Brú Finance's Defi series traces the history of finance from ancient times and discusses the Indian banking sector's Hundi system. The series aims to explain how DeFi works and its potential to revolutionize the financial industry.
Welcome to Brú Finance’s Defi series. This series aims to provide our community and DeFi enthusiasts with detailed explanations of how Defi works, its origin, infrastructure, and implications in the financial industry.
Over the next few weeks, we will be writing about DeFi. Join us on the journey with Brú Finance to learn more about DeFi.
Let’s start with the History of Finance.
In the history of economy and finance, many different types of financial systems exist. From ancient Rome to modern-day America, finance has always been an essential part of society.
In this article, we will look at the different types of financial system and how they have played a role in history, how they have been used to generate wealth and help businesses succeed, and how they have shaped the world.
The history of finance can be traced back to ancient Mesopotamia, where traders and bankers made deals for centuries. In the 6th century BC, the Sumerians developed a system of writing known as cuneiform, which helped them to organize their transactions.
The first banks were founded in Athens in 546 BC. In China, merchants started trading with India in the 1st century BC and began to learn about banking. In India, the first organized banking system was set up by the Buddha in 350 BC. From India, Indian traders started trading with Southeast Asia and the Persian Gulf. In 914 AD, Buddhist monks traveled to Baghdad to establish an Islamic bank.
While we argue that today’s financial system is plagued with inefficiencies, it is much better than the past systems.
Did you know that initial market exchanges were peer-to-peer?
A barter system requires the exact matching of two parties’ needs.
Non-physical transfer of money originated in 1873 with Western Union.
The pic shows a copy of an early transfer for $300. Notice the amount of the fee to $6.34 or roughly 3%.
It is remarkable that so little has changed in 150 years. Money transfers are routinely more expensive, and credit card fees are
The current system of banking has mostly stayed the same in the past 150 years. While digitization was an important innovation, it was an innovation that supported a legacy structure. The high costs associated with the legacy system spurred further innovations that we now refer to as Fintech.
Although this P2P financing has revolutionized banking, it has remained almost unchanged in the past 150 years.
Now that we have seen the Western banking system let’s dive into the history of the Indian banking system.
Did you know that India had a unique and complex transfer system that dates back to the 8th century, way earlier than the P2P barter system of Western Union?
It was called the Hundi system. The word Hundi goes back to medieval India. This system can be considered a precursor to the formal banking sector. The interest rates in Hundi were relatively high — 18% on average and the borrowers usually tend to pay interest monthly.
Technically, a Hundi was an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order.
The Marwaris were pioneers of Hundi transactions, and as the lines of communication and transportation increased during the later era, so did the business empires of Marwaris.
Hundis, being a part of the informal system, have no legal status and are not covered under the Negotiable Instruments Act of 1881. Though generally regarded as bills of exchange, they were more often used as equivalents of cheques issued by indigenous bankers.
Finance is a complex and old field that has dramatically impacted the world. Over the years, finance has developed various methods and tools to help businesses and individuals manage their finances. This has led to more significant opportunities for individuals and businesses, making finance one of the most critical aspects of economic development.
With technological advances, finance is now more accessible to a broader audience and has more opportunities to impact the economy. It is essential that people understand the history of finance so that they can future-proof themselves and their businesses.
In the next part of this series, we will look at how finance has advanced with technology and is changing the way we interact with the financial market.
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