Where we've been

When looking at where we've been, it's important to look at both the history of microfinance and the history of the formal banking sector, because it is likely that areas lacking formal banks are going to develop them in similar ways.

Microfinance History

The idea of microfinance dates back to community-oriented pawnshops in the 15th century. Over the next few centuries with the Irish Loan funds in the 18th and 19th centuries and the beginning of the European credit Union in the mid-19th century. Around this time, Lysander Spooner wrote of the benefits of microloans for entrepreneurial activities to the poor to alleviate poverty.

Microcredit became big in the US when it was included in parts of the Marshall Plan at the end of World War II. Microfinance institutions have changed over the course of the last few decades, beginning in the 1950s with subsidized agricultural credit in hopes of raising incomes and productivity. The 1970s saw the beginning of microcredit as it is known today, beginning originally in Bangladesh with the Grameen Bank. During the 1980s and since, they have primarily involved providing small loans to poor women to invest in tiny businesses to accumulate assets and improve household income and welfare. The most visible way in which microfinance exists is through microcredit, thanks to the 2005 declaration by the UN of that year being the Year of Microcredit.

History of the Formal Banking Sector

There is a long history of basic banking ideas dating back millenia that involved deposits and loans of commodities. Modern-day banking has its roots in Medieval Italian cities. Most of these early banks were set up by trading families to assist with general business activities. They often had very large clients such as other trading families, royalty, and even the papacy. Originally, it was illegal to charge interest, so the connection to trade was important because interest could be charged in the form of trading different currencies.

In the middle of the 17th century, goldsmiths were issuing receipts for precious metals that they held. The receipts were then used as currency. At some point, they realized that they could issue more receipts for gold and silver than they had in their vault because not everyone would ask for it back at the same time.

In the United States, banks were able to set up and issue their own notes very easily throughout the middle of the 19th century, until a federally chartered system of banks that supported protected national bank notes was set up after the civil war. It is this system that has basically laid the groundwork for what we have today.

As you can see, the formal banking sector began with a currency (notes for precious metals) and acted as places to store savings. It was only after this happened, that they began working to hand out loans. And then finally, all of the individual banks were pulled together and forced to use the same notes and work under the same system. This is similar to our pyramid in the Where We Are section.