The Development of Islamic Financing Scheme for SMEs in a Developing Country: The Indonesian Case

Small Medium Enterprises (SMEs) have significant role in employment creation and growth of gross domestic products of developing country. In the case of Indonesia, SMEs account for more than 90 percents of all company and in employment 1. However, in order to grow and contribute more significantly to the economy, SMEs face some constraints. One of the main constraints faced by SMEs is the lack of finance. Islamic bank financing products may help to solve this problem. The Islamic participatory schemes, such as mudarabah and musyarakah, integrate assets of lender and borrowers; therefore, they allow Islamic banks to lend on a longer-term basis to projects with higher risk-return profiles and, thus, to support economic growth. However, as Islamic banks try to avoid uncertainties, the mentioned schemes are not widely used. Therefore, support from government and academia needed to create innovation in the participatory financing scheme so that all related parties can share mutual benefits. Using Indonesia data, the paper analyzes data from Indonesia's National Agency of Statistics and Central Bank of Indonesia and reviews key literature and secondary data on Indonesian SMEs and Islamic banks. In the end, the paper offers a framework in which Islamic financing scheme could be used to solve financing problem faced by Small and Medium Enterprises (SMEs) in the context of developing country.