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SS1: ECONOMICS - 3RD TERM

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  1. Mining | Week 1
    3 Topics
    |
    1 Quiz
  2. Financial Institution I | Week 2
    7 Topics
    |
    1 Quiz
  3. Financial Institutions II | Week 3
    5 Topics
    |
    1 Quiz
  4. Financial Institutions III | Week 4
    5 Topics
    |
    1 Quiz
  5. Business Organisation | Week 5
    3 Topics
  6. Money | Week 6
    5 Topics
    |
    1 Quiz
  7. Channels of Distribution I | Week 7
    5 Topics
    |
    1 Quiz
  8. Channels of Distribution II | Week 8
    6 Topics
    |
    1 Quiz
  9. Business Finance | Week 9
    7 Topics
    |
    1 Quiz



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The creation of money by commercial banks is also known as “the multiple expansion of bank deposit”. This means that the banking system as a whole can create deposits equal to a multiple of the reserves that it acquires.

Commercial banks accept current deposits which they hold as the base on which they erect their ability to create, it should be noted that a single bank cannot create money unless it is a monopoly bank with branches.

Commercial banks know from experience that not all customers will withdraw their money at the same time. So they keep the reserve that they know will be enough to meet the demand of their customer for cash. In most cases, the central bank determines the legal reserve ratio. The banks, having met the legal reserve ratio, are free to lend the rest of their deposits to businessmen with interest on each loan.

Limitation of Money Creation:

The following are the factors that limit the ability of commercial banks to create deposits;

1. The legal reserve ratio (cash ratio) by commercial banks depends on the legal reserve requirement. If it is high less amount of credit will be created and vice versa. The central bank can change it depending on the kind of monetary policy it is pursuing.

2. Leakage of cash out of banking system, e.g too much withdrawal: If there is leakage of cash out of the banking system the amount of money created will be reduced.

3. Keeping excess reserves: If banks keep excess reserves above the legally required reserves then the process of credit creation will be disturbed. 

4. Lack of collateral securities causes the amount of credit created to be limited. In West Africa, most people do not have the collateral securities with which to borrow. This affects money creation.

5. Willingness of people to take loans.

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