Financial literacy and financial performance of rice farmers in East Java, Indonesia: a two step predictor substitution approach

The objective of this study is to examine the impact of financial literacy on the financial performance of rice farmers in Indonesia. Data were collected through a structured questionnaire survey involving 405 farmers, and analyzed using two different methods, two-stage residual inclusion (2SRI) and two-stage predictor substitution (2SPS), to address the potential endogeneity problem. In the first stage, Tobit regression was applied to identify the determinants of financial literacy, while in the second stage, ordinary least squares (OLS) was used to assess its effect on farmers’ financial performance. The results show that financial literacy is positively influenced by education, participation in extension activities, availability of subsidy, proximity to financial institutions, and participation in finance-related training. In contrast, household size has a negative impact on financial literacy. Furthermore, enhanced financial literacy significantly improves farmers’ financial performance. These findings underscore the importance of targeted financial literacy programs for farmers, contributing to the achievement of the United Nations Sustainable Development Goals, specifically SDGs 1 (No Poverty), SDG 2 (Zero Hunger), and SDG 4 (Quality Education).