Climate change, driven by human-induced emissions and energy use as posited in the Anthropogenic Global Warming (AGW) theory, has emerged as a global crisis disrupting ecosystems, economies, and household livelihoods—particularly in the agricultural sector (Mehta, 2024; Rahman et al., 2025a). Agricultural productivity is increasingly threatened by extreme weather events such as droughts, floods, and tropical storms (Ali and Mujahid, 2025). Without adequate adaptation strategies, food security will remain at risk, especially for smallholder farmers in vulnerable regions (Rahman et al., 2022a). Prolonged droughts and unpredictable rainfall patterns have significantly reduced crop yields, jeopardizing the livelihoods of rural populations dependent on agriculture (Rahman et al., 2023b). These challenges are further exacerbated by slow governmental responses and inadequate infrastructure, demanding immediate adaptation measures by farmers.

Beyond ecological impacts, climate change also intensifies the financial vulnerability of smallholder farmers (Yang et al., 2022; Oosthuizen, 2014). Climate-induced harvest failures lead to sharp revenue fluctuations, destabilizing household financial flows (Rahman et al., 2021; Toiba et al., 2024; Hanani AR et al., 2024). Studies by Samuel et al. (2021); Lasco, Espaldon, and Habito (2016) reported that 70% of smallholder farmers experienced a 40% decline in income during prolonged droughts. This instability hampers farmers’ ability to invest in adaptive technologies (Touch et al., 2024). In Vietnam, for instance, farmers risk losing assets as they rely on high-interest informal loans, using land as collateral (Migheli, 2024). Limited access to agricultural insurance further compounds their vulnerability; in India, only 4% of farmers are covered by climate insurance (Biswal and Chandra, 2025). Consequently, financial pressures drive widespread migration and unsustainable farming practices that worsen environmental degradation.

In this context, AGW theory does not merely provide an ecological background but also frames smallholders’ financial vulnerability as a systemic risk constraint. Specifically, AGW underscores how human-induced climate instability generates uncertainty in agricultural returns, thereby shaping farmers’ utility-maximizing financial behavior under risk. This connection has been emphasized in recent literature linking AGW with rural financial decision-making (Letourneau and Davidson, 2022). Building on this foundation, our study extends AGW theory into the behavioral and financial domain by examining how financial literacy influences climate-adaptive credit and precautionary savings—two climate financing behaviors explicitly designed to buffer households against AGW-driven risks.

Structural barriers such as complex bureaucratic procedures, lack of collateral, and limited rural banking infrastructure further restrict farmers’ access to formal financial services (Saqib et al., 2018). Many farmers, prioritizing short-term financial needs, resort to informal lenders with exorbitant interest rates or forego investments in climate-resilient inputs such as improved seeds and irrigation systems (Shisanya and Mafongoya, 2016). This entrenches a cycle of financial instability, undermining smallholder resilience (Babatolu and Akinnubi, 2016).

To better conceptualize these financial responses, following Cui, Zhang, and Xia (2022); Jokinen (2018) we define climate financing behavior as farmers’ financial decisions that are explicitly aimed at managing climate-related risks. This includes two forms: 1) climate-adaptive credit—formal borrowing targeted to support climate-resilient agricultural investments, and 2) precautionary savings—allocating income to create buffers against future climate shocks. This definition differentiates climate financing behavior from ordinary agricultural financial practices by emphasizing its climate-specific orientation.

Financial literacy emerges as a crucial strategy to disrupt this cycle. Farmers with access to financial education—covering risk management, savings, and budgeting—are better equipped to make sound financial decisions (Amosah, Lukman, and Ghana, 2023). Empirical studies have shown that financial education fosters a greater propensity to save and invest in adaptive technologies (Amosah, Lukman, and Ghana, 2023; Mutaqin and Usami, 2019). Moreover, integrating financial literacy initiatives with accessible financial products, such as group-based microcredit programs, significantly enhances farmers’ ability to withstand climate-related risks (Donatti et al., 2017).

From a theoretical perspective, this study is guided by Random Utility Theory (RUT) (Putri et al., 2024; Rahman et al., 2025a), which provides a behavioral framework to understand farmers’ financial decision-making under risk. In this framework, farmers are assumed to choose between alternative financial actions (e.g., borrowing or saving) to maximize expected utility given climate uncertainty, financial literacy, and resource constraints. By adopting RUT, we establish a logical chain: financial literacy enhances farmers’ ability to evaluate options, which shapes behavioral intention and ultimately leads to adaptive financial actions.

Despite an expanding literature on financial inclusion and behavior, relatively few studies have explored how financial literacy shapes climate-related financial decisions among smallholder farmers in developing countries. Recent works applying IV-Tobit approaches (Drall and Mandal, 2024; Yang et al., 2024; Zhang Hepei et al., 2025; Zhang et al., 2024) have advanced our understanding of financial behavior in rural development and agricultural contexts, yet limited attention is given to the intersection between financial literacy, savings, credit, and climate adaptation. Moreover, previous studies rarely account for income heterogeneity or the systemic constraints of rural credit policies such as Indonesia’s KUR Tani program, both of which are crucial in shaping adaptive financial choices (Rahman et al., 2025c; Rahman et al., 2025a). This gap limits the policy applicability of earlier findings. Addressing this gap, this study examines how financial literacy affects smallholder farmers’ decisions regarding access to formal credit and the allocation of post-harvest income to savings—both critical steps toward adaptation in a changing climate. This study pursues three key objectives: 1) to investigate how financial literacy influences farmers’ access to formal credit; 2) to assess its effect on precautionary saving behavior; and 3) to examine how these relationships vary across different income groups.

This study makes two primary contributions to the literature. First, it provides empirical evidence on the role of financial literacy in enhancing farmers’ financial behaviors to build climate resilience. Second, it focuses on the financial vulnerabilities of smallholder farmers in rural Indonesia, aligning with the Sustainable Development Goals (SDG 13: Climate Action; SDG 10: Reducing Inequalities). By highlighting financial literacy as a key adaptation strategy, this research aims to inform policies that promote financial inclusion and long-term economic sustainability for farmers confronting climate-related challenges.

By incorporating AGW theory and Random Utility Theory, this study contributes twofold: First, it provides a theoretically grounded explanation of why financial literacy matters for climate financing behavior under systemic risk constraints. Second, it highlights income heterogeneity and rural policy contexts, particularly Indonesia’s smallholder finance environment, as key dimensions shaping adaptive financial behavior.

The remainder of the paper is structured as follows: Section 2 details the research setting, data collection, and variable construction. Section 3 outlines the empirical model and estimation strategy. Section 4 presents the key results and discussion. Section 5 concludes by offering policy implications, acknowledging study limitations, and suggesting directions for future research.

This study provides new empirical evidence on the role of financial literacy in influencing climate financing behaviors—namely credit access and savings—among smallholder farmers in East Java, Indonesia, and contributes to bridging the gap between climate change adaptation and rural household finance. Grounded in the Anthropogenic Global Warming (AGW) theory, our findings are interpreted in light of systemic climate risks that disrupt agricultural returns and household financial flows. AGW emphasizes how human-induced climate instability produces heightened uncertainty (Larminat, 2023), and our results show that financial literacy operates as a buffer, enabling farmers to make more informed financial choices under such uncertainty. By framing farmers’ credit and saving decisions as climate-specific adaptive responses rather than ordinary financial behaviors, this study advances the theoretical link between AGW and rural household economics (Yousafzai et al., 2022).

One of the key findings is that financial literacy significantly increases the probability of smallholder farmers engaging in precautionary savings. This has deep implications for rural households facing irregular incomes, uncertain yields, and lack of safety nets—conditions increasingly common under climate stress. Savings here are conceptualized as climate-adaptive buffers, not merely household liquidity management (Gikonyo et al., 2022). By setting aside income—even in small amounts—farmers can smooth consumption, finance emergency repairs, or reinvest in climate-resilient inputs, which aligns with climate adaptation objectives (Wieliczko, Kurdyś-Kujawska, and Sompolska-Rzechuła, 2020). However, the study also finds that financial literacy does not significantly affect the amount saved. This knowledge–behavior gap reflects systemic constraints. While farmers may be willing and knowledgeable, their ability to save is capped by low and unstable incomes, high input costs, and limited formal savings instruments. This aligns with prior evidence in emerging economies (Xu et al., 2023), but our finding diverges in that literacy in Indonesia promotes the decision to save but not the scale. This contradiction with earlier studies suggests that local financial ecosystems—such as weak savings products or mistrust in institutions—are decisive factors (Guja, 2022).

Equally important is the finding that financial literacy significantly increases the likelihood of accessing formal climate credit. Unlike savings, where structural constraints dominate, access to credit depends heavily on awareness, documentation, and compliance, all of which literacy facilitates. Yet, the fact that literacy does not expand the amount of credit obtained reveals another systemic barrier: collateral constraints, bureaucratic limits, and land size restrictions, with average holdings below 0.5 ha. This explains why even middle-income farmers cannot expand borrowing despite being literate. Such findings echo AGW’s emphasis on systemic constraints and highlight that literacy alone cannot overcome structural barriers. The disaggregated analysis further reveals heterogeneity, with middle-income farmers benefiting more from literacy in terms of credit access, likely because they possess collateral or stable income flows to meet lender requirements, while low-income farmers use literacy to strengthen precautionary saving behavior, since credit access remains restricted. This pattern supports Random Utility Theory (RUT), as different groups maximize utility within their feasible choice sets (Toiba et al., 2024). The heterogeneity is therefore not post hoc but reflects structural credit market segmentation: those with assets leverage literacy for borrowing, while those without turn to savings.

Interestingly, savings and credit behaviors also interact. For low-income households, savings serve as a substitute when borrowing is unattainable. For middle-income groups, savings may complement credit, providing liquidity to meet repayment schedules. Although not formally modeled in this paper, these substitution–complementarity dynamics between savings and credit are important and should be explicitly quantified in future research. Beyond individual behavior, policy context matters. Indonesia’s flagship rural financial program—Kredit Usaha Rakyat (KUR Tani)—provides subsidized loans for smallholders but remains underutilized due to lack of awareness and procedural complexity (Gunawan et al., 2021). Our findings imply that financial literacy, when combined with reforms to KUR delivery mechanisms, could substantially increase uptake. Similarly, programs such as kampung iklim could embed literacy modules to build resilience (Gilang Prasetyo, Wahyuni, and Solina, 2022). Without integration into national policy instruments, financial literacy programs risk being too generic to deliver impact.

From a theoretical standpoint, this study shows that financial literacy improves adaptive financial intentions but interacts with systemic and contextual constraints. This reinforces AGW’s perspective that resilience requires more than individual capability—it requires enabling institutions. The policy implications are clear: financial literacy programs must be content-specific, focusing not only on budgeting and numeracy but also on climate-linked products such as insurance, weather-indexed credit, and mobile savings. Delivery should be localized, using trusted channels such as extension services, farmer groups, and local media including radio and WhatsApp groups. Policies must also be differentiated by income group, with middle-income farmers requiring credit-linked training, while low-income farmers need savings-oriented literacy with incentives for small deposits.

The implications for the Sustainable Development Goals should also be interpreted cautiously. While the results contribute to SDG 13 (Climate Action) and SDG 1 (No Poverty), claims regarding SDG 10 (Reduced Inequalities) are limited, literacy improved saving decisions among low-income farmers, but the effect size is modest and not sufficient to quantify distributional impacts. This study is therefore better positioned as a contribution to adaptive capacity rather than direct inequality reduction.

Several limitations should be acknowledged. First, the use of a cross-sectional dataset restricts the ability to make strong causal inferences and does not eliminate the possibility of reverse causality, whereby improved financial outcomes may themselves enhance financial literacy. Second, the financial literacy measure is confined to basic numeracy and does not capture climate-specific literacy dimensions, such as awareness of weather-indexed insurance, credit products, or risk-related variables (e.g., risk perception and trust building). Third, omitted variables, such as social capital and household-specific histories of climate related variables, may bias the estimates and should be considered in future work. Finally, robustness checks—such as alternative instrumental variables, different econometric specifications, or subsample regressions—could not be conducted due to data limitations. Future research should address these gaps by employing panel datasets, incorporating richer behavioral variables, and applying multiple robustness strategies.

Despite these limitations, the study provides novel theoretical and empirical contributions by situating financial literacy within a systemic climate risk and behavioral decision-making framework. While the mechanisms could not be fully disentangled, the results highlight that financial literacy supports adaptive financial behaviors in rural households, yet its effectiveness is conditioned by resource endowments and institutional constraints. Importantly, the findings call for more climate-sensitive and context-specific financial literacy and policy interventions that move beyond generic inclusion programs, thereby empowering smallholders to navigate climate risks more effectively.

This study investigated the role of financial literacy in shaping climate financing behaviors—namely credit access and precautionary savings—among horticultural smallholders in East Java, Indonesia. Grounded in the Anthropogenic Global Warming (AGW) theory and Random Utility Theory (RUT), the results demonstrate that financial literacy significantly improves the likelihood of farmers accessing formal credit and engaging in savings, thereby supporting adaptive financial decisions under systemic climate risks. However, financial literacy does not significantly influence the amount of credit or savings, reflecting structural constraints such as limited collateral, small landholdings, low incomes, and restricted financial product design. This knowledge–behavior gap emphasizes that while literacy improves financial intentions, systemic barriers prevent it from translating into larger-scale financial outcomes.

The disaggregated results further highlight that the impact of financial literacy differs by income group. Middle-income farmers benefit more in terms of credit access, largely because they have collateral or relatively stable income flows, while low-income farmers rely more on savings as an adaptive mechanism in the absence of viable credit opportunities. These patterns reflect structural segmentation in rural credit markets and confirm that financial literacy interacts with existing resource endowments to shape adaptive strategies. Importantly, this differentiation implies that one-size-fits-all interventions are unlikely to be effective in strengthening financial resilience to climate risks.

The study also reveals important complementarities and substitutions between credit and savings. For low-income households, savings substitute for credit when borrowing is inaccessible, while for middle-income farmers, savings may complement credit by providing liquidity for repayments and future investments. This interaction underscores the need for integrated approaches that view credit and savings not as isolated financial actions but as interconnected strategies for climate adaptation.

From a policy perspective, the findings underscore the need to move beyond generic financial literacy campaigns toward tailored interventions that explicitly incorporate climate-sensitive content. Financial education should cover not only basic numeracy and household budgeting but also climate-specific financial products such as weather-indexed insurance, mobile savings, and climate-resilient credit schemes. Delivery channels must be localized through farmer groups, extension services, cooperatives, and accessible digital platforms such as radio or WhatsApp groups, which are trusted and widely used in rural communities. At the same time, national programs such as Kredit Usaha Rakyat (KUR Tani) should be simplified and paired with financial literacy modules to bridge the awareness and procedural barriers that currently limit uptake. Policies should also differentiate by income group, linking credit training to middle-income households with collateral capacity and savings promotion to low-income households where liquidity constraints dominate.

In terms of broader implications, the study contributes directly to SDG 13 (Climate Action) and SDG 1 (No Poverty) by demonstrating how financial literacy enhances adaptive capacity and financial resilience under climate change. However, the contribution to SDG 10 (Reduced Inequalities) should be interpreted cautiously, as the effect size on reducing income disparities through savings among low-income groups is modest and insufficient to quantify distributional impacts. Rather than claiming direct effects on inequality reduction, the study is better positioned as evidence of enhanced adaptive capacity that can indirectly support more equitable resilience pathways.