COLLATERAL CHAOS: HOW INEFFICIENCIES IN MORTGAGE LAW ENFORCEMENT THREATEN THE STABILITY OF INDONESIAN BANKING

Abstract

Mortgage rights play a crucial role in maintaining banking stability by providing legal protection to creditors through collateral enforcement mechanisms; however, enforcement inefficiencies, inconsistent judicial decisions, and bureaucratic delays hamper their effectiveness in Indonesia. This study examines the systemic risks arising from failed mortgage enforcement by integrating legal analysis and financial risk assessment, offering a novel interdisciplinary perspective. The study hypothesizes that delays and inconsistencies in mortgage enforcement increase financial sector risk, limit credit growth, and weaken banking liquidity. Using a normative juridical approach, this study analyzes relevant laws and regulations, court decisions, and conceptual frameworks, complemented by interviews with legal experts, banking practitioners, and financial regulators. The results indicate that inefficient mortgage enforcement in Indonesia directly impacts banking stability by increasing systemic risk, particularly through delays in credit recovery, legal uncertainty, and increasing non-performing loans (NPLs). Slow collateral execution processes, inconsistent court decisions, and conflicting priorities between creditors weaken the function of mortgages as a risk mitigation instrument, thereby reducing creditor confidence, hampering credit distribution, and squeezing bank liquidity. Compared to countries with more efficient execution mechanisms, this situation makes the Indonesian banking sector more vulnerable to financial instability, necessitating legal and procedural reforms to strengthen legal certainty, expedite collateral execution, and enhance financial system resilience.