Can Sharia Banks Rescue MSMEs?

Global economic pressures are once again testing the resilience of the Indonesian economy. The weakening of the rupiah, which at one point exceeded Rp18,000 per US dollar, rising global energy prices, and heightened geopolitical uncertainty have driven up production and distribution costs. Meanwhile, to maintain exchange rate stability and control inflation, interest rates remain at a relatively high level. For large corporations, these pressures can still be anticipated through efficiency measures, market diversification, and broader access to financing. However, millions of micro, small, and medium enterprises (MSMEs) face a different reality. MSMEs are grappling with rising raw material prices, logistics costs, and operational expenses, while public purchasing power has yet to fully recover. Consequently, MSMEs are trapped in a cost-price squeeze: production costs are rising faster than the market’s ability to absorb price increases. This is a very serious issue. MSMEs contribute more than 60 percent of the national Gross Domestic Product (GDP), absorb around 97 percent of the workforce, and number over 65 million business units. When MSMEs weaken, what is actually weakening is the foundation of the Indonesian economy. So far, the most frequently offered solution is to expand access to financing, either through the People’s Business Credit (KUR) programme or various interest subsidy schemes. The government, through Finance Minister Purbaya Yudhi Sadewa, has even strengthened banking liquidity by placing around Rp200 trillion in state-owned banks (Himbara) with the hope of increasing credit distribution. Unfortunately, the problem is not simply a lack of capital. Banking liquidity is currently relatively adequate. The biggest obstacle is declining market demand. When sales weaken, MSME profits are squeezed, making banks more cautious about extending financing. Adding credit to businesses struggling to find a market does not solve the root of the problem.