The Determinant of Non-Performing Financing on Micro, Small and Medium Enterprises (MSME) Financing of Islamic Banking in Indonesia

The financing provided by Islamic Banks in the Micro, Small, and Medium Enterprises (MSME) sector has a high risk of default. The purpose of this study was to determine the effect of inflation, economic growth, and the exchange rate on nonperforming financing (NPF) of the MSME financing sector of Islamic Banking in Indonesia during 2010-2019. This study uses secondary data (times series) with multiple linear regression analysis approaches. The partial test result shows that inflation has a positive and significant effect on the problematic financing of MSMEs. This was caused by an increase in inflation that occurred which led to an increase in MSME production costs. Economics growth has a negative and insignificant effect on MSME financing problems. Indonesia’s economic growth is driven by the household consumption sector so it tends to have a less double impact on the economy. The exchange rate has a negative and significant effect on MSME financing problems. The depreciating rupiah exchange rate causes the price of MSME product to be cheaper in foreign markets which increases income from exports.

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