Credit creation is the process through which banks generate new credit in the economy. It begins when a bank receives deposits from customers. Banks are required to keep a fraction of these deposits as reserves, known as the reserve requirement. The remaining amount can be lent out to borrowers. When a bank issues a loan, it does not physically hand over the deposited money; instead, it credits the borrower’s account, effectively creating new money. This process multiplies as loans are redeposited and re-lent, leading to an overall increase in the money supply in the economy, which stimulates economic activity and growth.