May 18, 2022

How banking came into existence

We can understand how banking came into existence when we know the history of banks and financial systems. Banks came into existence through history as part of social progress.  Various historical events and eras led to the banking systems that we have today.


Banking is not just the act but the industry at large. Banking refers to the management of financial transactions such as cash, credits and valuable items by banks.When banks carryout these activities, it is known as banking.


  • Banking as financial mediation

Banks play an intermediary role to separate banking from nonbanking systems in the economy. It gives a peculiar and observable behavior to transactions.

People go to this intermediary to make deposits and do other transactions because they rely on it to create money and regulate the financial sector.


  • 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.

  • 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 credit creation theory that explains the power of banks to create money out of nothing.


  • Banking Began with Prototype banking System

Banking first began in a form known as prototype banking. It has its origin in ancient Assyria, India and Samariaand 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. This explains a lot of how banking came into existence.

  • 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 very unstable. 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.

  • Western origin of banks

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.

Farmersin that era benefitted from the lending system that allowed them to go on with their businesses without interruption.

  • The moral clause of how banking came into existence

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.



There are certain factors that make banking relevant to societies in various centuries. While cutting across various spheres of life they solve some major social problems and explain how banking came into existence.

  • 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 the retail banking.

  • Small businesses

Small businesses were catered for by the commercial banks which thrive side by side with the retail banks to offer services to both consumers and small businesses.

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

In the United States,research shows thatSmall 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.

  • 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 its 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.


  • The wealthy class

Wealthy business persons do not get exactly 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.

  • 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 establishments of banks.

  • Community service and altruism

Not all organizations are motivated by profits. Credit unions are very much like that. They are in sharp contract to banks and other financial institutions and are not established mainly to make profit.


The banking system as it is today having 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 strong economy and pull through their debts.

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

What made him famous was a bill that he submitted to the United States’s 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.


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