The study of the evolution and history of financial innovation revealed that such innovation was occurring at a brisk pace in the Mesopotamian civilisation, which existed in 3000 BC (Laevenet al., 2015; Verdier, 2013). Whilst many transactions in those days occurred free of cost and without agreements for future or immediate compensation, trade through exchange of goods of equivalent value was strongly prevalent (Laevenet al., 2015; Verdier, 2013). This resulted in the conceptualisation of commodity money, which enabled people to procure products and services with the help of commodities like gold and other precious metals, which were considered to be valuable (Railiene, 2015; Mention &Torkkeli, 2014). The development of trade resulted in the generation of forms of personal loans, which were compensated through interest. This in turn resulted in the development of increasingly sophisticated financial instruments and the establishment of banking firms in the Mesopotamian valley (Railiene, 2015; Mention &Torkkeli, 2014). This resulted in the development of specific financial instruments like bank deposits and acceptances from bankers (Railiene, 2015; Mention &Torkkeli, 2014).
This period also witnessed the development of contingency claims (Arthur, 2017a; Lee et al., 2012). With individuals being able to transfer ownership of monies through financial arrangements to the future, they simultaneously became vulnerable to risks on account of future uncertainties (Arthur, 2017a; Lee et al., 2012). Both borrowers and lenders could as such buy contingency claims through entry into financial agreements that called upon one party to make a payment that depended on the results of some occurrence (Mention &Torkkeli, 2014; Lee et al., 2012). Such arrangements were however subject to the inherent limitations of the barter system and could occur only if traders could identify people who desired the product or service that was on offer (Mention &Torkkeli, 2014; Lee et al., 2012).
With there being a necessity for a medium of exchange for the facilitation of trade, early types of metal money started to emerge, first in China in 1000 BCE and then in other countries, especially in the Middle East (Wyman, 2012; Laevenet al., 2015). This helped market participants in trading contractual claims to other parties (Wyman, 2012; Laevenet al., 2015). Lenders could for example sell their loan contracts for coins when in sudden need of cash. State bank paper money emerged in the 11th century AD, which facilitated financing arrangements (Su & Si, 2015; Arthur, 2017a).
Whilst there was a lull in financial innovation during the dark ages, commercial practices in city states like Venice and Genoa in Northern Italy evolved in the 12th and 13th centuries, resulting in use of bank deposits and acceptances (Schueffel&Vadana, 2015; Railiene, 2015). The use of these instruments spread widely in Europe in subsequent years along with the development of capitalism, which was based upon specific investments in the development of marketable goods (Schueffel&Vadana, 2015; Railiene, 2015). The growth of capitalism, which was distinguished by entrepreneurial activity, increasing competition, private ownership, and joint stock companies, resulted in the motivation for the creation of new financial instruments and products to satisfy the requirements of capitalists (Su & Si, 2015; Arthur, 2017a). Bonds and equities, two new financial instruments were developed to facilitate this by the 16th century (Su & Si, 2015; Arthur, 2017a). A Russian joint stock company issued equity in the 1550s, followed by the issue of bonds by the French government (Lee et al., 2012; Mention &Torkkeli, 2014). The use of bonds and equities spread across the western nations. Companies started issuing bonds and developed other types
