A brief history of lending through the ages

To build a financially successful life, it’s nearly impossible to avoid credit, in one form or another. You need credit to purchase property, start most businesses, pay for post-secondary education, buy a car… the list goes on.

The most common form of credit is issued through credit cards, but mortgages, credit lines, car loans and business loans also apply when describing lending. You might even think of verbal agreements between friends or family, whether it’s being “spotted” a few bucks for drinks, or asking for a little help with your rent. Because lending is so commonplace, it’s easy to forget that some form of issuing credit has been around for millennia.

We’ve heard about it in Shakespeare’s The Merchant of Venice, where the character Shylock lends money and demands a literal pound of flesh as collateral. (Putting up your car for a loan doesn’t seem so bad in contrast, does it?)

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

When did lending as a practice begin?

Money lending can be traced to about 3000 BC in ancient Mesopotamia. Located in today’s Middle East, ancient Mesopotamia was home to many different groups, including Sumerians, Babylonians, Assyrians, and Persians. Before fiat currency was widely used, these ancient peoples used food as a way to pay their debts. With the promise of harvest in the spring, farmers would borrow seeds and then share their crops to pay their debts.

These agricultural examples of borrowing and lending appeared in the Code of Hammurabi. Interest, more specifically, appeared in these ancient rules for both grains and silver. The Code declared that the maximum interest rate a lender could charge was 33% per year.

Let’s take a closer look at some of the Babylonian laws in the Code of Hammurabi:

48. If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not grow for lack of water; in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year.

You could say the Babylonians were pretty reasonable — If the harvest was ruined by a lack of water or some other reason, the borrower would not need to pay his debt, thus washing his debt-tablet clean. Banks clearly didn’t take this law into the present, considering, if your business fails and you can’t pay back that business loan, you’re not allowed to just wash your debt-tablet in water.

"Money lending can be traced to about 3000 BC in ancient Mesopotamia."

How did ancient lenders trust debtors without any security?

In a minute, you’re going to wish you had never asked.

117. If any one fail to meet a claim for debt, and sell himself, his wife, his son, and daughter for money or give them away to forced labor: they shall work for three years in the house of the man who bought them, or the proprietor, and in the fourth year they shall be set free.

This is an ancient appearance of collateral, though a brutal one at that. This law made it acceptable to put up your wife or child as collateral to your lender, who would have them work for three years before your debt was settled. People did what they had to do back then, but luckily, there are many support options now, even when paying off your debt feels impossible.

What happened during tough times?

As seen above, the Code of Hammurabi also described instances of ancient debt relief. Because peasants and farmers could find themselves losing their livelihoods, or even worse, loved ones to debt, the government would sometimes cancel all debt owed by peasants to the authorities, as a way to ensure peace and stability.

It’s interesting to compare this history of ancient debt cancellation to today’s handling of debt amidst the COVID-19 pandemic. The Canadian government hasn't exactly cancelled all debts, but they have put programs in place to defer mortgages and rent payments, halt eviction orders, and offer financial support to individuals and businesses affected by the pandemic. Although it might not be exactly the same as Hammurabi’s Mesopotamia, there’s an ancient precedent for the government to provide some form of debt relief in difficult times.

Today, there are also debt settlement counselors who can work on your behalf to help you obtain debt forgiveness from your creditors. With a KOHO Extra account, for example, you can access a financial coach, who will help you create a plan to tackle your debt, and answer any other questions you may have with regard to credit, investing, budgeting, and more.

Lending in ancient Greece

A little west of Mesopotamia, lending had become a common practice. The concept of interest was generally accepted in ancient Greece, as it seemed reasonable for a lender, who risked his money, to receive a profit in return. Within society, lenders were often highly regarded as their willingness to risk their money through lending encouraged trade and helped to boost the economy.

Interest rates were lower in ancient Greece than in Mesopotamia — the general limit was 12%, with mortgages and larger loans having interest rates closer to 16% and 18%, respectively. Still, despite the commonality of lending with interest, there were strong familial values advocating for free loans, as charging your family interest was seen as shameful.

This familial opposition to interest has largely carried over into modern times, with most familial loans having a low or nonexistent interest rate.

What did ancient philosophers think about lending?

Philosophers often questioned the ethics of lending, as Plato worried lending could lead to social instability. To him, lending often demonstrated a lack of regard for the poor, not too different than the perception of loan sharks today. Even Aristotle believed that of all the methods for making money, usury (predatory lending) was the most contrary to nature.

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

Religion played a significant role in condemning the lending of money at interest, with the Qu’ran and Bible renouncing interest completely, and the Torah only allowing Jewish people to lend at interest to non-Jewish people. Early Islamic writing, specifically, considered interest as undeserved income.

The Bible also condemned usury, specifically when lenders would charge interest to the poor. This made money lending a contentious topic in the Middle Ages. Although loans were essential to nourish trade and the economy, ultimately, the Church was a big obstacle to the creation and operation of banks.

Banks with actual branches really began appearing in England around 1826, but their main purpose was to control the circulation of money. One business man’s failed attempt at requesting a loan from the Bank of England reinforced, for years, the idea of the bank being a last resort for lending.

So, merchants and independent lenders were still the most popular options for 19th century English citizens seeking a loan. Banking in America during the same period, however, began to offer more commonplace loans to average citizens.

"Aristotle believed that of all the methods for making money, usury (predatory lending) was the most contrary to nature."

Lending in America in the 1800s

Although the first American bank, Bank of North America, appeared in 1791, the early 1800s was an important time for lending in America with the establishment of the Philadelphia Savings Fund Society. They were essentially a bank, though they avoided that term since the public was hesitant towards financial institutions at the time. The Society’s primary goal was to encourage working-class citizens and immigrants to be successful and stable through saving and homeownership, with primary investments in bonds and mortgage-backed loans. They began to lend more heavily in the 1870s, and by the 1880s became one of the biggest banks in the United States.

Throughout the southern states of early 19th-century America, the government was known to intervene in banking operations. In places like Virginia, Kentucky and Mississippi, the state governments would take stakes in the banks and require them to subsidize state programs and improvements. Though various states had different regulations, banks were generally seen as necessary to improving the economy by lending and providing credit to future American business owners.

1900s to the present: Credit cards and credit scores

Americans originally began using credit cards in 1920, though they were specifically issued by individual retailers for customers to use in their stores. Universal credit cards, as we use them now, began in 1950 by Diners’ Club Inc., charging merchants around 4-7% of total billings. The big credit card companies we know today, like Visa and Mastercard, formed in the 1970s, allowing personal credit to no longer be limited to location.

For centuries, credit was given based on your reputation and character. This might seem beneficial to borrowers since records weren’t permanently kept in digital storage, however, it left room for a lot of bias in deciding whose testimony was reliable for assessing a borrower’s risk. We see this bias continue today from older, now transformed practices like redlining, to ongoing subconscious (or in some unfortunate cases, conscious) racial bias while banking.

In the 1900s, credit scores were a topic of controversy, as companies like Atlanta’s Retail Credit Company (RCC) would keep files not only on Americans’ credit history, but also on their sexual, social and political lives as well. The introduction of digital credit records resulted in public outcry, which led to the Fair Credit Reporting Act being passed in 1970, requiring bureaus to make records publicly available, and to erase any data related to a person’s race, sexuality and disability. The RCC eventually changed their name to Equifax in 1975, and, joined by TransUnion and Experian, formed the top three companies for consumer credit reporting.

Invention of Credit Scores

One of the earliest attempts to standardize credit evaluation occurred in 1841 when Lewis Tappan established a credit reporting agency. Tappan gathered and sold information on a company’s creditworthiness to lenders, which can be considered an early form of credit reports. However, the question, "When was credit score invented?" urges us to delve further into the 20th century, to 1989. This significant year sees the conceptualization of the first modern credit score by the Fair Isaac Corporation, also known as FICO.

Credit scores are now widely used to help lenders assess the financial ability of a borrower to pay back their debts — you’ll find it hard to be approved for a loan without a decent credit score. Luckily, there are now many ways to build your credit history, including KOHO’s Credit Builder.

The bottom line

Lending, usually with interest, has been around for thousands of years and has evolved through the ages with regard to method, interest, collateral, public perception, culture, records, and banks. We’ve seen collateral evolve from the promise of crops and exploitative labour, to homes and cars; interest went from immoral and controversial, to reasonable (usually) and expected.

Nowadays, with the rise of financial technologies aiming to disrupt traditional business models, banks and lenders are being pushed to adapt to their consumers’ needs.

Looking through history, it’s likely (and necessary) that the loan industry will continue to evolve. Hopefully, it evolves in a way that meets the needs of consumers, wherever they are on their financial journey.