| By creating credits we mean the process whereby | | | | protect customer's deposits and prevent bank crisis. |
| commercial banks, make it possible for more deposits | | | | This percentage of cash ratio banks will keep is fixed |
| to be made through loan and this process of creating | | | | by the central bank, and varies from one country to |
| credits is also called creation of money or money | | | | another. Assuming the central bank fixes 10% as the |
| creation. By granting loans to their customers, | | | | cash ratio, it then means that for every deposit a bank |
| commercial banks increase the purchasing power of | | | | receives, 10% of the deposit must be kept in the bank |
| the borrower and also increase the volume of money | | | | while the remaining 90% can be given out as a loan or |
| in circulation. Commercial banks use current account | | | | overdraft by the bank. This 10% cash ratio is kept or |
| as basis of creating credit or money. However, it is not | | | | reserved with the bank in order for the bank to meet |
| possible for one commercial bank to create credit or | | | | up with customer's withdrawals. There are other |
| money. For credit or money to be created, the entire | | | | methods by which commercial banks generate credit, |
| banking system, will have to be involved. | | | | for example the death of a customer, by government |
| Commercial banks are required by law to keep certain | | | | policies, by the sale of receipts and treasury bills, and |
| percentage of their deposits with them. This | | | | also by selling shares to customers and the entire |
| percentage kept with them is known as Cash ratio or | | | | public. |
| Liquidity ratio or Cash reserve. This is done in order to | | | | |