History and origin of banking

Last Updated on April 7, 2021 by admin


There have been many accounts on the origin of banking in the world. Many people view banking in terms of its usefulness and functionality in modern societies. If you are looking at it that way, you may not get the full ideas behind its origin.There are clearer historical roots of banking that can give us a better understanding of the banking system today.

Banking has not always been in existence. Its origin can be traced to some ancient civilizations and progress in human societies that made doing business easier for people at that period in history. It is the advancement of trade and economy that brought about the need for banking. This advancement was sustained until we arrived at the current way of banking.

Societies have often exchanged goods and services through money and other means since ancient times.But money does not regulate itself. When left to the global market, the value of a currency can be destroyed. That is why understanding the origin of banking as we have it today is very important.

Banking first began in a form known as prototype banking. People that were involved in trading goods and services in the early times used the prototype kind of banking.

It has its origin in ancient Assyria, Inda and Samaria, and many parts of the ancient world as long as 2000 BC. The merchants in these places gave loans to farmers in the form of grains and all those involved in the business value chain.

Italy for instance had the famous Banco de Napoli in Naples Italy that has been providing banking services since the 14th century. They were largely controlled by wealthy families in this ancient city before social systems took over. It is recorded that in historical times, kings and lords borrowed from wealthy families to run the affairs of the state. The interest of the wealthy family is often protected in return.

In those days, business was not anything like it is today. Italy reaped the bountiful benefits of international trade leading to a strong and powerful merchant class that had influence and even controlled governments

That is very different from what the relationship between banks and the state is today. Things have changed dramatically allowing banks to make great improvements and advancements.

It is from these prototype banks that the current banking systems evolved. They do not operate in similar circumstances but provide quite the same services as they always use to provide.

Interestingly, the history of banking is one. That is, there is not a separate origin of banking for Africans and Europeans because trade went across continental lines before the advent of modern banking.

However, the western/European world can lay claim to having originated the current banking system practiced in the world today.

king came into existence through history as part of social progress.  Various historical events and eras led to the banking systems that we have today.

It is often fascinating to discuss the banking system without recourse to any particular country. This is because we can talk about how banking came into existence without seeming to refer to any particular country. It is everybody’s affair.

Money is at the center of most banking systems around the world and banks came to solve the problems and maximize the opportunities created by money because money predates banking. A good understanding of how banking came into existence will provide you with one or more of the following:

Also read: History and origin of Banking in Nigeria

  • The role of banking in modern societies

Banking is still very relevant to our modern world. There is yet to be an alternative to it because of the massive supports and enforcement it enjoins from the government. There is no country in the world today without a standard banking system to guide the way money and other valuable items are used. Although banks came into existence many centuries ago, they are still very relevant today though in a unique form different from what they were many years ago.

If you access banking in the medieval period, renaissance period, and the modern period, you will find that no period shares the same motivation. What inspired banking in the medieval period is different from what is driving it today.

  • How banking can develop an economy

Historical research hints that the banking system is the foundation of the economy of the United States. The United States has one of the world’s strongest banking systems and the most developed economy as well. It owes its solid economy to many years of an efficient banking system. Its banking system laid the foundation for modern banking. It was recommended that banking will help the United States pull through the battered economy created by heavy spending on wars.


  • Who controls the banks?

If there is a global market or a global financial economy, who controls banking and to whose advantage? It is a big question but you can unravel it if you know how banking came into existence. Also, the interest behind it will further clarify you.

In most advanced countries the banks are influenced by many actors other than a government. Social systems, the private sector can affect banking. The banks on their own do not control state actors in our modern era.

In historical times many private wealthy families had control of the state but it is not the norm at the moment because other non-state actors can influence the banking policies of a country.

  • What a banking system collapse will be like

While we are studying how banking came into existence, we should know what the society without the complex banking system will be in today’s world. Recall that societies survived for many years without any organized banking system. The banking system drives the economy and it is the lifeblood of any nation. If the banking system collapses, the government will also collapse along with the economy. The signs are obvious in most weak economies where the government’s ability to improve the economy seems impossible because the banking systems have collapsed.

You can also read: Lucrative Small Scale Business you can start in Nigeria with little capital


In most societies, people have bank accounts with various banks both nationally and internationally. Banking is not just the act but the industry at large.  Banking refers to the management of financial transactions such as cash, credits, and more by banks.

When banks carry out these activities, it is known as banking. It does not include money alone. Other items of value are also transacted by banks. When these valuables, cash, credits, and more are deposited in banks, they don’t save them by keeping them locked up somewhere. Rather they are used in line with relevant banking policies because the value of these items is not static.

Banks use deposits for many purposes on behalf of depositors. They also share dividends, profits, and losses with their customers based on their policies and type.

An individual can do all this without going to the bank but banking as it is today is most preferred because they can do many things that an individual cannot do all by himself.

It is through banking that the security of money and other valuables are intact. Banks get protection from the states to continue with their financial transactions and they have all policy support to succeed.

It is almost impossible for an individual to wade through all the barriers and risks involved in financial transactions. But banking provides an easy route.

The banks bear most of the risks involved and make some profit too. Overall, they make the economy buoyant.

An explanation of the major reasons for the existence of banking will help to deepen our understanding.

  • Banking as financial mediation

It is held by any people that banking plays an intermediary role to separate banking from nonbanking systems in the specialty. It gives a peculiar and observable behavior to transactions.

People go to this intermediary to durable deposits, do other transactions because they rely on it to create money and regulate the financial sector. Medium is recognized in many societies as a medium of exchange, a measure of value, a unit of account, a store of value, and more.

Hardly anyone can survive without money and banking. The relationship between money and banking is like that of the hen and the chick. It is not a question of which comes first but which produces and tends which.

In that case, the banking sector often seizes the day. So, everyone looks up to it to be able to interact with other sectors of society. The ownership of your money is traded in the course of this mediation and the result is what everyone does by resorting to the bank as the intermediary.


  • Economic centered approach to banking

Agents of the state can use banking to their economic advantage. By influencing banking regulations, banks can be made to reserve a portion of the deposits made by their customers to allow for lending. This will ensure that there is enough money in supply to boost the economy.

The banks get this money into circulation by lending for businesses and other purposes. This can be done directly through a bank lending scheme or by funding government programs aimed at empowering citizens to improve their businesses. When a deposit is made at the bank the customer cannot access all the money It is when a portion of it has been reserved that the customer can withdraw what is left.

Where this is practiced, it is a small portion that is reserved and the customer can still withdraw the larger portion of the deposit that was made.  The main strength of this approach is that it encourages the supply of money.

Supply of money refers to the volume of money in circulation within a particular period. It is expected that the supply of money should tally with the demand for it in an economy.

One notable sign of a poor supply of money in an economy is a low Gross Domestic Product (GDP). It is a sign that the economy is not growing and making progress.

It is the GDP of a country’s economy that determines whether it is developed, developing, or underdeveloped. That is why country’s give much attention to it. When the GDP is low it shows that the purchasing power of consumers is low.

Putting more money into circulation is the solution that is why some experts support this approach. However, too much money in circulation is not good. It means that the supply of money to the economy is higher than the demand for money so the value of the currency affected will drop.


  • Banking is about money creation

There is a perspective on how banking came into existence that holds that banking is here to create money. This perspective is based on a theory known as credit creation theory that explains the power of banks to create money out of nothing. It is wrong to think that banks

Banking ensures that there is enough money for everyone to use. It monitors the money in circulation to ensure that everyone benefits. The list of those to benefit is not exclusive. It includes the man with a high taste for lavish spending and the man who wants only a meal per day.

Your deposits at the bank empower them to lend more but they do not depend on it since they can create money on their own. That sounds attractive to many state actors. However, it is not a guarantee that the economy will be fine since external factors and the global financial market can ruin the strategy. When too much money is in circulation, it is also a disadvantage to the economy because the value of money will drop.

So, if you think that the need to create money brought banking to the existence, you are a follower of the credit creation theory.




Banks have a long history and it has thrived because of its importance for both individuals’businesses and the state.

  • Saving

Banking helps to save money for some future purposes. It is the safest way to secure your money because the bank will take responsibility for securing the money in their possession. At the time preferred it can then be withdrawn for business or other purposes.

Some saving types allow for a limited period of access while others do not have any limit for account access. There are other traditional methods of saving money but they are unreliable.

Banks also save valuable items and values like gold and jewelry. They all occupy a vital place in the trade.

In many banks, saving creates the opportunity for customers to benefit from loans for mortgages, cars, and other purposes.

  • Investments

Money can be invested to generate more money in the economy Investment supports businesses and government programs, allowing circulation of money in the economy. It is through banking that investments are made possible in an economy.

Banks can also help in investments. The Investment bank for instance helps large corporations in managing shares and it provides advisory services too. Aside from large corporations, individuals can also benefit from the bank through investments. They can purchase shares and take part in other financial offers of the bank.

  • Economic Growth

The growth of the banking sector also signals the growth of a country’s economy. The banking sector often gets support and provides help to the government for programs and policy implementation. This sign shows that banking goes far beyond personal or group transactions.

As demonstrated by the First Bank in America proposed by Alexander Hamilton banks can revamp a national economy because they help in regulating the entire financial sector to avoid wanton economic crisis. Even when such a crisis occurs, they can easily be managed.


  • Business Services

Aside from individuals, banks support businesses through diverse services. They have the opportunity to get loans, save money and benefit from other banking services.The state can also support businesses through the banks by issuing policies that can improve the ease of doing business.




  • The Merchant Class

The emergence of the merchant class signaled the end of the feudal class. Frequent wars and fighting have made land ownership and territorial control ver6y 8nstable. The merchants who are traders did not actively take part in the war but facilitated it by supporting armies with supplies of both necessities and luxury.

When feudalism was no longer tenable it was the merchant class that replaced them in Italy’s history. They exercised more power and influence than the feudal lords thus planting the seeds for a renaissance period. The merchant class becomes rich in a different way. They made money by doing business, buying and selling goods that are produced to consumers. This system spread rapidly till it became a major trend in most European societies where merchants become richer than the state.

Merchants were inspired by wars. The middle ages were a period where the church wanted more control of the holy land. That brought about wars and its very high cost on the state. They needed business people to provide supplies to their armies on the field.

Since it was purely a feudal era when it began, more people were motivated to become merchants. It was a quick way to become rich and influential because what sustained wars at that time was supplies.

Those who chose this part became very rich supplying products and services to soldiers fighting holy wars for the church. These holy wars were known as crusades. There was a lot to sell because they had to trade with different worlds and cultures.  They traded silks, spices, perfumes, and more and were very rich. They charged states a lot of interests whenever they lend money and the states accepted to continue their war campaigns. So, states grew weaker in Europe and merchants became richer.The merchant class became very powerful and influential in many European states at that time.

  • Western origin of banks

Europe has laid claim to modern civilization and it is doing so with the banking system as well. While there is no clear evidence that there was no banking system in other parts of the world aside from Europe, Europe appears to have more advanced financial systems than other parts of the world.

This is because they originated banking and have made progress over the years to the point where the rest of the world considers Europe as the reference point for successful banking.

Italy has been tagged the rallying point in terms of how banking came into existence. Ancient Italy had many wealthy merchants because it is considered a gateway to Europe.

A commercial revolution took place during a historical period known as the high middle ages which spanned from 1000 -1350AD. Farmers and other merchants in that ear benefitted from the lending system that allowed them to go on with their businesses without interruption due to unavailable money. In Italy, wealthy families like the Bardi and Peruzzi families were fully in control of the banking industry in the 14th century in Florence. From Florence, it spread to many other parts of Europe. The famous Medici bank was also set up around 1397.

The more the banking system spread across Europe the more complex it became. Its capacity to handle credit transactions also grew.


  • The moral clause of how banking came into existence

The high interest charged by merchants raised a lot of moral issues to the extent that merchants were considered greedy people who love money. They knew about the opportunities that the wars provided so took advantage of them to exploit people for their gains.

There was this big moral question of usury. Usury is not just about interests. It involves charging extremely high-interest rates when lending money to both state and non-state actors with the motive of getting more money and becoming richer.

That probably inspired Islam’s negative attitude to usury as a way to waging a different war from the Christian holy wars. This period lasts throughout the middle ages and inspired the renaissance because many merchants emerged in Europe making the possibility of social changes very high.



Certain factors make banking relevant to societies in various centuries. While cutting across various spheres of life they solve some problems that can affect economic growth. If wars and trade inspired the earliest forms of banking,

The factors that inspired banking many centuries ago are different from the factors that drive them today. They are drawn from our everyday experiences and can make life better. These factors not only inspire banking but influence its progress over the years.

Even if banking was not created in the past, it will have pop-up along the way fr obvious reasons. It will emerge because, throughout human history, trade has been expanding and never contracting. The type of banking that dominates a particular economy depends on the needs involved.


  • Consumers

In an economy that is dominated by consumers who often do transactions involving consumer goods whether produced locally or imported. The greatest motivation for banking in such situations is retail banking. The need to satisfy the needs of consumers could be said to be the answer to the question of how banking came into existence.

Little wonder retail banking is also known as consumer banking and personal banking. The system of banking offers services to individuals that are consumers. It is not focused on offering services to businesses as in other forms of banking.

There can be different forms of banking in a particular economy based on the needs of the people but an economy can be dominated by one form of banking rather than another.

This in no wise limit retail banking from helping individuals solve their problems. So, if you have ever opened a savings account, sought check services, or requested a mortgage, loans, and more, you are being supported by a retail bank.

Retail banks are accessible, they protect the wealth of members of the public that make deposits and they make cheap loans available to consumers toaccess their basic needs and more. In most societies, retail banking grows the economy


  • Small businesses

It is small businesses that supply products to consumers and even engage in a certain level of production. They are catered for by the commercial banks which thrive side by side with the retail banks to offer services to both consumers and small businesses.

Commercial banks have a larger scope than retail banks which mainly serve the needs of consumers. Small businesses account for the continued existence of the practice of banking. Without them, banks would not thrive as they are ding now. In addition to their statutory loans, they are also credit creators that give out loans for business and other purposes.

Without commercial banks, it will be difficult to do business in the world today because banks introduced most of the financial systems that we have today. Banks provide a place to save money, get loans for mortgages, cars, and other purposes to keep the economy running.

Their collapse will mean the collapse of the economy. The need to maintain our existing economic systems is responsible for the continued existence of commercial banks.

In the United States,research shows that Small businesses make up: 99.7 percent of employer firms, 64 percent of net new private-sector jobs, 49.2 percent of private-sector employment, 42.9 percent of private-sector payroll, 46 percent of private-sector output, 43 percent of high-tech employment, 98 percent of firms exporting goods


  • Trust and solidarity

The unique functions of retail banks and commercial banks are found in the mutual banking system. It is based on cooperation among members that jointly own it.

Members of cooperative groups can easily get loans, save and get other financial services from mutual banking. How they get their funds for business is often from within the corporative group.

In many countries, mutual banking incorporates the functions of both retail and commercial banks. They not only give business loans to their members but also provide loans for individuals. It is founded on trust and solidarity.

Mutual banking or cooperative banking points to the fact that had banking not been in existence, a group of businesspeople can come together to establish a mutual or cooperative bank to get several financial benefits.


  • Investment by large corporation

Investment banking is not like other forms of banking. It deals mainly with large companies in helping them access the financial markets and their features. These corporations do not have to handle issues of shares of stocks and other stock offerings because the investment bank serves as an intermediary between them and the financial market.

In addition to these financial features, they help in debt financing and investor sourcing for corporations. If you hear of a major deal recorded by a struggling big firm, then investment banking should come to your mind.

Investment banking has become a very important part of the existence of banking in today’s world. It is so knitted to the banking sector that without it there would not be any vibrant economy.

If businesses have grown and expanded through history, it will no doubt have led to the existence of banks as well. So, it is safe to conclude that the existence of banking services is because of certain necessities that history cannot avoid.


  • The wealthy class

Wealthy business persons do not get the same banking services as other persons. They have special services provided through private banking. This service is offered to them in banks and other financial institutions because of their net worth.

In every period in human history especially the middle ages where the merchants thrived and were wealthy their wealth could have motivated the establishments of private banking to provide for their special financial needs.

Private banks are non-incorporated banks that also cater to the financial needs of partners of high-net-worth corporations. They get many other services too including financial advisory services. Special attention to highly wealthy individuals is known since the history of commerce, it will continue to be a viable reason for the existence of banks and the services that they offer.


  • Technology

Technology has made online banking a possibility. It has also helped society to make meaningful progress for many centuries too. Even if there were no banking services, technology, and its endless possibilities could have inspired the establishment of banks.Online banking uses mobile applications developed with security features to carry out transactions that can be done in the bank. Online banking works on all internet devices.Instead of going to the bank, people can use their internet devices for banking. Technology will have progressed to this point even if there were no banks for some few previous centuries.

  • Community service and altruism

Not all organizations are motivated by profits. During the middle ages where the merchant class dominated, they were criticized by some moralists as greedy and lovers of money because of the practice of usury. Usury is high-interest rates for loans and money that they lend to persons and state actors.

Credit unions are very much like that. They are in sharp contrast to banks and other financial institutions established mainly to make a profit. Credit unions do not seek to make a profit only, they support people in need of financial assistance with much lower interest and other services.

It is widely known as a traditional method of banking because any member that makes a deposit automatically becomes part of the owners of the bank. It gives depositors both customer and owner status.


It provides other functions like a bank but it has its peculiar mode of operation. This form of banking was inspired by the high priority on trust and solidarity in many societies.

Although profit seems to be a big motivation factor for most businesses, the majority of people around the world still think that trust and empathy should drive businesses too.These reasons and more answers the question of how banking came into existence. However,a look at banking strictly in its modern form will solidify our positions which have been that banking is a product of many factors in human history that shaped commerce since historical times.

These factors have not to stop shaping the practice of banking and will keep doing so in the future.






The banking system as it is today has its roots in the United States where Alexander Hamilton espoused the idea that since most countries were indebted after the war era establishing banks will be a way out for most countries to build a strong economy and pull through their debts.

He conceived of a situation whereby the value of money will be regulated and a standard currency can be maintained to create a near equal opportunity for countries to recover from financial distress. His strategy further brought the world together and created what we know today as modern banking.

The post-war era and the crisis in most economies are responsible for the existence of the modern banking system.


  • How Alexander Hamilton created Modern Banking

Man Alexander Hamilton is a famous American statesman, military commander, economist, and banker. He is regarded as one of the founding fathers of the United States.

What made him famous was a bill that he submitted to the United States Congress in 1970 proposing the establishment of a national bank. The proposal was approved and the bank was known as the First Bank of the United States. It was supposed to help regulate the banking sector. The significance of this bank is that it brought a whole new ideology that a national bank was the key to advancing national economies in the post-war world.


His ideas brought about the transformation of the American economy from a mainly agrarian one to the commercial that it is today. It takes the baton from the old order that was destroyed by wars, and from the merchant class to a whole new ear where a central bank regulates and controls all financial activities within a country.


However, it is argued that Charles Sanford brought modern banking into existence. When Charles Sanford became a part of the Bankers Trust in 1960, he brought out several ideas and many of them quickly spread across the banking world. His ideas were influential but not a landmark as that of Alexander Hamilton.

He became chief executive of the company a position he held for six years and made positive impacts. The most fascinating of his ideas is the new way to measure risks and the distributive model of lending.

This model holds that loans can be repackaged, written, and sold to other actors in the market.  What was considered a big problem became an opportunity to generate higher finance. Long-term credits were provided for those with greater prospects for funding.

Those quite fascinating the position of Alexander cannot be disputed because of its lasting impact. One major feature of banking in modern times is that it is highly regulated. This allows the state to have a firmer grip on the economy of a country and protect it from all adversities even from them the international market.

Meet Ogbeide Frank, popularly known as perere, a blogger who loves writing about finance and Tech. He studied Business administration at the Ambrose Alli University Ekpoma and Mobile Communication at Orange College Malaysia .Frank have worked as a banker and consultant in variety of Nigeria agencies

For Advertisement, Content marketing andsponsored post: contact : kokobest04@gmail.com


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    Ogbeide Frank loves writing and research about finance and Tech. He studied Business administration at the Ambrose Alli University Ekpoma and Mobile Communication at Orange College Malaysia .Frank have worked as a banker and consultant in variety of Nigeria agencies For Advertisement, Content marketing and sponsored post: contact : kokobest04@gmail.com

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Ogbeide Frank loves writing and research about finance and Tech. He studied Business administration at the Ambrose Alli University Ekpoma and Mobile Communication at Orange College Malaysia .Frank have worked as a banker and consultant in variety of Nigeria agencies For Advertisement, Content marketing and sponsored post: contact : kokobest04@gmail.com
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