How Banks create Money?

how banks create money

John deposited some amount of money in the bank. Let's see how his money travels.

To the deposited amount of money, the bank gives John a small amount of interest (1%).

The bank gives out loans at a higher interest rate i.e. 5% to other people using the same deposit.

Profit made by bank = Incoming Interest - Interest Expense

5% - 1% = 4% income Expense Profit

To keep John's money safe so that he can take it out whenever he wants, his bank uses a Fractional Reserve Banking system.

It states that the bank needs to hold a fraction of deposit in cash and can loan out the rest.

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