II- History and Evolution of commercial banks
The history and evolution of commercial banks can be divided into distinct phases, from their
early origins in ancient civilizations to their development during the Middle Ages and their
transformation in the modern era.
1- Origins
The origins of commercial banking can be traced back to the earliest civilizations, where
institutions emerged to facilitate trade and safeguard wealth. In Mesopotamia around 2000
BCE, temples and palaces acted as financial centers, accepting grain and precious metals
while extending loans to farmers and merchants. These practices were regulated by the Code
of Hammurabi (c. 1750 BCE), which established rules on lending and interest rates,
demonstrating an early institutionalization of banking activity.
In the Greco-Roman world, banking became more specialized. In Greece, private bankers
known as trapezitae operated in marketplaces, accepting deposits, exchanging currencies, and
granting credit to merchants. Similarly, in Rome, the argentarii provided safekeeping,
currency exchange, and loans. These early bankers not only supported trade but also created
networks that facilitated long-distance commerce across the Mediterranean.
Banking traditions also developed independently in India and China. In ancient India,
merchants used instruments such as the adesha an order directing a banker to pay a third party
comparable to bills of exchange, which enabled the transfer of funds across regions. In China,
during the Tang and Song dynasties (7th–13th centuries), institutions issued jiaozi, considered
one of the earliest forms of paper money, while providing credit and safekeeping services to
traders.
II- Core Functions of Commercial Banks
Commercial banks act as financial intermediaries, channeling funds from savers to borrowers.
As the IMF observes, their primary role is “to take in funds called deposits from those with
money, pool them, and lend them to those who need funds”. In practice, this intermediation
entails three core functions: accepting deposits, providing loans and credit and facilitating
payments and transfers. They also offering various other financial services. Each function is
essential to the bank’s role and to the broader economy, as outlined below.
1- Accepting Deposits
Commercial banks provide a secure place for individuals and businesses to park funds. They
accept various types of deposit accounts for example, demand (checking) accounts that
allow immediate withdrawal, savings accounts (interest-bearing with limited transactions),
and time or fixed deposits locked in for a set term. In IMF terms, “deposits can be available
on demand… or with some restrictions (such as savings and time deposits)”. By pooling these
deposits, banks accumulate the funds they will re-lend to borrowers. Depositors typically earn
interest (lower than the bank charges on loans), and in many countries deposits are backed by
government insurance for example in Côte d’Ivoire, deposits are backed by a regional deposit
insurance scheme under the FGDR-UMOA, which guarantees compensation in the event of a
bank failure. This deposit-taking function thus provides liquidity and safety to savers, while
supplying the bank with the capital needed for lending. The difference between the interest
paid on deposits and earned on loans constitutes most of a commercial bank’s income.
2- Providing Loans and Credit
Lending is the chief asset-generating function of a commercial bank. Banks use deposited
funds to make loans to households, businesses, and governments a process often described as
capital allocation. Loans take many forms: mortgages for home purchases, auto loans,
business loans, consumer credit, and lines of credit (such as overdraft facilities or credit
cards). Banks evaluate borrowers’ creditworthiness and typically require collateral or
guarantees to mitigate risk. The interest paid by borrowers is higher than what the bank pays
depositors, and this “spread” is the bank’s primary profit. As one analyst notes, commercial
banks are fundamentally in the business of “capital allocation… making loans and extending
credit to people who can pay it back”. Moreover, by issuing loans banks effectively expand
the money supply. Under fractional-reserve banking, only a fraction of deposits are held as
reserves, so when a bank credits a borrower’s account with a loan amount, new deposit money
is created. This credit creation process can multiply the initial deposits through lending (the
so-called money multiplier). In this way, bank lending not only finances economic activity but
also generates money in the economy.
3- Payment and Transfer Services
Another core function is to enable financial transactions between parties. Commercial banks
maintain the payment system infrastructure: they clear and settle checks, process electronic
funds transfers, and issue payment instruments. For example, banks provide debit and credit
cards, online and mobile banking transfers, wire transfers, and automated clearinghouse
(ACH) transactions. As the IMF explains, banks “process payments, from the tiniest of
personal checks to large-value electronic payments between banks,” and they participate in
complex clearing networks (often involving central banks and private clearinghouses). In
many countries, banks also operate real-time settlement systems or instant payment platforms,
so that transactions can be settled almost immediately. Efficient payment services are vital for
commerce. A smooth, reliable payments infrastructure ensures wages, invoices, and purchases
can be settled quickly. Indeed, a well-functioning payment system is widely regarded as “a
prerequisite for an efficiently performing economy” disruptions in payment clearing (such as
network failures) can severely hamper trade and growth. Thus, commercial banks play a
critical role in both domestic and international payments: handling everything from payroll
direct deposits and bill payments to large interbank wire transfers and cross-border transfers
(e.g. via SWIFT).
Beyond deposits, lending, and payments, commercial banks provide a variety of ancillary
services to meet customer needs. They may rent safe-deposit boxes, issue traveler’s checks,
money orders, and payment cards, and act as agents or trustees by collecting payments,
handling foreign exchange, or managing estates. Many banks also offer investment and
insurance products, such as mutual funds, wealth management, and insurance brokerage,
while supporting trade with letters of credit and guarantees. Though secondary to deposit-
taking and lending, these services complement core functions and give customers a complete
range of financial solutions that sustain both daily transactions and long-term economic
activity.
SOURCES:
https://www.ancientpages.com/2016/03/07/modern-banking-concept-started-ancient-babylonian-
temples/
https://www.cambridge.org/core/journals/journal-of-economic-history/article/origin-of-banking-
religious-finance-in-babylonia/B5696F26B0DD719F277A7BEDCBA9F249
https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Banks
https://www.fgd-umoa.org/en/intervention-framework/deposit-insurance/
