A commercial bank can create money by

Step 1: Analyze the question The question asks how a commercial bank creates money (credit creation). It is not asking who issues physical currency.

Step 2: Explain the concept Commercial banks create money through the credit creation process. When people deposit money, the bank keeps only a fraction as a cash reserve (the cash ratio) and lends out the rest. The borrower's loan is credited to their account as a new deposit, so the money supply increases. The process repeats as that money is spent, deposited in another bank, and lent again.

Step 3: Evaluate each option

• A. Issuing currency: Wrong. Only the Central Bank (the CBN in Nigeria) issues currency notes and coins.
• B. Increasing cash ratio: Wrong. A higher cash ratio means the bank must keep more in reserve and can lend less, which reduces money creation.
• C. Issuing cheque: Wrong. A cheque is only an instrument customers use to transfer money they already have in their accounts. It does not create new money by itself.
• D. Lending to borrowers: Correct. Loans and overdrafts create new deposits, which expands the money supply.

Step 4: Answer The correct option is D. lending to borrowers.

Exam tip: Remember "Loans create deposits." Whenever you see "commercial bank" and "create money", think of lending (credit creation). If you see "issue currency", think of the Central Bank. Also remember that the lower the cash ratio, the more money banks can create.