History of Banking

Finance existed before purpose-built banking institutions. Merchant bankers accepted deposits, transferred funds, and handled bills of exchange, while money dealers known as sarrafs supplied credit. These activities connected banking functions with commercial relationships rather than a separate nationwide banking organization. s1

The British-owned New Oriental Bank opened Iranian operations in 1888. The Imperial Bank of Persia followed in 1889 under a concession that included exclusive banknote-issuing rights. A Russian loan bank subsequently added another institution tied to a foreign power. Modern banking therefore developed within the unequal diplomatic and commercial relationships of the late Qajar period. s1

Iranian ownership changed that landscape. Bank Sepah began in 1925 with army pension resources, and the government-owned Bank Melli followed in 1928. Melli became central to mobilizing domestic funds. Later private banks and specialized lenders broadened the institutional landscape and the channels through which savings could reach investment. Potkin Basseer’s historical assessment nevertheless distinguishes expansion of finance from its distribution: credit serving government priorities did not necessarily provide equivalent opportunities for private borrowers. s1

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The revolution brought nationalization and consolidation of banking institutions. A contemporaneous IMF account describes this reorganization as preceding the implementation of the Law of Usury-Free Banking. The law was passed in 1983, with implementation beginning in March 1984. These were distinct changes: nationalization concerned ownership, while the later framework concerned how financial transactions were structured. s2

This distinction matters when reading institutional histories. A bank can retain familiar functions such as accepting deposits and financing businesses while the legal language and contractual basis of those activities change. Conversely, adopting a new framework does not by itself establish how risk and returns are distributed in practice. The IMF account is evidence of the historical reform sequence, rather than verification of compliance by every bank. s2

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A 2019 Peterson Institute policy brief illustrates why legal descriptions need to be checked against banking behavior. Its authors described a substantial gap between formally prescribed Islamic financial principles and transactions that, in their assessment, often resembled conventional fixed-return banking. This is a dated analytical finding, not a statement that every institution or contract operated identically. s3

The same study examined competition from unlicensed financial institutions. Some attracted deposits with higher promised returns while operating outside adequate supervision. Subsequent intervention, liquidity support, closures, and transfers of assets and liabilities demonstrated that financial activity extended beyond the institutions visible in a conventional bank directory. s3

For readers exploring this history, the useful distinction is between who owns an institution, which contracts it formally uses, and how effectively it is supervised. None answers the others automatically. Banking history consequently concerns both the expansion of financial services and the recurring problem of making promises to depositors credible. The evidence presented here reaches into the late 2010s; it does not establish the condition of the banking system at the 2026 cutoff. s3

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