Addressing Legal Gap in Creditor Safeguards for Mortgage-Backed Loans

Abstract

This article studies the legal gap in creditor safeguards for mortgage-backed loans, focusing on substantive, structural, and cultural aspects of Indonesia’s legal system. Substantive challenges arise from gaps in the legislative framework, such as the rigid timelines stipulated in Law No. 4 of 1996 on Mortgage Rights, which often fail to account for practical delays in land registration processes. Structural gap, including inefficiencies in bureaucratic structures, limited capacity of the National Land Agency, and inconsistent oversight of Land Deed Officials, further hinder the implementation of creditor protections. These issues are compounded by cultural and normative barriers, such as the lack of legal awareness among debtors, permissive attitudes toward loan defaults, and societal acceptance of non-compliance with financial responsibilities. The article applies Lawrence M. Friedman’s theory of legal structures, highlighting the interplay between structure, substance, and culture, to analyse the factors contributing to these gaps. Recommendations include modernizing Indonesia’s land registration processes through reliable electronic structures, strengthening institutional capacity, enhancing oversight mechanisms, and fostering a culture of legal compliance among stakeholders. Additionally, promoting the use of authentic deeds in credit agreements and improving coordination between agencies are proposed as measures to reduce risks for creditors. The findings highlight the urgent need for comprehensive legal and institutional reforms to address these gaps, ensuring greater legal certainty and protection for creditors. By addressing these challenges, Indonesia can foster a more secure financial environment that supports economic growth while safeguarding the interests of creditors and other stakeholders in mortgage-backed transactions. This article contributes to the broader discourse on improving legal frameworks in emerging economies, particularly in the context of financial and property rights.