The role of financial literacy in climate mitigation: The case of central Colombia

Abstract

Understanding how financial literacy shapes borrowing decisions in the face of climate shocks is crucial for enhancing farmers’ resilience, ensuring food security, and reducing rural poverty. This study investigates how financial literacy influences the borrowing behavior of farmers in central Colombia when facing adverse weather events such as landslides and droughts. Using a mixed-methods approach, we analyze survey data from 360 farms through logit regressions, assessing financial literacy across four key components and examining loan sources. Qualitative interviews with the same sample complement the analysis, providing deeper insights into farmers’ decision-making processes. Drawing on prospect theory, we incorporate perceived risks into our framework to better explain borrowing behavior. The results show that financially literate farmers are more likely to take loans, including those from non-financial sources. However, among financially literate farmers, older individuals are less likely to borrow from non-financial lenders. Additional factors, such as risk attitude and financial constraints, also play a significant role. Interviews reveal that farmers prioritize subjective perceptions, such as convenience, trust, and speed, when choosing non-financial lenders. These findings underscore the importance of financial literacy programs tailored to farmers’ risk perceptions and borrowing preferences, offering valuable insights for policymakers seeking to improve credit access and climate resilience in rural communities.