History of Modern Banking

The modern banking system is important to a nation’s economic development. Over the last few years, the banking world has undergone many changes due to deregulation, technological innovations, globalization, environmental situation, etc. Banking experts believe that the banking system was introduced in the early stages of human civilization.

From different angles, the source and origin of modem banking can be justified:

1. Introduction of Coins.
2. Different Civilization.
3. Expansion of Business and Trade.
4. Various Religions and Religious books.
5. The contributions of Goldsmith, Money-Lenders, and Businessmen.

Let’s try to understand them;

1. Introduction of Coins

From ancient times coins were introduced in different countries as a medium of exchange. Gradually, this became a profitable business for business people and money lenders.

2. Different Civilization

At different stages of human civilization. Indus Civilization (5000-2000) coins were available in Mohenjudaru of Pakistan; in Egypt, coins were found in the mummy of the Pyramid.

3. Expansion of business and trade

The expansion of business and trade played a vital role in the advancement of modem banking.

4. Various Religions and Religious books

Much information regarding the banking business was incorporated in the Quran, the Bible, the Beth, and the Mahabharat.

5. The contributions of Goldsmiths, money-lenders, and the businessmen

For the growth and development of the banking business, the Goldsmiths, Moneylenders (Mahajan), and business people had positive roles.

(a) The Goldsmiths

The Goldsmiths had a definite role in the advancement of modem banks. From the ven’ ancient periods, the Goldsmiths, over and above their activities, used to act as custodians of the surplus funds of the general people of the society.

In the middle ages, the Goldsmiths became affluent. At one time, Goldsmiths used to deposit their money with the treasury of England.

During King the First Charles regime, in 1640, the reserve funds of the Goldsmiths with London Tower were confiscated, and they had to pay a penalty of thousand pounds. Then they left the gold business and got involved with the banking business. Thus, the Goldsmiths had a definite role in advancing modem banks.

(b) The Money-Lenders

The Money-Lenders (Mahajan) also played an important role in the growth and development of modem banking. They used to keep the surplus money of the people and refund those in case of need. Later, they took it as a profession. They used to pay interest to the depositors and earn interest on loans. They also used to take security mortgages against loans.

In Europe, they were called Medici, Bengkuci, Piti, Missouri; in the Indian subcontinent, Seth, Chetti, Multani, and Kabuliwala were the Mahajans. In Europe, most of the Mahajans were Jews; amongst them, Emperor Farook Shayar ornamented him with the title of world banker.

(c) Businessmen

Business Class also played a vital role in the growth and development of modem banking. From the ancient periods, the Business Class was trustworthy to the general people. They were honest, faithful, and solvent.

The businessmen of the seven hills of Rome were world-famous. The general people used to deposit money to them for the safety and security of funds. Over time, they were involved in the money-lending business.

Banking Issues in the 21^st century

Financial systems evolve through time, passing through three phases:

1. Phase one is bank-oriented, where most external finance is raised through bank loans funded through savings. Banks are the most important financial intermediaries in the financial system, and interest income is the main source of revenue.
2. Phase two: This phase is market-oriented. Households and institutional investors begin to hold more securities and equity, and non-banking financial institutions offer near-bank products such as money market accounts.
3. Phase three: In this phase, trading, underwriting, advising, and asset management activities have become more important for banks than the traditional core banking functions.

The position of the banking sector at the beginning of the new century:

1. First, it would be wise, to begin with the performance of banks measured by banks profitability: In the 1980s, Japanese banks were very profitable and became even more so. But banks’ profit elsewhere is either trendless or slipping. The recovery to average levels in 1999 was short-lived.
2. The growth of bank assets: In the 1970s, banks’ assets grew rapidly in nominal terms across 14 countries. But more restrictive monetary policies and lower inflation contributed to the sharply lower growth of banks’ assets almost everywhere in the 1980s and 1990s.
3. Banks’ foreign assets:
   1. Foreign asset growth rates tended to outpace domestic assets in all three decades.
   2. The average ratio of total assets to nominal GDP for most industrial countries rose in 1970.
   3. For Switzerland, banking assets had been more than 100% of national income since the 1970s & very nearly so for Japan & Germany.
   4. In other countries, there had been a steady rise from 40% to 60% of national income in the 1970s to well over 100% by the 1970s.
4. Employee Cost: While profitability was fairly static, banks were looking for other sources of income by expanding into non-interest income areas.
5. Share price performance: The banks’ relative share price performance gives the most important idea of what the market thinks about the bank’s prospects compared to the other sectors.