Madrasahs, as Islamic educational institutions in Indonesia, play a strategic role in shaping the character of future generations. However, they face several challenges, including limited resources, insufficient teacher training, and negative public perceptions. This study aims to explore the contribution of madrasahs to character education and to identify the challenges they encounter. A scientific review method was employed through a thematic analysis of relevant literature on character education in madrasahs. Data sources include journal articles, books, research reports, and policy documents published within the last six years. The findings indicate that madrasahs significantly contribute to the internalization of Islamic values through curriculum integration, humanistic teacher–student interactions, and religious and social activities. Nevertheless, challenges such as inadequate facilities and limited teacher training persist, particularly in small private madrasahs located in underdeveloped, frontier, and outermost (3T) regions. While many madrasahs have undergone substantial transformation in infrastructure and human resources, disparities remain. Therefore, context-specific innovative approaches are needed, including facility improvements, teacher capacity building, and shifts in public perception, to optimize the role of madrasahs in supporting character education and enhancing their image in society.