<p>If financial intermediation margins were competitive, there would be no <i>prima facie</i> case for subsidized credit. Using a method that bounds default risk premia, we show that bank intermediation margins are uncompetitive in Kazakhstan. Two evaluations are carried out to determine whether subsidized credit policy in Kazakhstan increased SME value-added and profits. The first uses observational data on individual SMEs, which show that subsidized credit increased SME profits. The second uses regional panel data on SMEs, which shows that subsidized credit increased SME value-added. These evaluations serve as background to a discussion of capital market policy in transition countries such as Kazakhstan, where domestic capital markets are dominated by oligopolistic commercial banks. Second-best theory suggests that positive evaluations do not necessarily justify the continuation of subsidized credit policy. Paradoxically, second-best policy may be inimical to first-best policy, which seeks to remedy the problem of excessive margins of intermediation through capital market reform.</p>