For millions of small businesses in Indonesia, the question of how to obtain capital is not simply a matter of finding the cheapest loan. It can involve religious principles, trust, paperwork, geography and the fear of entering a financial agreement whose costs are difficult to understand. A new study of Indonesian micro, small and medium-sized enterprise (MSME) owners and managers finds that Islamic financing is viewed positively by many entrepreneurs, yet adoption remains constrained by limited availability, complicated application procedures and widespread uncertainty about how the products actually work. The research, published in Discover Sustainability, offers one of the most detailed recent examinations of why Shariah-compliant financing appeals to business owners—and why that appeal does not always translate into use. Its central message is striking: demand for ethical and religiously compatible finance may be growing faster than the financial infrastructure and public understanding needed to support it.
Islamic finance is not a single product but a system of financial arrangements designed to comply with principles derived from Shariah. One important distinction from conventional lending is the avoidance of riba, commonly understood in this context as interest charged on a loan simply because time has passed. Instead, Islamic financing can involve profit-and-loss sharing, trade-based transactions, leasing or asset-backed arrangements. In a profit-sharing contract, for example, the financier may provide capital while the entrepreneur manages the business, with returns distributed according to an agreed formula rather than a fixed interest payment. In a trade-based structure, the financier may purchase an asset and resell it to the customer at a disclosed markup, with payment made over time. These mechanisms are intended to connect finance to real economic activity, increase transparency and distribute risk more fairly. For an MSME with unpredictable income, such principles can appear more compatible with both business realities and personal values.
The Indonesian researchers—Faizi, Airlangga Surya Kusuma and Purwanto Widodo—used an explanatory sequential mixed-methods design to investigate this complicated decision-making process. The approach began with quantitative research involving 176 MSME proprietors and managers who had experience with Islamic financing or were willing to participate in the study. The researchers then selected seven participants from that larger group for qualitative interviews. This sequence is important because statistical measurements can show which factors are associated with positive perceptions, while interviews can explain how those factors are experienced in daily business life. The quantitative component measured perceptions, influences on adoption and barriers, while the qualitative component explored entrepreneurs’ experiences, motivations, concerns and expectations. By integrating the two forms of evidence, the study sought to move beyond the simplistic question of whether entrepreneurs “like” Islamic finance and instead examine the conditions under which they might actually choose it.
Across the study, entrepreneurs generally expressed favorable views of Islamic financing. Their support was linked first to compatibility with religious beliefs, but the attraction was broader than religious observance alone. Participants associated Islamic products with ethical conduct, fairness, openness and a sense that finance should contribute to productive activity rather than merely generate returns on money. Some also connected these arrangements with community values and sustainable business practices. The language of “blessing” appeared as part of this moral and social outlook, reflecting the belief that a financing decision can have consequences beyond its immediate financial outcome. For business owners operating within tightly connected families, markets and religious communities, the identity of a financial institution may matter almost as much as its price. A product perceived as honest, socially responsible and aligned with Islamic principles can therefore gain legitimacy that a conventional comparison based only on interest rates may fail to capture.
The researchers also identified several practical factors that strengthened entrepreneurs’ willingness to consider Islamic financing. Transparency and fairness were particularly important because small businesses often have limited accounting capacity and are vulnerable to unexpected fees or changing repayment conditions. Clear contracts, understandable profit-sharing formulas and visible links between financing and real assets may reduce that uncertainty. Trust in the institution was another crucial element. Entrepreneurs need confidence that a bank or financing provider is genuinely applying Shariah principles rather than using Islamic terminology to repackage conventional debt. Support and mentoring also influenced perceptions. MSME owners frequently require more than capital: they may need help preparing financial records, evaluating a proposed contract, managing cash flow and understanding the risks of different financing structures. When providers offer guidance, Islamic financing becomes a relationship-based service rather than a purely administrative transaction.
Yet positive perceptions were repeatedly separated from actual access. The most significant obstacle identified by the study was the limited availability of Islamic financial services, particularly in rural areas. Indonesia is a vast archipelago, and the physical and digital distribution of financial services is uneven. An entrepreneur may be interested in a Shariah-compliant product but live far from a relevant branch, lack reliable internet access or have no nearby adviser capable of explaining the contract. Even where providers exist, products may not be designed for the irregular revenues, small collateral base and informal record-keeping common among MSMEs. Conventional lenders may appear more attractive simply because their procedures are familiar, their branches are easier to find or their application systems are more widely advertised. Access, in this sense, is not only a question of whether a financial product exists; it also depends on whether the entrepreneur can reach it, qualify for it and understand it without disproportionate time or expense.
Complexity in the application process emerged as a second major barrier. Entrepreneurs described or anticipated difficulties involving documentation, eligibility requirements and the time needed to complete an application. Such obstacles can be especially damaging for small firms, where the owner may also be the manager, accountant, purchasing officer and salesperson. Every additional form, visit or clarification competes with the daily work of keeping the business operating. Islamic financing can also appear complicated because the underlying contract may involve several stages or technical terms. A financing arrangement based on a sale, lease or partnership requires the applicant to understand not only the amount received and the amount repaid, but also who owns an asset at each stage, how profit is calculated, what happens when the business performs poorly and which risks remain with each party. If these details are not communicated plainly, the promise of fairness can be undermined by the experience of administrative opacity.
A lack of knowledge and awareness was therefore more than a minor inconvenience; the researchers described it as a critical challenge. Some entrepreneurs held misconceptions about the costs, mechanisms or affordability of Islamic financing, potentially assuming that a Shariah-compliant product is automatically cheaper—or automatically more expensive—than a conventional alternative. In reality, the total cost depends on the structure of the contract, the asset involved, the provider’s margin, fees, repayment schedule and the distribution of commercial risk. A fixed markup in a trade-based arrangement may resemble interest from the customer’s perspective, even though the legal and economic structure is different; a profit-sharing arrangement may expose both parties to a different pattern of uncertainty. Without financial literacy and transparent comparison tools, entrepreneurs may be unable to distinguish genuine risk-sharing from marketing language. The study suggests that education must therefore explain mechanisms rather than simply promote Islamic finance as a moral label.
The seven qualitative interviews added a human dimension to the statistical findings by showing how decisions are shaped by overlapping personal, commercial and social pressures. Entrepreneurs weigh religious compliance alongside affordability, speed, institutional reputation and the likely effect on business growth. Family members, peers, religious leaders and community figures may influence whether a financing option is trusted or rejected, but social encouragement cannot compensate for a missing branch or an inaccessible application system. Participants’ accounts also pointed toward a practical route for expanding adoption: providers need simpler procedures, clearer explanations, more suitable products and sustained mentoring, while policymakers and financial institutions must improve access outside major urban centers. Digital platforms could widen the reach of Islamic finance, but only if they are usable, secure and paired with human assistance for applicants who lack technical or financial expertise.
The findings do not show that Islamic financing will replace conventional finance, nor do they establish that every MSME would benefit from the same contract. The quantitative sample included 176 participants and the qualitative phase only seven, so the results should be interpreted as evidence about perceptions and adoption dynamics rather than a complete national estimate of demand. Even so, the study reveals a potentially powerful alignment between ethical finance and the needs of small businesses. Indonesia’s MSMEs are widely recognized as important contributors to employment, innovation and social inclusion, yet their growth is often restricted by inadequate capital. Islamic financing may help address that gap when its principles are matched by accessible institutions, realistic eligibility criteria and contracts that entrepreneurs can genuinely understand. The research suggests that the next stage of expansion will depend less on persuading business owners that Islamic finance is desirable than on making it available, comprehensible and operationally practical. In a market where trust is capital, the institutions that can turn those promises into transparent everyday experiences may determine whether Islamic finance remains an appealing idea or becomes a mainstream engine for small-business growth.
