International Journal of Finance, Economics and Business Vol. 1, No. 4, December 2022, pp.250-264. © 2022 SRN Intellectual Resources e-ISSN: 2948-3883 https://doi.org/10.56225/ijfeb.v1i4.91 International Journal of Finance, Economics and Business Article Does Sharia Banking have the Capability to Increase Micro, Small and Medium Enterprises Financing? Shaleh Yudiansyah 1 , Srinita Srinita 1 , Suriani Suriani 1, * and Gunawan Eddy 1 1 Department of Economics, Faculty of Economics and Business, Universitas Syiah Kuala, Banda Aceh, Indonesia; yudiansyahshaleh2@gmail.com (S.Y), srinita@unsyiah.ac.id (S.R), egunawan@unsyiah.ac.id (G.E) * Correspondence: suriani@unsyiah.ac.id (S.S) Citations: Yudiansyah, S., Srinita, S., Suriani, S. & Eddy, G. (2022). Does Sharia Banking have the Capability to Increase Micro, Small and Medium Enterprises Financing? International Journal of Finance, Economics and Business, 1(4), 250-264. Academic Editor: Farah Roslan. Received: 12 August 2022 Accepted: 28 November 2022 Published: 31 December 2022 Abstract: The contribution of Micro, Small, and Medium Enterprises (MSMEs) has played an important role in GDP and employment growth in Indonesia in the last decades, but still, MSMEs have difficulties accessing bank loans. This study examines the effect of internal factors of Islamic banking performance ratio, financing to deposit ratio, capital adequacy ratio, non-performing financing of total financing, and non-performing financing for MSMEs on the development of MSMEs financing in Islamic Banking in Indonesia. It consists of three Islamic Financial Institutions; Islamic Commercial Banking, Islamic Business Unit Bank, and Islamic Rural Banking from January 2015 until December 2021 (monthly base), using secondary data with 252 observations. The regression model used in this research is Generalised Least Squares (GLS), using Panel Data and the random effect model approach. The results of this study showed that all independent variables, financing to deposit ratio, capital adequacy ratio, non-performing financing of total financing, and non-performing loans for MSMEs, have a significant effect on MSMEs’ financing growth. This study indicates that the contribution of the capital adequacy ratio has a significant positive effect on the growth of MSMEs financing. Also, the financing to deposit ratio and non-performing financing from total financing negatively affect MSMEs financing growth. Besides that, the non-performing financing for MSMEs relatively had no strong negative effect on MSMEs financing growth in sharia banking in Indonesia. Keywords: financing; micro, small, and medium enterprises; financial system; Sharia banking. Copyright: © 2022 by the authors. Submitted for possible open access publication under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/). 1. Introduction The primary function of banking is to act as an intermediary financial institution between those who have funds and those who need funds. It is stated in Indonesia Act, i.e. the function of banking is to collect funds from the public, distribute funds to the public and provide banking services (Undang-Undang 1998). It aimed to support the implementation of national development and realising equitable development and social welfare to realise equitable economic growth and national stability, besides gaining banking profit.