Suppose a typical small open economy in a developing country is characterized by: a. The Central Bank has set a required reserve ratio of 7.5 % for the entire banking system. b. There are five (5) Banks in this simple banking system, BANK A, BANK B, BANK C, BANK D and BANK E. c. BANK A has an initial deposit of Ksh. 20,000 and makes a provision of 2.5% to retain additional reserves. A customer also presents a cheque of Ksh 2,000, which is honored. A Customer who is advanced money from Bank A keeps aside 5% of the advance for his personal use. d. Bank B also makes a provision of 2.5% to retain additional reserves. A customer also presents a cheque of Ksh 1,430, which is honored. A Customer who is advanced money by Bank B keeps aside 10% of the advances for personal use. e. The government through the Central Bank injects an additional Kshs. 10,000 into the banking sector through Bank C and bank D to support the Banking Sector, so that each receives 50 percent of this injection. The Central Bank also reviews the required reserve ratio and lowers it by 20 percent. f. Bank C makes a provision of 5% to retain additional reserves. A customer who is holding a cash of Ksh 2000, decides not to deposit it and another customer who had deposited a cheque of Ksh 1000 with bank C has it dishonored. A Customer who is advanced money by Bank C keeps aside Ksh. 2,000 for personal use. g. Bank D also makes a provision to retain 10% as additional reserves. It also sets aside Ksh 3000 to pay dividends to its shareholders. A Customer who is advanced money by Bank D keeps aside 5% for his personal use. h. Bank E makes a provision to retain additional 10% as reserves. A customer also presents a cheque of Ksh 2,000, which is honored. It also sets aside Ksh 2500 to pay dividends to its shareholders. Required: Identify with reason in this case any six (6) factors that would limit Credit Creation in this Banking system
Suppose a typical small open economy in a developing country is characterized by:
a. The Central Bank has set a
b. There are five (5) Banks in this simple banking system, BANK A, BANK B, BANK C, BANK D and BANK E.
c. BANK A has an initial deposit of Ksh. 20,000 and makes a provision of 2.5% to retain additional reserves. A customer also presents a cheque of Ksh 2,000, which is honored. A Customer who is advanced money from Bank A keeps aside 5% of the advance for his personal use.
d. Bank B also makes a provision of 2.5% to retain additional reserves. A customer also presents a cheque of Ksh 1,430, which is honored. A Customer who is advanced money by Bank B keeps aside 10% of the advances for personal use.
e. The government through the Central Bank injects an additional Kshs. 10,000 into the banking sector through Bank C and bank D to support the Banking Sector, so that each receives 50 percent of this injection. The Central Bank also reviews the required reserve ratio and lowers it by 20 percent.
f. Bank C makes a provision of 5% to retain additional reserves. A customer who is holding a cash of Ksh 2000, decides not to deposit it and another customer who had deposited a cheque of Ksh 1000 with bank C has it dishonored. A Customer who is advanced money by Bank C keeps aside Ksh. 2,000 for personal use.
g. Bank D also makes a provision to retain 10% as additional reserves. It also sets aside Ksh 3000 to pay dividends to its shareholders. A Customer who is advanced money by Bank D keeps aside 5% for his personal use.
h. Bank E makes a provision to retain additional 10% as reserves. A customer also presents a cheque of Ksh 2,000, which is honored. It also sets aside Ksh 2500 to pay dividends to its shareholders.
Required:
Identify with reason in this case any six (6) factors that would limit Credit Creation in this Banking system.
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