Insights Into The History Of The Lending Market. Part 1: Basics & Central Institutions
Lending is the temporary giving of money or property to another person with the expectation that it will be repaid afterwards, often times with interest attached. In a business and financial context, lending includes many different types of commercial loans. In finance, a loan is a debt provided by an entity to another entity at an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and the date of repayment. The types of commercial loans from the lending market include bank financing for small business start-ups and working capital, and also asset financing for equipment, machinery, and personal loans. This article will focus on central institutions, such as banks. Peer-to-Peer (p2p) lending will be covered in Part 2.
Banks And Credit Bureaus
A bank’s role in the lending and financing industries includes helping corporations with their financial needs, ranging from various ways of gaining access to capital for growth and investments, to assisting in mergers and acquisitions, to converting currencies. Credit bureaus work for lending institutions to help them make loan decisions in individual cases. The primary purpose of credit bureaus is to ensure that creditors have the information they need to make good decisions. Typical clients for a credit bureau include banks, mortgage lenders, credit card companies, and other financing companies. Credit bureaus are not responsible for deciding whether or not an individual should have credit extended to them, they merely collect and synthesize information about that individual’s credit score and give that information to lending institutions. Consumers can also benefit from credit bureaus, by receiving information about their own credit history. Credit bureaus will look at an individual’s borrowing and bill-paying habits to determine whether or not they represent a risky loan. Reports from credit bureaus will usually also help determine the interest rate for debtors on their loans; An individual with a higher credit score will likely have a lower interest rate on their loan.
Advantages And Disadvantages Of Bank Loans
The majority of banks and financial institutions provide personal loans. A bank loans money to a business based on the value of the business and its perceived ability to service the loan by making payments on time and in full. Bank personnel do not usually get involved in any aspect of running a business to which a bank grants a loan. Once a business borrower has paid off a loan, there is no more obligation to — or involvement with the bank lender, unless the borrower wishes to take out a subsequent loan. However, bank loans can be very difficult to obtain unless a small business has a substantial track record or valuable collateral such as real estate. Banks are usually careful to lend only to businesses that can clearly repay their loans, and they also make sure that they’re able to cover losses in the event of default. Moreover, interest rates for small-business loans from banks can be quite high, and the amount of bank funding for which a business qualifies is often not sufficient to completely meet its needs.
History Of Debt And Bank Loans
The concept of debt is both ancient and modern. In his book, Debt: The First 5,000 Years (2011), David Graeber traces the historical development of the idea of debt. According to him, debt-systems were, firstly, recorded in the Sumerian civilization around 3500 BC. It explores the historical relationship of debt with social institutions and much of the fabric of human life in society. It draws on the history and anthropology of a number of civilizations, large and small, from the first known records of debt from Sumeria in 3500 BC until the present. Today, debt is everywhere. Even governments have debts, which can be sold to banks, pension funds, as well as private and overseas investors. These financial institutions and individuals effectively lend the government money in return for gaining a safe investment with a guaranteed interest payment. A large portion of many government debts are invested in by overseas investors.
Romans, ancient Greeks, and other cultures have ample evidence of the age-old concept of loans. The oldest records go all the way back to Assyria and Babylonia where merchants of the time made grain loans to farmers and traders. The main European economies didn’t really catch on to the power of lending until around the 13th century when the all-powerful churches realized the financial benefits of raising much needed revenue in the form of interest. Through the 1800’s, the indentured loan mechanism allowed the landed gentry and rich tradesmen to borrow money for the purchase of land or a house. The early Italians later set up the model of modern banking loans by applying interest rates to the loans they lent out. Lending is now subject to far greater controls with the advent of basic banks and central banks.
The Bank of Amsterdam, established in the Dutch Republic in 1609, is often considered to be a forerunner to modern central banks. The bank’s innovations helped lay the foundations for the birth and development of the central banking system. The model of the Wisselbank as a state bank was adapted throughout Europe, including the Bank of Sweden (1668) and the Bank of England (1694). The Bank of England was given exclusive possession of the government’s balances, and was the only limited-liability corporation allowed to issue banknotes. By the end of the 18th century it was increasingly being regarded as a public authority with civic responsibility toward the upkeep of a healthy financial system. In 1992, the British government gave the Bank of England the freedom to set interest rates. That decision was part of a trend that made central bankers the most powerful financial actors on the planet, not only setting rates but also buying trillions of dollars’ worth of assets, targeting exchange rates, and managing the economic cycle. This has been the subject of debate on whether they are good or bad — with much reason to believe central banks could be a bad force in the world, driven by greed and personal agendas, and being among the most powerful and secretive people on the planet. The founding fathers of the United States interestingly warned against having a central bank.
Until the mid-nineteenth century, commercial banks were able to issue their own banknotes, and notes issued by provincial banking companies were commonly in circulation. The Federal Reserve System belongs to a later wave of central banks, which emerged at the turn of the twentieth century. These banks were created primarily to consolidate the various instruments that people were using for currency and (at least on the surface) to provide ‘financial stability’. Many also were created to manage the gold standard, to which most countries adhered. Central banks of this era also learned to act as lenders of last resort in times of financial stress.
After the Financial crisis of 2007–2008 central banks led change. Central banks debated on whether they should experiment with new measures like negative interest rates or direct financing of government. As governments tightened fiscal policy from 2010 onwards, it sometimes seemed that central banks were left to revive the global economy alone, including the implementation of a country’s chosen monetary policy.
The Future Of Lending
Several factors have led to a shrinkage of loan markets, particularly for high-risk borrowers, and a paucity of options for risk-seeking savers. The resulting lending gap means conditions have been fertile for alternative lending models to emerge and grow, such as online and Peer-to-Peer (p2p) platforms, such as the GetLine Network, which is a decentralized, global-capable, Peer-to-Peer lending platform. Please stay tuned for Part 2 on Peer-to-Peer lending.
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