Association for Public Policy Analysis & Management

The phrase ``nothing can be said to be certain, except death and taxes'' has become one of the most succinct aphorisms for summing up the singular characteristic of modern market democracies. This idea that citizens must add to the national purse by paying taxes has an antecedent: credit. However, because credit is narrowly construed, it has not acquired the inevitability of death and taxes.

In this paper, I examine the vital role that bank credit plays in the governance of market democracies. Focusing on bank credit as a channel of monetary policy and risk transfer, I distinguish between prime and subprime credit instruments as alternative, often antagonistic, ways of directing the operation of market economies.

More specifically, I am seeking to conduct a regulatory impact assessment (RIA) of the move toward tighter regulatory supervision of the credit industry. I develop an agent-based computer simulation as an advanced ex-ante tool for conducting this RIA in a formal and quantified way.

I hypothesize that the organic evolution of the credit industry, because traditional institutions prove to be an unreliable source of credit to the rural and SME sectors of the economy, has been stymied by the strategy of emulating the macroprudential regulatory policies of the formal enterprise sector. I test the hypothesis using the microcredit industry of Kenya after watershed years for the industry in 2005/06. My findings suggest that a more risk-tolerant paradigm for the microcredit industry is indeed likely to lead to sustained positive impacts.