Applying quasi‐static deformation to a dry granular system induces a series of faults. We numerically investigate idealized systems with regular initial arrangements of particles and find that microscopic shear zones develop through a fingering‐like instability before the creation of faults. Considering infinitesimal deformations of the system, we find that this instability is caused by interactions among slips at contact points between particles, which are communicated through the displacement field. © 2004 American Institute of Physics