How did the Banking System Start and Why?

The world’s most famous financial institutions are banks. They come in different categories like central banks, agricultural banks, and electronic banks, etc. Check out our article what are the different types of banks in Egypt to find out the most popular ones.

Origin of the word “Bank”

Banks came into being during the Middle Ages specifically in Venice, Italy. At first they were just simple bench like tables operated by “money changers”. These tables were called “banco” hence banks

First bank in the world

Banca del giro in Venice was established in 1587 and was followed by Bank of Amsterdam in 1609. By the 18^th century banks increase the number on a global level

Why banks?

With global trade booming and the challenge of dealing with different cultures the norm was the barter system but as trade evolved economists agreed a different system was needed.

At first the barter system depended on exchange of goods as currency. It evolved into the usage of different metals and precious stones until it settled on gold as the most valuable and stable currency.

Once gold became the standard currency another problem arose, where to store it and how to keep it safe from bandits and thieves? And this is how banks came into being.

Merchants and rulers decided to keep their gold in a safe -no pun intended- place in exchange for a fee.

Banking services:

Once bankers and banks became popular and the gold reserve they stored increased they started thinking of how to expand their business and use the gold they have in storage, as normally the owners only used 10% of the stored gold and saved up the rest.

As such bankers started offering the following services:

• Loans with pre-agreed upon interest rates and due dates.
• They invented pay orders which are current day cheques to facilitate merchants’ trade in other cities without having to transport a lot of gold.
• They invented the banknote which was a certificate or piece of paper promising the bank will pay a specific number of coins to the holder of the banknote. These banknotes eventually evolved into modern day paper currency

Banks continued to operate this way until WW1 in 1914. 

To find out more on the Egyptian banking history read The 5 Oldest Banks in Egypt