Purpose This study aims to investigate the impact of profit and loss sharing (PLS) financing, a key component of Islamic finance, on the industrial production index (IPI) within large and medium enterprise categories in Indonesia. PLS financing is hypothesized to contribute to real economic activity, irrespective of prevailing economic conditions. This study examines the impact of these policies across two distinct regimes: high and low IPI growth regimes. Design/methodology/approach This study uses the Markov switching analysis method to achieve its objectives using monthly secondary data from June 2014 to May 2024, sourced from authoritative state institutions such as the Financial Services Authority, Bank Indonesia and the Central Statistics Agency. The analysis includes two control variables: inflation and the growth of total financing by all banks. Findings The findings reveal that PLS financing exerts a positive and significant influence on the IPI within Indonesia’s high- and low-growth regimes. Research limitations/implications This research is limited to one country, Indonesia, and uses only two control variables, inflation and growth of total banking credit (Islamic and Conventional). Practical implications These results suggest that the government should promote the expansion and development of PLS financing, particularly during periods of economic downturn, to maximize its potential benefits to society. Originality/value To the best of the authors’ knowledge, this study represents one of the earliest scholarly efforts to examine the role of Islamic bank financing across two distinct industrial growth regimes – high and low. It seeks to provide rigorous empirical evidence on the capacity of Islamic banks to support economic growth under both favorable and adverse economic conditions.
Cahyono et al. (Wed,) studied this question.