The impact of religiosity and financial literacy on financial management behavior and well-being among Indonesian Muslims

The study addresses how religiosity and Islamic financial literacy shape financial behavior and well-being among Muslims in Indonesia. It is motivated by the rapid growth of the global Islamic finance market (valued at $3.96 trillion in 2022/2023 and projected to reach $5.94 trillion by 2024/2025) and prior evidence that religiosity and financial literacy influence savings, investment decisions, and well-being. Islamic economics emphasizes maqasid al-shariah (preservation of faith, self, intellect, progeny, and wealth), with Sharia guiding ethical economic conduct, contradicting prior claims that Islam negatively relates to pro-growth attitudes. The research gap lies in understanding the interplay between religiosity (centrality of religiosity), Islamic financial literacy, and their joint effects on financial management behavior and financial well-being, considering sociodemographic moderators. The study integrates Rational Choice Theory, Rational Choice Theory of Religion, and Behavioral Finance to explain how utility maximization within religious constraints and psychological biases shape Muslim financial decisions. It aims to inform financial education, policy, and Sharia-compliant product development to improve Muslim consumers’ financial outcomes.

The literature review integrates three lenses: (1) Rational Choice Theory (RCT) posits utility-maximizing decisions under stable preferences and full information; applied here, Muslims with Islamic financial literacy rationally select Sharia-compliant products that also optimize economic outcomes. (2) Rational Choice Theory of Religion suggests religious engagement is driven by cost-benefit evaluations to maximize spiritual and social rewards; thus, religiosity can influence financial choices aligned with religious benefits. (3) Behavioral Finance highlights psychological biases, emotions, identity, and sociocultural factors that deviate from pure rationality; in Islamic contexts, preferences for Sharia-compliance may outweigh higher returns from conventional products. Centrality of Religiosity (CRS) is conceptualized across five dimensions: intellectual, ideology, public practice, private practice, and religious experience. Islam centrally guides economic conduct (e.g., avoidance of extravagance and riba), motivating the hypotheses: H1: Centrality of religion positively impacts financial management behavior. H2: Centrality of religion positively impacts financial well-being. Islamic financial literacy is defined as knowledge, skills, and attitudes to manage finances per Islamic principles (prohibiting riba, gharar, maysir). It enables informed selection of Sharia-compliant products and moderation in spending, leading to: H3: Islamic financial literacy positively impacts financial management behavior. H4: Islamic financial literacy positively impacts financial well-being. A research framework links centrality of religiosity and Islamic financial literacy to financial management behavior and financial well-being.

Design and data collection: Cross-sectional online survey conducted May–June 2021 using non-probability sampling. Sample: 1,141 Muslim individuals in Indonesia, aged 18–65. Demographics included gender, cohort (Gen Z, Millennials, Gen X, Baby Boomers), location, education, and income. Measures: Centrality of religion measured using the Centrality of Religiosity Scale (CRS; Huber & Huber, 2012) capturing intellect, ideology, public practice, private practice, and religious experience. Islamic financial literacy measured using the Basic Islamic Financial Literacy instrument (Antara et al., 2016), focusing on knowledge of riba, gharar, and maysir. Financial management behavior measured with adapted items from Strömbäck et al. (2017); items referencing conventional credit cards were removed due to riba. Financial well-being measured via financial anxiety and financial security dimensions from Strömbäck et al. (2017). All instruments used a 6-point Likert scale (strongly disagree to strongly agree). Analysis: Structural equation modeling (SEM) with AMOS to test hypothesized paths and model fit; reliability and validity assessed (Cronbach’s alpha, composite reliability, AVE). Additional analyses using SPSS: t-tests (gender) and one-way ANOVA (cohort/age, education, income) with post-hoc comparisons. Model fit indices: CMIN/df = 4.559, CFI = 0.865 (marginal fit), TLI/NNFI = 0.844 (marginal fit), RMSEA = 0.056 (acceptable). Reliability/validity: Composite reliabilities ranged 0.757–0.858; AVE was acceptable overall though some factors were slightly below 0.50, supported by adequate CR. Item deletions were applied to ensure Sharia compliance.

SEM path results (all supported): • Centrality of religiosity → Financial management behavior: β = 0.074, SE = 0.013, CR = 2.095, p = 0.036. • Islamic financial literacy → Financial management behavior: β = 0.211, SE = 0.039, CR = 3.597, p < 0.001. • Centrality of religiosity → Financial well-being: β = 0.146, SE = 0.040, CR = 2.998, p = 0.003. • Islamic financial literacy → Financial well-being: β = 0.286, SE = 0.120, CR = 3.502, p < 0.001. Islamic financial literacy shows a stronger effect than religiosity on both outcomes. Gender t-tests: No significant gender differences in centrality of religiosity (p = 0.568) or financial management behavior (p = 0.198). Significant differences favoring males for Islamic financial literacy (male mean 3.540 vs female 3.050; p = 0.001), lower financial anxiety (male 2.916 vs female 3.087; p = 0.001), and higher financial security (male 3.396 vs female 3.168; p = 0.001). Cohort ANOVAs: Significant differences across cohorts for all variables. Older cohorts (Gen X + Baby Boomers) exhibit higher centrality of religiosity, better financial management behavior, lower financial anxiety, and higher financial security than younger cohorts. Gen Z shows higher Islamic financial literacy than the oldest group (p = 0.032). Education ANOVAs: No significant differences in religiosity or Islamic financial literacy across education levels. Tertiary education is associated with better financial management behavior (secondary vs tertiary MD = -0.182; p = 0.001), lower financial anxiety, and higher financial security vs secondary education (p = 0.001). Income ANOVAs: No differences in centrality of religiosity by income. Higher income is associated with higher Islamic financial literacy (all pairwise differences significant), better financial management behavior, lower financial anxiety (lowest income vs moderate MD = 0.347; p = 0.001; vs highest MD = 0.411; p = 0.001), and higher financial security (lowest vs moderate MD = -0.368; p = 0.001; lowest vs highest p = 0.001). Additional insight: Among religiosity dimensions, private practice emerged as most salient, followed by ideology and religious experience.

Findings show both centrality of religiosity and Islamic financial literacy positively shape financial management behavior and financial well-being, with Islamic financial literacy exerting the stronger influence. This aligns with RCT: Muslims with greater knowledge of Islamic finance rationally choose behaviors and products that maximize utility under Sharia constraints, improving financial outcomes. The positive link between religiosity and well-being is consistent with the Rational Choice Theory of Religion, suggesting spiritual and social rewards accrue from aligning financial behaviors with religious principles, thereby lowering anxiety and bolstering security. Behavioral Finance helps explain gender and generational patterns: despite similar religiosity and financial management behavior by gender, men report higher literacy and well-being indicators, potentially reflecting differing socialization or psychological factors. Younger cohorts, though more financially literate in Islamic finance, show higher financial anxiety and lower financial security, suggesting psychological factors (e.g., future outlook, risk perceptions) and life-cycle effects may mediate how literacy translates into well-being. Education and income enhance financial management behavior and well-being, consistent with increased resources and knowledge facilitating utility-maximizing choices. The salience of private religious practice suggests personal devotion (e.g., prayer) may be a key channel linking religiosity to financial outcomes through enhanced self-control, moderation, and adherence to Sharia-compliant financial norms.

The study demonstrates that greater centrality of religiosity and higher Islamic financial literacy are associated with better financial management behavior and improved financial well-being among Indonesian Muslims, with literacy having the stronger effect. Socioeconomic factors matter: men report higher Islamic financial literacy and well-being; older cohorts show higher religiosity, better financial behavior, and well-being; tertiary education and higher income levels are linked to superior financial outcomes. Theoretically, integrating Rational Choice Theory, Rational Choice Theory of Religion, and Behavioral Finance provides a nuanced framework for understanding Muslim financial behavior. Practically, enhancing Islamic financial literacy through education by religious teachers, Islamic economics scholars, and financial institutions can improve financial security and reduce anxiety. Future research should employ longitudinal designs, broaden samples across diverse Muslim communities, examine additional religiosity dimensions and advanced financial literacy constructs, elucidate mechanisms linking religiosity and literacy to outcomes, and test interventions to improve Islamic financial literacy and financial well-being.

- Cross-sectional design limits causal inference. - Non-probability sampling of Indonesian Muslims may limit generalizability across broader Muslim populations. - Reliance on self-reported measures introduces potential response and social desirability biases. - Socioeconomic controls may omit relevant variables influencing financial decisions and outcomes. - Islamic financial literacy measured at a basic level; advanced literacy dimensions were not assessed.