The Evolution of the Lending Space

Nowadays there are dozens of ways to attract money for either personal or business purposes. Besides traditional financial banks, there are various alternative financing solutions that have experienced tremendous growth in the past decade, all serving different groups and targeting their specific needs. When considering these alternatives, you have to think, what is the origin and development of lending?

How It All Beganimage

The first traces of lending and borrowing go back to 12.000BC. Our ancestors implemented a system where they swapped goods in exchange for foodstuffs or tools. In Japan, for example, rice was used as the predominant form of currency for thousands of years. 3.000 years later, societies began to use coinage as a transaction method and pictographic tablets of clay to record economic transactions. Borrowers would receive a loan in coins (ie: to buy a cow) and the lenders would receive payments in goods (ie: milk). Eventually it was the ancient Romans that laid the foundation for the banking system, formalizing the administrative aspect and creating rules and regulations for financial transactions.

From the Romans to Medieval Times

In Roman times lending was primarily carried out by private individuals. Over time, large wealthy families replaced individual lenders as their own sort of “institution.” The Jewish played a significant role in the development of the banking industry in Europe and Africa since charging interest was forbidden by Christians.

Charging interest was commonly used in ancient times, but with the rise of new religions its moral basis became questionable and sometimes forbidden. Jewish people were not allowed to charge other Jews interest, but this restriction didn’t apply to people of other faiths. In contrast, the Christian church initially banned interest and kept this policy for centuries.

From the Middle Ages and thereafter, lending and other financial services were more formalized. These activities became predominantly carried out by budding banking institutions. Although the first bank was established in Venice, Italy, the banking industry spread to northern and western European countries soon after. The English and the Dutch established the first modern banks in the late 17th century, which were in many ways similar to how we know banks to be today.

21st Century

For decades, banks have been the main resource for capital investment; unfortunately, their reach does not go far enough. Banks have proven to be hesitant to service higher risk groups such as: start-ups, entrepreneurial enterprises, and people with an irregular income. To add to this, the strictness and limitation of banks worsened after the financial crisis of 2008. Financial institutions abruptly cut back on issuing loans, therefore, making it significantly harder, and in some cases impossible for people to get loans.

In reaction to the turmoil banks were facing and the new restrictions they implemented, alternative-financing companies stepped into the lending space. The three main new resources for people and businesses to attract capital are: peer-to-peer (P2P) lending, crowd-funding and micro-lending. These concepts have similar characteristics, the most importantly, they all avoid the intervention of traditional financial institutions. Often there are significant differences, which are sometimes forgotten, therefore, leading to confusion and misuse of the terms.

In the next blog post I will discuss these three alternative financing solutions, their key characteristics, and main purpose.

image – Isabelle de Clercq