Examine the factors limiting credit creation in your country.
- Lack of Cash: The total amount of cash, available to the banking system limits the volume of credit that can be create
- Many people have inadequate securities to secure loans leading low credit creation.
- Poor banking habits of the people: few people are in the habit of using cheques, the grant of loans leads to the withdrawal of cash from the credit creation stream of the banking system. This reduces the power of banks to create credit to the desired level
- Unfavorable policies of the central bank. The high reserve ratio set by central bank limits them from creating more credit.
- Excess reserves: some banks keep more cash in reserves than the legal reserve requirements; this limits their power to create credit.
- Delayed clearance of cheques limits expansion of reserves of the commercial banks and their ability to create credits
- Large subsistence sector, whose output doesn’t pass through the market but instead passes through barter system, this limit demand for money and borrowing.
- High liquidity preference; people prefer to hold wealth or assets in cash or near cash form than saving with commercial banks. Hence limit total deposit and lending
- Existence of many banks. The various commercial banks compete for customers which tend to limit the creation of credit in individual commercial banks.
- Uneven distribution of commercial banks. Commercial banks are concentrated in urban areas which limit credit creation process to small section of urban people.
- Political instability discourages potential investors leading to low demand for money hence limited credit creation.
- High bank and interest rates. The high bank rate limit central banks from borrowing and hence limits the process of credit creation
- Limited profitable ventures that discourage potential investors form investing. This cause low demand for money hence limited credit creation
- Persistent inflation which discourages commercial banks from lending and leads to low credit creation
CATEGORIES Economics
TAGS Dr. Bbosa Science
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