Can Islamic Banking Support Indonesia's SMEs Amid Uncertainty?

Amid a global economic slowdown and pressure on domestic consumption, one word is increasingly heard across various segments of society: “frugality”. Society has entered survival mode. Households are holding back on spending, the middle class is rearranging spending priorities, while small business operators face an increasingly quiet market. In small shops, traditional kiosks, and home-based enterprises, the complaints are almost uniform: fewer buyers, rising production costs, but access to financing remains difficult. This situation illustrates a fundamental economic issue in Indonesia today, namely the weakening purchasing power of the population. In such conditions, the micro, small, and medium enterprise (MSME) sector becomes the most vulnerable group. Yet, MSMEs have long been the backbone of the national economy. When crises strike, this sector often serves as a social buffer and the largest absorber of labour. The question then arises, amid increasingly complex economic pressures, can Islamic banking be present not merely as a financial institution, but also as a support for MSMEs? This question is important to pose because for years, Islamic banking has been positioned as a symbol of national Islamic economic growth. However, when small communities face real economic pressures, the public certainly awaits concrete contributions, not just narratives of asset growth and business expansion. Data shows that the economic challenges faced by society are indeed not going well. The Financial Services Authority (OJK) has even highlighted the weakening of domestic demand, reflected in declining sales of houses, vehicles, and various other consumption sectors. Meanwhile, national MSME credit is beginning to show improvement in 2026, but its growth is still very thin, only around 0.12 percent annually as of March 2026. Behind these figures lies a far more complex social reality. Many MSME actors now face a paradoxical situation. On one hand, they need additional capital to survive, but on the other, their ability to repay instalments is declining due to the sluggish market. In such conditions, Islamic banking should have strategic space to differentiate itself. The Islamic economic system has been built from the outset not merely to chase profits, but also to bring economic justice, equity, and support for the real sector. Principles of profit-sharing, business partnerships, and the prohibition of speculation essentially give Islamic banks a moral foundation closer to MSME needs. It is here that criticism of the Islamic banking industry begins to find its relevance. For a long time, the public has seen Islamic banks as not fully different from conventional banks. Even, criticism has emerged that Islamic financing costs often feel more expensive and more complicated compared to conventional systems. Such criticism even became a national public discussion recently. This issue cannot be taken lightly. Because when small communities need quick and easy solutions, they tend to choose the most practical financing access, even if it carries high risks. The proliferation of online loans is a real example. Many small business operators end up trapped in digital debt because they feel access to formal financial institutions is too difficult, too bureaucratic, or not suited to the needs of small businesses that move quickly. Yet, philosophically, Islamic banking has great potential to become a more humane alternative. The Islamic system recognises the concept of sharing risks, not merely transferring risks to customers. In the MSME context, this approach is very relevant because small businesses often face income uncertainty. Unfortunately, Islamic financing practices in Indonesia are still dominated by murabahah contracts or sales that in practice often feel similar to ordinary credit. Partnership-based financing schemes like mudharabah and musyarakah are not yet dominant because they are considered more risky for banks. As a result, Islamic banks are often trapped in the same business logic as conventional banks, namely seeking the safest and most profitable sectors. MSMEs considered high-risk still struggle to obtain financing. On the other hand, the current challenges for MSMEs are not just about capital. Many small business operators face issues with productivity, digitalisation, market access, and supply chain efficiency. This means support for MSMEs cannot be limited to just channelling financing. Therefore, the future of Islamic banking is truly determined by its courage to break from old paradigms. Islamic banks can no longer just be “ordinary banks with an Islamic label”. This industry needs to move towards becoming an ecosystem for community economic empowerment. Such steps are actually starting to appear. Bank Syariah Indonesia (BSI), for example, is strengthening a value chain approach to drive MSME growth based on the halal ecosystem. As of November 2025, BSI’s MSME financing reached Rp51.78 trillion. This ecosystem approach is important because MSMEs cannot grow alone. They need markets, mentoring, digitalisation, and supply chain certainty. However, the bigger challenge is how models like this do not stop at just a handful of large banks. The national Islamic banking industry still faces serious structural problems. Although its asset growth is quite high, the market share of Islamic banking in Indonesia remains relatively small compared to the total national banking industry. Several reports show the market share of Islamic banking still around 7.69 percent of total assets.