The Impact of Islamic Leadership and Islamic Work Ethics on MSE Employee Performance: A Mediation Analysis

Abstract

In recent years, Indonesia's human resources have shown a decline in competitiveness, as reflected in the suboptimal performance of employees in Micro and Small Enterprises (MSEs). This study investigates employee performance from an Islamic organizational behavior perspective, with the Islamic work environment as a mediating variable. Using a non-experimental, quantitative approach, data were collected from 245 Muslim MSE employees in Bandung City and analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM). The findings show that Islamic leadership, Islamic work ethics, Islamic work motivation, rewards, and the Islamic work environment have significant positive direct effects on employee performance. Moreover, the Islamic work environment partially mediates the influence of Islamic leadership, work ethics, motivation, and rewards on performance, although direct effects were stronger. These results suggest that MSEs have effectively applied Islamic values in their organizational practices, contributing to improved employee performance. The study also highlights a strong collaboration between leaders, employees, and the organizational environment, reflecting a comprehensive application of Islamic principles. This research contributes practical insights for business owners aiming to enhance employee performance, which can ultimately improve business competitiveness.