What is money creation?
Many people think a bank simply takes savers’ money and lends it to others. The real process is a little different. When a bank makes a loan, it writes a new balance into the borrower’s account. Nobody else’s balance goes down, yet the economy now has more deposits to spend. That new deposit is money too.
The Bank of England said this plainly in a 2014 publication: in the modern economy, most money is created by commercial banks making loans. The reverse is also true: when a loan is repaid, that money is “wiped out” again.
Say Karim takes a Tk 5 lakh bank loan to buy a pickup van. The bank shows Tk 5 lakh in his account. Nobody’s deposit went down, but the money available to spend in the country rose by Tk 5 lakh. When Karim pays the van dealer, it moves to the dealer’s account, but the total stays the same. The numbers and story are made up.
Why it matters to an investor
- To understand inflation: when lending grows very fast, the money supply grows fast too. If goods do not keep up, prices come under upward pressure.
- To understand why the central bank moves rates: through the policy rate it changes the cost of borrowing, and so influences how much new money gets created.
- To recognise a credit boom: when loans and money grow very fast together, asset prices often swell too, and a correction can follow.
- To read the numbers in the news: knowing what “broad money”, “reserve money” and “private sector credit growth” mean makes economic news much clearer.
Two kinds of money
The first is central bank money: notes and coins, plus the reserves banks hold at Bangladesh Bank. Its total is called reserve money. The second is bank money: the balances in your savings, current and fixed deposit accounts. Notes plus all deposits make up broad money, or M2.
By Bangladesh Bank’s figures, broad money was about Tk 22.2 lakh crore at the end of November 2025. Of this, cash held outside banks was about Tk 2.69 lakh crore, only around 12%; the remaining 88% or so was bank deposits. In June 2026 the share of cash outside banks was about 14%. In other words, most of the country’s money is numbers in banks’ books.
Source: Bangladesh Bank, Selected Economic Indicators
See the numbers as a table
| Cash outside banks | Bank deposits | |
|---|---|---|
| Broad money | 12 | 88 |
The money multiplier: textbook and reality
Textbooks often show it like this: a bank keeps part of each deposit as reserves and lends the rest, that loan is deposited somewhere else, and round it goes until the money has multiplied several times. This is the money multiplier. Bangladesh Bank publishes this ratio (broad money ÷ reserve money); in November 2025 it was 5.48.
The Bank of England says that in practice the order is often the reverse: the bank lends first, creating a deposit, and then finds the reserves it needs. The central bank controls the “price” of reserves, the policy rate, more than their quantity. So the multiplier is better seen as a measure of the outcome than as a mechanical rule.
What keeps money creation in check
- Profit and risk: a bank wants to lend only to borrowers it expects to repay. Bad loans are the bank’s own loss.
- Demand for loans: when rates are high or the future is uncertain, people and businesses borrow less.
- Rules: capital requirements and rules such as the CRR and SLR stop banks lending without limit. For example, when the CRR was cut from 5% to 4% in April 2020, banks were expected to gain about Tk 12,800 crore of extra liquidity.
- Central bank policy: raising the policy rate makes loans dearer and slows money creation; cutting it does the reverse.
Worked example
- Start by assuming the country’s total money (notes + deposits) is 1,000 units. The numbers are only an example.
- The bank lends Karim 5 units, putting 5 units of new deposit in his account. Total money is now 1,005.
- Karim pays the van dealer 5 units. Money moves from one account to another; the total is still 1,005.
- Some years later Karim repays the 5 units of principal. His deposit falls by 5 units and the loan is closed. Total money is back to 1,000.
Result: lending creates money and repayment destroys it. So if new lending grows faster than repayments, the money supply grows; if not, it shrinks.
Common mistakes
- Thinking a bank simply passes savers’ exact money on to borrowers, and no new money is created.
- Thinking all money is printed by the government or central bank. It does print the notes, but most money is bank deposits.
- Thinking more money means a richer country. If goods and services do not grow, extra money just pushes up prices.
- Assuming banks can create unlimited money at will. Profit, risk, regulation and central bank policy keep it in check.
Most of a country’s money is bank deposits, created when banks lend and destroyed when loans are repaid. The central bank steers the pace through interest rates.