A Brief History of Lending Through the Ages

The practice of lending goes back thousands of years, and the first examples can be traced back to Ancient Mesopotamia. Usury was a controversial issue when ethics and religion were closely related to government laws and culture, especially in the Middle Ages

Lending also played a large role in 1800s America, encouraging working-class citizens to achieve financial stability through savings and home ownership.

For centuries, your ability to borrow money was based on word of mouth and character, but has since evolved to depend on digitized credit scores.

To achieve significant financial results, it is almost impossible to avoid some form of credit. You need a loan to buy real estate, start most businesses, pay for higher education, buy a car... the list goes on.

The most common form of credit available to the average person is through credit cards, but mortgages, lines of credit, car loans and business loans also fit the bill. You might even consider verbal agreements between friends or family, whether it's "borrowing" a few dollars for "drinks" or asking for a little help with rent. Because lending is so common, it's easy to forget that some form of lending has been around for millennia.

The idea of ​​credit can be found in Shakespeare's play The Merchant of Venice, where the character Shylock lends money and demands literally a pound of flesh as collateral. (Offering your car, gold, or home as collateral doesn't seem like such a bad idea compared to that, does it?)

But lending began much earlier than the 1600s and was practiced all over the world (not just in literature). And although it has been discussed with skepticism in art and philosophy, lending has played a vital role in driving economic development from ancient to modern history.

When did the practice of lending begin?

Money lending can be traced back to around 3000 BC. in Ancient Mesopotamia. Located in what is now the Middle East, ancient Mesopotamia was home to many groups of peoples, including the Sumerians, Babylonians, Assyrians and Persians. Before fiat currency became widely used, these ancient peoples used food as a way to pay their debts. With the promise of a harvest in the spring, farmers borrowed seeds and then shared their harvest to pay off debts..

Such examples of agricultural borrowing and lending appeared in the Code of Hammurabi. Interest (rent), as a concept, appeared in these ancient rules for both grain and silver. The code declared that the maximum interest rate that a lender could charge was 33% per annum.

Let's take a closer look at examples of Babylonian laws in the Code of Hammurabi:

"48. If anyone owes a debt for a loan, and a storm destroys the grain, or the harvest fails, or the grain does not grow due to lack of water; in that year he should not give his creditor any grain, he washes his debt table with water and does not pay rent for this year."

One could say that the Babylonians were quite reasonable - if the harvest was spoiled due to lack of water or for some other reason (read: the occurrence of force majeure), the borrower did not have to pay his debt, thus clearing his debt table. Banks clearly haven't picked up on this law nowadays, considering that if your business fails and you can't pay back the business loan, you're not allowed to just wash your debt table with water.

How did ancient lenders trust unsecured debtors?

Now you'll regret asking.

"117.If someone defaults on a debt and sell himself, his wife, his son and daughter for money or give them to forced labor: they must work for three years in the house of the person who bought them, or from the owner, and in the fourth year they must be released."

This is an example of an ancient form of bail, although a cruel one. This law made it acceptable to pledge one's wife or child to a creditor who would use their labor for three years until the debt was repaid. People did what they had to, but fortunately there are now many options, even when paying off debt seems impossible.

What happened during difficult times?

As seen above, the Code of Hammurabi also described cases of ancient debt reduction. Since peasants and farmers could lose their livelihoods or, worse, loved ones due to debt, the government would sometimes cancel all debts that peasants owed to the authorities in order to ensure peace and stability..

It's interesting to compare this story of ancient debt reduction with modern debt management amid the COVID-19 pandemic. For example, the Canadian government has not canceled all debts, but it has introduced programs to defer mortgage and rent payments, suspend eviction orders and provide financial support to people and businesses affected by the pandemic. While this is not exactly the same as Hammurabi in Mesopotamia, there is ancient precedent for the government to provide some form of debt relief in times of trouble.

Today, there are also debt settlement consultants who can work on your behalf to help you obtain debt relief from your creditors.

Lending in Ancient Greece

A little to the west of Mesopotamia, lending became a common practice. The concept of interest was generally accepted in Ancient Greece because it seemed reasonable that a lender risking his money should receive a profit in return. Lenders were often highly valued in society, as their willingness to risk their money through lending facilitated trade and helped grow the economy.

Interest rates in Ancient Greece were lower than in Mesopotamia—the general limit was 12%, and mortgages and jumbo loans had interest rates closer to 16% and 18%, respectively. However, despite the prevalence of interest-bearing lending, there were strong family values that favored interest-free loans, since charging a family interest was considered shameful.

This family opposition to interest has largely survived to this day, and most family loans have low or zero interest rates.

What the Ancients Thought About Lending philosophers?

Philosophers often questioned the ethics of lending because Plato feared that lending could lead to social instability. In his opinion, lending often showed disrespect for the poor, which is in some ways similar to the perception of moneylenders today. Even Aristotle believed that of all methods of earning money, usury (predatory lending) is the most contrary to human nature.

Religion and lending in the Middle Ages (500 AD - 1500 AD.. BC.)

Religion played a significant role in condemning interest-bearing lending, since the Koran and Bible completely rejected interest, and the Torah allowed only Jews to borrow at interest from non-Jews. Early Islamic scriptures viewed interest as unearned income.

The Bible also condemned usury, especially when lenders charged interest to the poor. This made lending a controversial issue in the Middle Ages. Although credit was necessary to develop trade and the economy, ultimately the Church became a great obstacle to the creation and operation of banks.

Banks with actual branches began to appear in England around 1826, but their main purpose was to control the circulation of money. One businessman's unsuccessful attempt to obtain a loan from the Bank of England long supported the idea that a bank was the last place to borrow.

As such, merchants and independent lenders remained the most popular options for 19th-century English citizens seeking credit. At the same time, in America, the banking sector began to offer the most common loans to the middle class.

Lending in America in the 19th Century

Although the first American bank, the Bank of North America, appeared in 1791, the early 1800s were an important period for the development of lending in America with the creation of the Philadelphia Savings Society. They were essentially a bank, although they avoided the term because the public distrusted financial institutions. The Society's primary purpose was to promote success and stability for the working class and immigrants through savings and home ownership, with major investments in bonds and mortgages. They began making loans more aggressively in the 1870s and by the 1880s had become one of the largest banks in the United States.

Throughout the 19th century, the government intervened in banking operations in the Southern states. In states such as Virginia, Kentucky, and Mississippi, the state and government intervened in banks and required them to subsidize government programs and improvements.. Although regulation varied among states, banks were generally seen as an essential institution for improving the economy by providing credit and lending to future American businessmen.

In the 1900s, credit ratings became the subject of controversy as companies such as the Atlanta-based Credit Rating Company (RCC) kept files not only on Americans' lending history, but also on their sexual, social, and political lives. The introduction of digital credit reports sparked public outcry that led to the passage of the Fair Credit Reporting Act in 1970, requiring bureaus to make records public and erase any data related to a person's race, sexual orientation and disability. In 1975, RCC eventually changed its name to Equifax, and along with TransUnion and Experian, they formed the three leading consumer credit reporting companies.

The Invention of Credit Scores

One of the earliest attempts to standardize credit scoring occurred in 1841, when Lewis Tappan created a credit reporting agency. Tappan collected and sold information about a company's creditworthiness to lenders, which can be considered an early form of credit reporting. However, the question "When was credit scoring invented?" forces us to delve into the 20th century, namely 1989. This landmark year saw the formulation of the first modern credit score by the Fair Isaac Corporation, also known as FICO.

Credit scores are now widely used to assess a borrower's financial ability to repay their debts - you will be hard-pressed to get approved for a loan without a decent credit score.

Summary

Lending, usually with interest, has been around for thousands of years and has evolved through the centuries in terms of methods, interest, collateral, public perception, culture, records and banks. We have seen collateral evolve from the promise of harvest and the exploitation of labor to houses and cars; interest has gone from immoral and controversial to reasonable and expected.

Nowadays, with the advent of financial technologies aimed at disrupting traditional business models, banks and lenders are forced to adapt to the needs of their customers..

Looking at history, we can say (and this is necessary) that the lending industry will continue to develop. We hope it will evolve to meet the needs of consumers, no matter where they are in their financial journey.

Posted with the support of the landing platform guarantor LendPal.io