We consider instability of the flat interface in a two-layer Couette flow model developed earlier (Kalogirou & Papageorgiou, 2016, J. Fluid Mech. 802, 5–36; Katsiavria & Papageorgiou, 2022, Wave Motion 114, 103018. (doi:10.1016/j.wavemoti.2022.103018)) for a thin layer near one of the walls. For the case when the less viscous fluid resides next to the moving wall, we find that even a small slip effect at the interface can destabilize an otherwise highly stable flow to the Turing-type instability. The singular effect of small slip in an otherwise very stable configuration may have important ramifications in physical and technological applications. The neutral points of the dispersion relation give rise to travelling wave solutions that are continued to finite amplitude numerically and their linear stability properties identified for a set of parameter values for disturbances that include subharmonic modes with twice the wavelength of the nonlinear travelling wave. We determined Hopf and regular bifurcation points of travelling waves and rigorously justified their existence for some set of parameter values. Weakly nonlinear analysis close to bifurcation from a flat state is also presented for small amplitude waves in general. We also present global existence and regularity results for periodic initial conditions without any restriction on parameters.