Bank liquidity creation is a fundamental function of financial intermediation, transforming illiquid assets into liquid liabilities to support economic activity. While essential for economic growth, an excessive or insufficient level of liquidity creation can pose significant risks to financial stability. This article investigates the potentially non-linear relationship between bank liquidity creation and financial stability, with a particular focus on the moderating role of institutional quality within African economies. Leveraging a comprehensive review of existing literature, this study conceptualizes how various dimensions of institutional quality—such as control of corruption, rule of law, government effectiveness, and regulatory quality—can influence the nature and strength of this relationship. We posit that a curvilinear association exists, where optimal liquidity creation fosters stability, but deviations (either too little or too much) can lead to fragility. Furthermore, we argue that robust institutional frameworks can mitigate the adverse effects of extreme liquidity creation, fostering a more resilient financial system. This analysis provides critical theoretical insights for policymakers and regulators in African contexts, emphasizing the need for prudential regulation tailored to specific institutional environments to promote sustainable financial development and stability.