Determinants of Sustainable MSME Financing by Banks

Deni Ramdani; Shintya Novita  Rahmawati; Affix  Mareta; Alex Johanes Simamora; Wildan Yudhanto

doi:10.33395/owner.v10i4.3560

Authors

Deni Ramdani Universitas Tidar
Shintya Novita Rahmawati Universitas Tidar
Affix Mareta Universitas Tidar
Alex Johanes Simamora
✉ Corresponding author: alexjohanessimamora@untidar.ac.id Universitas Tidar
Wildan Yudhanto Universitas Tidar

DOI:

https://doi.org/10.33395/owner.v10i4.3560

Abstract

Sustainable financing for micro, small, and medium enterprises (MSMEs) has become an important strategy to support economic growth and sustainable development in Indonesia. However, limited studies examine how bank characteristics influence sustainable MSME financing. This study investigates the effects of financial integrity, bank reputation, and sustainability mechanisms on sustainable MSME financing by banks in Indonesia. This study employs a quantitative approach using panel data from 47 banking companies listed on the Indonesia Stock Exchange during 2021–2024, resulting in 187 observations. Data were analyzed using fixed-effect regression and robustness testing with two-stage least squares (2SLS). The findings show that financial integrity, bank reputation, and sustainability mechanisms positively and significantly affect sustainable MSME financing. Sustainability mechanisms become the most dominant determinant, indicating that ESG-oriented governance strengthens banks’ capacity to distribute sustainable financing. The robustness test confirms that the results remain consistent after controlling for potential endogeneity problems. Theoretically, it integrates signaling theory into sustainable MSME financing by positioning banks as signal providers through financial integrity, reputation, and sustainability governance. Methodologically, it uses bank-level objective data from financial reports, annual reports, sustainability reports, and reputation indicators, rather than relying on MSMEs’ survey-based perceptions. Contextually, it highlights sustainability governance as a determinant of sustainable MSME financing in an emerging market where MSMEs play a central role in economic development. Therefore, this study advances the literature by showing that sustainable MSME financing is shaped not only by MSMEs’ characteristics or financing demand, but also by credible signals and governance mechanisms provided by banks.

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