Perceptions determinants and adoption barriers of Islamic financing among MSMEs entrepreneurs in Indonesia using an explanatory sequential mixed methods design

Abstract Micro, small, and medium-sized enterprises (MSMEs) play a vital role in driving economic growth, fostering innovation, and promoting social inclusion, particularly in emerging and developing economies. However, access to financing remains a major challenge that hinders growth and development. Islamic finance, which focuses on profit and loss sharing, asset-backed financing, and avoiding interest-based transactions, can effectively address the unique needs of MSMEs. This study aimed to (1) quantitatively measure MSME entrepreneurs’ perceptions of Islamic financing, (2) identify the key factors significantly influencing these perceptions, (3) examine the main barriers hindering adoption, (4) qualitatively explore the lived experiences underlying entrepreneurs’ perceptions, and (5) integrate quantitative and qualitative findings to develop a holistic understanding of Islamic financing adoption dynamics. This study employed a mixed-methods approach to investigate MSME entrepreneurs’ attitudes toward and perceptions of Shariah-compliant financial products in Indonesia. The study participants were MSME proprietors and managers with experience in Islamic financing and a willingness to participate in the study. The sample size selected for the quantitative analysis was 176. For the qualitative analysis, 7 individuals were recruited from the sample of 176 to provide deeper insights into the quantitative findings. The findings reveal that MSME entrepreneurs have a positive perception of Islamic financing schemes driven by ethical considerations, community values, and the promise of sustainable business practices. These findings directly address the research questions by confirming that compatibility with religious values, the promise of sustainability and blessing, emphasis on transparency and fairness, evolving procedures and access, support and mentoring provided, and alignment with social concerns contribute to the appeal of Islamic financing, while significant barriers-including limited access to Islamic financial services, particularly in rural areas, and the complexity of application procedures-hinder widespread adoption. A lack of understanding and awareness of Islamic financing principles among entrepreneurs also poses a critical challenge, often leading to misconceptions about costs and mechanisms.