Indian Economy :History of Banking

History of Banking

The name 'bank' is usually used in the sense of commercial bank. The word 'bank' seems to have originated from the Germanic world 'banck' which means a joint stock fund or heap. It is possible that the word has also been derived from the French word 'banque' and the Italian word 'banco'. The Italian word 'banco' refers to a bench at which the money changers or mediaeval bankers used to change one kind of money into another and transact their banking business. Thus, the early banking was associated with the business of money changing.

The first public banking institution was The Bank of Venice, founded in 1157. The Bank of Barcelona and the bank of Genoa were established in 1401 and 1407 respectively. These are the recognized forerunners of modern commercial banks. Exchange banking was developed after the installation of the Bank of Amsterdam in 1609 and Bank of Hamburg in 1690.

The credit for laying the foundation of modern banking in England goes to the Lombards of Italy who had migrated to other European countries and England. The bankers of Lombardy developed the money lending business in England. The Bank of England was established in 1694. The development of joint stock commercial banking started functioning in 1833. The modern banking system actually developed only in the nineteenth century. In India, the first modern bank 'Bank of Bengal' was established in 1806 in the Bengal presidency.

Development of banking habits

Before the Industrial Revolution, the size of business units was very small. After some years, there was a great increase in the size of the business units. Therefore, joint stock forms of business organisations were established. Such form of business organisation widened the circle of investors, by enabling people with small means to become share holders of big industrial enterprises.

Still, some people did not want to undertake any kind of risk by investing their money. Hence, an institution was created to mobilize funds on terms acceptable by the people. Such an institution is called 'Bank', whose business is to mobilize capital. And hence, banks are connecting link between the people, who have surplus money and the people who are in need of money. In addition to this, banks undertake the risk arising out of the possible default of the ultimate borrower.

The early stages of banks included three types of institutions

The merchant banker, who was primarily a trader. He accepted customer's money and kept it under safe custody.

The money lender, who lent his surplus money to the needy persons on deriving some interest payment.

The gold smith, who accepted the valuables like gold and diamond of the customers and kept it under his safe custody. It will be returned to the customer on demand and interest will be collected for that.