Explaining Tajikistan’s Divergence: Financial Inclusion and Digital Payment Trends amid COVID-19

Abstract

This paper reviews the changing dynamics of financial inclusion in Tajikistan from 2017 to 2024, considering the pandemic shock as well as the recovery that followed. Based on harmonized World Bank Global Findex microdata for the years 2017, 2021, and 2024, it estimates Logit, Probit, and Linear Probability Models, supplemented with Oaxaca-Blinder decompositions for the subperiods 2017-2021 and 2021-2024. The analysis considers whether changes in account ownership and the use of digital payments result from shifts in population characteristics, like, in education, income, employment, or digital access, or from structural and institutional factors in the financial system. The results reflect a nonlinear pattern. Between 2017 and 2021, overall account ownership declines even as education, labor-force participation, and mobile phone penetration rise. Decomposition results indicate that this decline is not driven by less "favorable" population characteristics but by changes in coefficients: the traditional drivers of account ownership (income, employment, and age) lose explanatory power, and increased digital access does not lead to greater use of accounts. By contrast, between 2021 and 2024, account ownership and digital payment use rise sharply. Again, this gain is due mostly to coefficients rather than endowments, suggesting that the financial system begins to convert similar characteristics, mostly links to wages, pensions, and remittances, and phone and internet access, into higher probabilities of inclusion. Thus, together these findings depict a specific "Tajikistan paradox" that evolves over time: one characterized by a first phase of more access, but interestingly, lower use around 2021, followed by a recovery when institutional means of payment and digital infrastructure begin to reinforce each other. Evidence underlines that expanding physical and digital infrastructures is a necessary but not sufficient condition. Sustainable progress towards financial inclusion requires reforms that divert accounts and digital services into meaningful transactions and visibly demonstrate their benefits.