Credit Creation Process and its Consequences Under Fractional Reserve System

Abstract

This study aimed at discussing the credit creation process and its consequences under fractional reserve system. The study has critically reviewed stakeholder input on the concept relating to the process of creating new credit specifically in developed countries which has been established that private banks can create around nine (9) times of the customers deposit held by them from a mere debit and credit entry of transaction. The study has established that the created credit was not squarely invested into real economic activities as mostly used to purchase the pre-existing asset especially stock and properties which has leads to persistent rise in property prices. It also captures the two major concepts of inflation and interest rate that has negative consequences on household and the economy at large. The study recommends that major stakeholders should work on having a stable and efficient monetary system that will be capable of fostering economic stability through actual economic growth. Such a system should be capable of curtailing credit creation, inflation control, poverty reduction, creation of employment opportunities, housing affordability, inequality control, crime reduction and provision of sustainable economic, environmental and social atmosphere that will trigger better living standard of people and the economy at large.