Employee Behavior, Emotional Factors, and Financial Performance: The Moderating Role of Islamic Financial Literacy among Indonesian MSMEs

Background/ problem: The micro, small, medium enterprises (MSME) owners in Central Java, Indonesia, face financial challenges and emotional strain due to economic uncertainty and limited financial literacy. This increases the risk of burnout and reduces productivity, hindering business growth. Exploring how Islamic financial literacy could aid in managing these pressures may bridge a critical knowledge gap. Objective/ purpose: This study examines the impact of financial anxiety, counter productive work behavior, and emotional exhaustion on the financial performance of MSMEs, with Islamic financial literacy as a moderating variable and emotional exhaustion as mediating variable. Design and Methodology: This research was conducted in Central Java, Indonesia, among 287 MSME owners. Data were collected by distributing questionnaires online or face-to-face directly with respondents. Data were analyzed using structural equation modelling. Results: Financial anxiety significantly affected emotional exhaustion (β = .45, p = .01). Counterproductive behavior significantly affected emotional exhaustion (β = .38, p = .05). Islamic financial literacy moderates the impact of financial anxiety on emotional exhaustion (β = -.22, p = .03). It also moderates the effect of financial pressure on emotional exhaustion (β = -.30, p = .02). Financial anxiety negatively impacts MSME financial performance (β = -.50, p = .01). Emotional exhaustion negatively affects MSME performance (β = -.40, p = .04) Conclusion and Implications: Islamic financial literacy can reduce financial anxiety and emotional exhaustion among MSME owners, highlighting how culturally relevant financial knowledge supports resilience under economic pressure. Behavioral scientists can use these insights to develop values-aligned financial education and stress management interventions, strengthening MSME owners' financial resilience and decision-making in high-stress contexts, ultimately fostering long-term stability and growth.