The impact of the banking sector development on the financial performance of the communication sector in sierra leone

3.3.2 Fractional Reserve Theory of Banking 
Fractional Reserve theory asserted that banks must not lend all the fund 
mobilized from savers and must reserve a certain portion. The theory further 
stated that, banks are required to keep in cash in hand certain amount of 
depositor’s fund and must not keep all. Regulators does impose ceiling to the 
nature of reserve to be held in accordance to the level of deposits held in order 
to provide cushion for depositor’s withdrawal as the need arises. The central 
government uses fractional reserve as a tool to implement monetary policies. 
Banks are considered to be money multipliers in relation to the fractional 
reserve theory. According to Werner (2014a, pp. 4
–6 cited in (Ravn, 2019)) 
many writers on banking have argued that this view is incorrect. Banks do not 
merely recirculate extra money. However, banks are able create new money 
by lending and relending savers deposits whiles retaining only a fraction in 
reserves. 
The banking theory of fractional reserve embraces the view that, deposits 
injected into the banking system would results in a multiple expansion of more 
deposits and is refer to the “miracle of the fractional reserve system”. The 
theory makes it clear that, no individual bank can create multiple deposits when 
there exist many banks and also individual banks may not recognize the role, 
they played in the creation of multiple deposit process. They only recognized 
that they can able to make more loans in respect on an increase in deposit. 
The fractional reserve banking system provides a special relationship with 
depositors as interest are paid on their deposits instead of the bank charging 
interest for their services in case where this system is non-existence. The 
system allowed banks to earn revenue by making effective use of depositor’s 
money and share the interest received from borrowers with the depositors. 

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