Determining Factors of Working Capital Financing of Micro, Small, and Medium Enterprises (MSMEs) in Islamic Banking: An Empirical Evidence from Indonesia

Abstract

This study aims to analyze empirically the determinants of the working capital financing of MSMEs under dual-banking system like Indonesia in the period January 2015 to April 2022. By using the selected variables and the time series data analysis method, namely the Error Correction Model (ECM), this study found that: (1) In the short term, the NPF variable have a significant effect on the decline in the distribution of capital working financing in Islamic banking in Indonesia; (2) In the long term, the variables of number of branch offices and ROA have a significant influence in increasing the number of working capital financing distributions for MSMEs in Islamic banking in Indonesia. Meanwhile, the inflation variable does not have an influence on the amount of Islamic banking financing distribution in Indonesia, both in the short and long term. This research is expected to contribute to policy making related to Islamic banking financing for the MSMEs sector in Indonesia.

Working Capital and Investment Financing in the MSME Sector: Impact on the Profitability of Islamic Commercial Banks in Indonesia

“…Working capital financing is a form of short-term financing financed by Islamic Commercial Banks to fund the company's working capital needs per Sharia principles (Maghfirlana & Sulaeman, 2021). The term of working capital financing does not exceed one year and has an extension option as needed.…”

“…Access to external financing is crucial for the survival and development of MSMEs that depend on bank financing. Thus, it is necessary to make it easy for MSMEs to obtain financing (Maghfirlana & Sulaeman, 2021). Especially in the provision of financial services, Islamic banking plays an essential role in efforts to boost MSMEs in Indonesia.…”