Determinants of MSME financing decisions to enhance business sustainability at Islamic Microfinance Institutions

This study examines the determinants of financing decisions to enhance business sustainability among micro, small and medium enterprises (MSMEs) at Islamic microfinance institutions ( Baitul Maal Wat Tamwil/BMT ) in Yogyakarta, Indonesia. MSMEs are crucial for economic growth and employment, but often face capital constraints. Islamic microfinance, with its profit-sharing principle and reduced reliance on physical collateral, offers a potential solution to this. Using a quantitative approach, data were collected via a questionnaire from 201 owners and managers of MSMEs who were BMT clients. The data were analysed using partial least squares structural equation modeling (PLS-SEM). The results indicate that capital needs, income level, profit-sharing systems and service quality significantly and positively influence MSMEs' financing decisions. The findings highlight that both the internal motivations of entrepreneurs and institutional characteristics drive financing choices. The study provides practical insights for BMTs to refine their service strategies, emphasising Sharia-compliant equitable profit-sharing and service quality. It also offers a basis for policymakers to design more inclusive financial support for sustainable MSME development.