Socioeconomic determinants of informal financial practices in Afghanistan: barriers to financial inclusion

Abstract

While formal finance and financial inclusion have gained increasing importance worldwide, Afghanistan continues to rely heavily on informal financial mechanisms. Understanding the factors that contribute to financial inclusion in such contexts is crucial, as financial inclusion plays a key role in reducing poverty and promoting economic development. This study examines the socioeconomic factors influencing informal finance, formal finance, and financial inclusion in Afghanistan, with a specific focus on informal borrowing, informal savings, formal borrowing, formal savings, and formal account ownership. Using data from the 2021 Global Findex Database, a nationally representative survey of 1,002 adults in Afghanistan, the study employs probit regression models to analyze how key characteristics such as gender, age, education, income, employment status, rural-urban residence, and mobile phone ownership shape financial behavior. The findings indicate that informal finance in Afghanistan is primarily driven by income disparities, employment status, and rural residence, functioning as a safety net for low-income and rural households. In contrast, financial inclusion and formal finance are primarily determined by the same socioeconomic characteristics, including gender, education, age, and rural residence, while income emerges as an additional determinant of formal financial practices. Although mobile phone ownership does not emerge as a key determinant, it may contribute to financial inclusion by facilitating access to digital financial services. Overall, this study contributes to the literature on financial behavior in low-income economies by identifying the specific socioeconomic determinants of informal finance, formal finance, financial inclusion, and barriers to financial inclusion in Afghanistan, and by offering policy-relevant insights aimed at expanding formal finance, digital financial access, and financial inclusion.