One of the contributions of the Islamic banking sector to Indonesia’s economy is channeling funds to MSMEs in the form of financing since a number of them could not access financial services. Interestingly, the MSMEs grew as the Islamic Banking sector rose. However, no single study analyzes such an impact on unemployment in both rural and urban areas. This paper aimed to reveal the effect of MSMEs financing in Islamic banks on unemployment in Indonesia. It further aimed to discover such an effect on unemployment in Indonesia's urban and rural areas separately. Dynamic panel GMM two-step analysis is used in this research to estimate cross-province data in Indonesia between 2010 and 2019. The results of the study reveal that MSMEs financing in Islamic Banks contributed significantly to the reduction of unemployment in Indonesia as a whole. It is also found that the unemployment in urban areas is reduced by MSMEs financing in Islamic Banks. On the other hand, there is no significant relationship between MSMEs financing in Islamic Banks and unemployment in rural areas. These findings can be the basis for Islamic banks to increase MSMEs financing and for the government to expand Islamic banks' role in every part of Indonesia to reduce unemployment, especially in rural areas.