutang yang didahulukan), Article 65(2) of the Shipping Law establishes that certain maritime liens (hak istimewa maritim) enjoy super-priority over ship mortgages. These include, among others: (i) Unpaid wages of the master and crew; (ii Compensation for death or injury of crew members; (iii) Funeral costs in the event of a crew member’s death, and (iv) Medical expenses and related welfare obligations. Thus, it can be concluded that the enforcement of a mortgage is subject to the prior settlement of these maritime liens, reflecting the law’s protective stance toward seafarers’ rights and obligations arising directly from the operation of the vessel.

   Practical Consideration for conducting Ship Financing

   Prior to begins the commencement of Ship Financing in Indonesia, the following points can be considered:

   1. Due Diligence: Comprehensive due diligence should be carried out on the vessel’s ownership, encumbrances, insurance coverage, and compliance with maritime safety standards. Under the Shipping Law, before a ship mortgage can be registered, the parties (banks or shipowners) must first obtain a vessel’s legal status certificate from the Harbourmaster at the port where the vessel is registered. This certificate confirms the vessel’s status, including whether or not it is already subject to an existing mortgage.
   2. Regulatory Environment: Parties must ensure compliance with both OJK regulations and the Shipping Law. This includes verifying whether the lender is permitted to provide ship financing in Indonesia, as foreign financial institutions may require cooperation with local entities.
   3. Vessel Registration: In ship financing, banks and financiers often prefer to provide loans when the vessel is registered under a flag state that shares their national identity. Therefore, to secure financing from an Indonesian bank, it is advisable for a shipowner to register the vessel under the Indonesian flag and record it in the Indonesian Ship Registry to serve as eligible collateral.
   4. Insurance: Creditors typically require vessels to be insured under hull and machinery (H&M) policies and protection and indemnity (P&I) coverage. It is also be noted that typically, a banker’s clause, a provision that protects the interest of bank or financiers over the vessel must also be included in the vessel insurance policy.
   5. Typical Agreements in Ship Financing: Depending on whether the project involves a newbuild vessel or a second-hand vessel, the following agreements are typically involved:
      1. For newbuild vessels: Initial Term Sheet (ShipTerm), Loan Agreement, Security Documents (including ship mortgage, assignment of insurances, etc).

      2. For second-hand vessels: Initial Term Sheet (ShipTerm), Loan Agreement, Sale and Purchase Agreement, Security Documents (including ship mortgage, assignment of insurances, etc).

   6. Mortgage Enforcement: Under Indonesian law, a vessel may be encumbered by multiple ship mortgages. This layered structure is permissible, with the priority of claims determined strictly based on the chronological order of registration in the Ship Registry. The first-registered mortgage enjoys the highest priority, followed by subsequent mortgages in their respective order of registration. This ranking system becomes particularly relevant in syndicated financing or when multiple creditors provide financing secured against the same vessel.

      In the event of default, the enforcement of a ship mortgage may be executed through two main methods: parate execution and judicial execution. Parate execution is the most common and efficient method, allowing the mortgage holder to directly sell the vessel at a public auction without needing to first file a lawsuit and obtain a court order. This right must be explicitly stated in the mortgage deed itself. In contrast, judicial execution is required if there is no parate execution clause, or if a dispute arises regarding the mortgage’s enforcement. This process is more time-consuming as the creditor must file a lawsuit in court and wait for a legally binding judgment before the auction can be carried out.

      1. The BMPK amount depends on the party applying for the financing. If the borrower is a related party, the maximum limit is 10%. If the borrower is not a related party, the limit ranges between 20% and 30%, depending on the type of borrower and the lending bank. ↩

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Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.

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1. Ship Financing in Indonesia
2. Keypoints of Ship Financing under Indonesian Legal Framework
3. Practical Consideration for conducting Ship Financing

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