Does Sharia Banking have the Capability to Increase Micro, Small and Medium Enterprises Financing?

The contribution of Micro, Small, and Medium Enterprises (MSMEs) has played an important role in GDP and employment growth in Indonesia in the last decades, but still, MSMEs have difficulties accessing bank loans. This study examines the effect of internal factors of Islamic banking performance ratio, financing to deposit ratio, capital adequacy ratio, non-performing financing of total financing, and non-performing financing for MSMEs on the development of MSMEs financing in Islamic Banking in Indonesia. It consists of three Islamic Financial Institutions; Islamic Commercial Banking, Islamic Business Unit Bank, and Islamic Rural Banking from January 2015 until December 2021 (monthly base), using secondary data with 252 observations. The regression model used in this research is Generalised Least Squares (GLS), using Panel Data and the random effect model approach. The results of this study showed that all independent variables, financing to deposit ratio, capital adequacy ratio, non-performing financing of total financing, and non-performing loans for MSMEs, have a significant effect on MSMEs’ financing growth. This study indicates that the contribution of the capital adequacy ratio has a significant positive effect on the growth of MSMEs financing. Also, the financing to deposit ratio and non-performing financing from total financing negatively affect MSMEs financing growth. Besides that, the non-performing financing for MSMEs relatively had no strong negative effect on MSMEs financing growth in sharia banking in Indonesia