Analysis of Determinants Affecting the Distribution of MSME Funds in Indonesia: A Study of the VECM Approach

Abstract

This study analyzes the dynamic relationship between Islamic monetary instruments (SBIS, PUAS, and the
PLS mechanism) and the distribution of MSME financing in Indonesia, using a Vector Error Correction Model
(VECM) for the period January 2014 to December 2023. The estimation results indicate significant policy
transmission challenges: SBIS has a negative and significant effect on MSME financing. This crucial finding
indicates that SBIS functions as a “liquidity trap,” encouraging Islamic banks to place funds in low-risk liquid
instruments rather than in risky real-sector financing, such as MSMEs. Meanwhile, PUAS and the underlying
PLS mechanism are statistically insignificant, indicating risk aversion and operational barriers to profit-sharing
contracts. IRF and FEVD analyses reinforce the conclusion that policy transmission remains weak, with MSME
financing variations dominated by internal bank shocks. Theoretically, this study reveals a critical gap in the
Mudarabah-based monetary framework, where liquidity instruments sacrifice the goal of promoting the real
economy. The practical implications require regulators to redesign liquidity instruments (such as SBIS) to better
encourage real-sector incentives, thereby strengthening the alignment between sharia principles and national
economic development.