The Strategic Role of Islamic Banks in Financing MSMEs through Sharia Contracts in Indonesia

Abstract

This study explores the strategic role of Islamic banks in financing micro, small, and medium enterprises (MSMEs) in Indonesia. As the backbone of the national economy, MSMEs face major challenges such as limited access to capital and dependence on interest-based loans. Islamic banks, operating under sharia principles, offer alternative financing mechanisms through contracts such as murabahah (cost-plus sale), mudharabah (profit-sharing), musyarakah (partnership), and ijarah (leasing). Using a qualitative approach with literature review from last five years, this research highlights how these contracts provide fairness, transparency, and risk-sharing mechanisms suitable for MSME development. Findings reveal that murabahah remains dominant due to its simplicity, yet mudharabah and musyarakah show higher potential in empowering SMEs through genuine partnerships. Moreover, ijarah is effective in enabling SMEs to access productive assets without heavy initial capital. Despite these advantages, challenges such as low financial literacy, limited regulatory support, and mismatch between products and SME needs persist. The study concludes that optimizing sharia-compliant financing, supported by education, innovation, and government policies, will strengthen Islamic banks as key drivers of inclusive and sustainable economic growth in Indonesia.