Indonesia's micro, small, and medium enterprises (MSMEs) have been growing steadily, but the financing they receive from Sharia banks hasn't kept pace. This study aims to figure out why. It turns out that banks' strategies for collecting funds from third parties have a lot to do with it.

Sharia banks need to step up their game in gathering funds from various sources. Research shows that the more funds they raise, the more they can allocate to MSME financing.

The study used a fancy model called Vector Error Correction Model (VECM) to look at both long-term effects and sudden shocks to the system. Here's what they found:

In the short term and long term, banks' capital adequacy ratio (CAR) has a negative impact on MSME financing. But third-party funds (TPF), non-performing financing (NPF), bank ownership and policy (BOPO), and financial development ratio (FDR) all have a positive long-term effect on MSME financing.

When it comes to the banks' profitability, TPF, CAR, and NPF are positively significant in the long term. BOPO and NPF also prove beneficial in the short term.

If there's a shock to the CAR, it negatively affects MSME financing. Interestingly, a shock to MSME financing also negatively impacts the banks' profitability, but this effect is stable in the long run.

The Booming MSME Scene: Does Sharia Banking Keep Up?

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