Toward A Risk-Tolerant Paradigm in Microcredit: Modeling the Case of Kenya



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Following the United Nations declaration of 2005 as the International Year of Microcredit, international organizations began to promote a tighter regulatory and supervisory framework for the microcredit industry. In this dissertation, I review the theoretical basis of this development in light of the recent empirical findings that microcredit programs tend to have initial success yet demonstrate few significant effects that persist after two years. I explore the hypothesis that a more risk-tolerant paradigm for the microcredit industry would lead to more sustained positive impacts for microcredit. I utilize an integrated, dynamic, micro-macro, agent-based simulation as an ex-ante policy assessment tool. I test the hypothesis for Kenya with possible application to other developing countries and regions. My findings suggest that a more risk-tolerant paradigm using digital credit (understood to mean mobile phone-based loans that are instant, automated, and remote) for the microcredit industry is indeed likely to lead to more sustained positive impacts.