The origin and evolution of installment credit: The EMI story

The origin and evolution of installment credit: The EMI story

If you thought the core concept behind the Equated Monthly installments (EMI) has roots in modern times, you are in for a story today. The practice of installment credit isn’t new. And by ‘isn’t new’ we mean that it is as old as civilization itself. There are certain reports that suggest that credit repayment in parts was even prevalent during the barter system times and earlier, albeit in a much different form, even before the concept of currency had come into existence.

So, what’s the genesis of credit as a concept? If studies are to be believed, you’d be surprised to know that it dates back to ancient Mesopotamian times. That’s about 4,500 years to 5,000 years ago! For the unaware, Mesopotamia, which is modern-day Iraq, Kuwait, Turkey and the surrounding areas, is often referred to as ‘The Cradle of Civilization’. In short, it is the land where the earliest-known civilizations are believed to have begun, the time to which installment credit also dates back. Agriculture loans and other forms of consumer credit, mostly to propel trade, were said to have been common.

While the prevalence of consumer credit in Sumer is still debated, historians have some evidence to prove the same in Babylon. Seeds were lent for farming with a promise that the repayment would be in the grains reaped from the borrowed seeds, it is said. Now, take into consideration the Code of Hammurabi, the oldest-known evidence of a legal framework followed in the Babylonian empire, which recorded the terms loan, debt, creditor, and the concepts of collateral, penalty, and repayment.  One of the laws (which as a matter of fact are inscribed in stone) says that if a storm prostrates the grain or the harvest fails or the grain does not grow for lack of water, the debtor doesn’t have to pay the creditor any grain that year (pretty considerate for a law that also propagated an eye for an eye to grant debt relief, isn’t it?). Grains and silver were usually used for debt settlement and the interest was usually calculated annually. Equated Yearly Instalment, if you will.

And then a little later in time and elsewhere in Ancient Greek and then in Roman and beyond, different forms of loans were prevalent in accordance with their law, various research show.

Closer to home too, where another earliest form of civilization began, there are pieces of evidence of usury dating back to ancient and early Vedic times.  For instance, ‘usurer’ or ‘Kusidin’ was mentioned several times in Vedic texts with the interpretation of a lender who lends on interest. This was done in the context of prohibiting lending at interest rates between 2,000 and 1,400 BCE (Before Common Era). Ergo, almost 4,000 years ago.

More frequent and detailed references to interest payment are to be found in the later Sutra texts (700-100 BCE), as well as the Buddhist Jatakas (600-400 BC). The above observations were made in the ‘History of Usury Prohibition, A Short Review of the Historical Critique of Usury’ by Wayne A.M. Visser and Alastair McIntosh.

Other religious scripts such as Manusmriti and Arthashastra, the ancient Indian treatise on economic policy, statecraft, political science, and military strategy, attributed to Kautilya, also have references to lending, interest rates, creditor, and others in a rather detailed manner.

A little further into time, a Reserve Bank of India’s publication titled Payment Systems in India notes, there existed loan deeds – called ‘rnapatra’ or ‘rnalekhya’ – were in use in Ancient India. These deeds contained details such as the name of the debtor and the creditor, the loan amount, the rate of interest, repayment conditions, and tenure. The publication also said that the execution of loan deeds continued during the Buddhist period when they were called ‘inapanna’.

Nineteenth-century Period Hundi. Hundi was the most important class of credit Instruments that evolved in India and their use was most widespread in the twelfth century. They represent the oldest surviving form of credit instrument. COURTESY: MUSEUM CELL, RBI

As civilization progressed, so did the concept of credit which eventually evolved into a more structured, legitimate and commercial (read interest, penalties and business-like) manner through different ages and eras. With formal banking coming into the fold of civilization the world over, lending credit and regulation only became more sophisticated and common with more legal protection to both the lender and the borrower.

Fast forward to modern times, thanks to the advent of technology, the steady growth of trade and commerce, and financial necessities, installment credit found even more popularity and has become an indispensable part of life.

In the early times of civilization and BCE, transactions of installment credit were carried out in places of worship and other official places for centuries. In the Common Era through the Middle Age and the Early Modern Era, banks (in different forms) emerged and had become lending institutions. And you all know the story from there. To their credit, banks have formalized lending and further created a category for installment credit. Today, in the fintech era, we have installment credit, available almost instantaneously at the click of a button. You know this story too.

So, the bottom line is that installment credit has behind it several full centuries of history as a concept and remained a popular and viable instrument of payment. It has undergone changes on various fronts, but as a definition, it is more or less similar to the present-day Equated Monthly Instalment (EMI). Simply put, the core concept of installment credit remained the same – borrow some loans and repay them in installments. What it did also remained the same – gave people a chance to afford things that they otherwise wouldn’t have been able to, gave them financial independence, provided them with flexibility and convenience, and ultimately helped them not compromise on their plans.

What changed though are the names – from the mention in the Babylonians’ the Code of Hammurabi to references in Ancient Greek and Rome to the practices in the common era to more structured forms in early modern times such as layaway credit to the more recent EMI to pay-later – it is same, same, but different. Of course, the intent, channels and conditions changed as a new name came by. But that is only natural and is a part of evolution!

That is it for today, folks. We have seen the EMI evolution this week. Next week, we shall discuss the EMI revolution.

Note: You now know the origin and evolution of installment credit/EMI. In case you need quick, transparent and low-cost credit at flexible repayment tenures, click here. We are happy to help!