Credit creation and credit multiplier

Credit  creation   is  the  process   by  which  money   lent  out  by  commercial    banks  using   the  cheque facility  expands  to result  into greater  volume  of credit  than the amount  originally   lent out.  OR.  Credit creation   is the process   of creating new demand deposits   through   lending out excess funds to credit worthy customers by commercial   banks by use of cheques.

Credit (Bank deposit/ Money) multiplier

Credit multiplier (M) is the number of times the initial bank deposits multiply   to give the final bank deposits

Example 1

Calculate the total credit created  when the initial  deposits  are 5,000/=  and the cash ratio  is 5%

Solution

Total final deposit = 20 x 5000 = 100,000/=