The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking

assets in payment for the check to the presenting bank (Bank B). Bank A

will also strike the $9,000 demand deposit liability carried for the bor-

rower from its books. Thus, after check clearance, Bank A has $10,000

in assets and $10,000 in liabilities. Note, however, that the composition

of its assets has changed. Before the loan, it had $10,000 in cash assets;

now it has $1,000 in cash assets and $9,000 in loan assets. The $1,000

in cash assets meets the assumed 10 percent reserve requirement ratio

against transaction account liabilities. See Exhibit 5.2.

4.The $9,000 in deposit created by Bank A is now a demand deposit on

the books of Bank B, increasing that bank’s liabilities. Bank B also re-

ceived a transfer of $9,000 in cash assets when it received payment for

the check deposited by the manufacturing company. Bank B, subject to

the same 10 percent reserve requirement as Bank A, must keep $900

(10 percent) against the deposit, but can use the remaining $8,100 to

support a new loan and the creation of a new $8,100 deposit.

5.When Bank B makes the $8,100 loan, its assets and liabilities will in-

crease initially and then decline to their pre-loan level in response to the

collection of the borrower’s check. Assume that the borrower writes a

check for the loan amount to pay for a corporate service and that the

corporation deposits the check in its account in Bank C. Bank B’s newly

created $8,100.00 will now reside as a liability in Bank C, together with

the $8,100 in cash assets Bank B had to transfer in payment for the

check. (See Exhibit 5.3.)

EXHIBIT 5.2 Assets and Liabilities for Banks A and B

Bank A Assets Liabilities Bank B Assets Liabilities

Cash
Assets

$1,000 Demand

Deposit

$10,000 Cash

Assets

$9,000 Demand

Deposit

$9,000

Loan $9,000

Required reserves $900—excess over reserves $8,100.

EXHIBIT 5.3 Assets and Liabilities of Banks B and C

Bank B Assets Liabilities Bank C Assets Liabilities

Cash
Assets

$9,000 Demand

Deposit

$9,000 Cash

Assets

$8,100 Demand

Deposit

$9,000

Loan $8,100

Required reserves $810—excess over reserves $ 7,290.

Money and Its Creation 95