Strengthening Real Sector Resilience: Profit-Sharing Financing Model of Islamic Banking and Its Impact on SME Growth

Abstract

Small and medium enterprises (SMEs) form the backbone of Indonesia’s real sector but remain highly vulnerable to financial shocks, largely due to limited access to risk‑mitigating capital. Islamic banking offers profit‑and‑loss sharing (PLS) instruments—mudarabah and musharakah—that theoretically align financier‑entrepreneur interests and build resilience, yet their adoption remains extremely low. This study employs a multiple‑case qualitative design to investigate how PLS financing models are implemented in practice and how they influence SME growth and resilience. Data were collected through semi‑structured interviews with six Islamic bank officers and six SME owners across three Indonesian Islamic banks, supplemented by document analysis and observation. Thematic analysis revealed four overarching themes: partnership‑based financing practice, multidimensional SME growth, persistent barriers of information asymmetry and moral hazard, and mitigation through embedded mentoring and technological monitoring. The findings indicate that genuine PLS arrangements foster relational financing, enhance managerial capacity, and cushion enterprises during economic downturns, thereby strengthening real‑sector resilience. However, widespread operationalisation is hindered by high transaction costs and cultural preference for collateralised debt. The study contributes a processual resilience‑building model and recommends a synergetic ecosystem involving government guarantees, fintech integration, and capacity‑building programmes to unlock the full potential of PLS financing