Fractional reserve banking is the foundation of modern banking. In this system, banks keep only a fraction of their customers' deposits as reserves and lend out the rest. The goal is to increase money supply in the economy and encourage economic activity.
When you deposit money in a bank, the bank doesn't lock it all away in a vault. Instead, it keeps a small portion (determined by the central bank's reserve ratio) and lends the rest to other customers.
For example: If you deposit 100 taka and the reserve ratio is 10%, the bank keeps 10 taka in reserve and can lend out 90 taka. When that 90 taka is spent and deposited in another bank, that bank also keeps 10% (9 taka) and lends out 81 taka. This chain continues, and from your original 100 taka deposit, the banking system eventually creates up to 1,000 taka in total money supply. This multiplication effect is called the money multiplier.
In Bangladesh, Bangladesh Bank sets the Cash Reserve Requirement (CRR) for commercial banks, currently around 4-5%. This means banks must keep 4-5% of their total deposits with Bangladesh Bank and can lend out the remaining 95-96%. This system enables banks to serve as engines of economic growth by channeling savings into productive loans.