The name Penang comes from the Malay word Pinang, which means the “betel nut tree” (Areca catechu). The name Pulau Pinang translated literally from Malay means "betel nut island". The original name of Penang was Pulau Ka-satu or "First Island", it was renamed to Prince of Wales Island on 12 August 1786 to commemorate the birthday of the Prince of Wales, who later became George IV. During the early and middle parts of the last century, Penang Island was also known as "The Pearl of the Orient". The capital, George Town, was named after King George III of Great Britain.

Penang was part of the Malay sultanate of Kedah until 1786, when Captain Francis Light built a fort at the site of present-day George Town and managed to get the island ceded to the British East India Company. Local folklore tells of how he fired gold coins into the surrounding jungle to induce his men to clear the area. Fourteen years later, the Sultan of Kedah further ceded a strip of land on the mainland across the channel to a very persuasive Captain Light. In 1832, Penang Island, along with Malacca and Singapore, became the three British Straits Settlements. The Penang maritime port was among the busiest in the region, attracting rich merchants involved in the lucrative trade of tea, spices, porcelain and cloth.

Settlers and fortune-seekers from the all over called Penang home and it was from this interesting mix of Chinese, Malay, Indian and Siamese (to name a few) cultures that Penang became a melting pot for hybrid communities – the most famous being the Baba Nyonya, Jawi Peranakan and Eurasians.

For more than a century, the major trading post remained under British colonial rule until 1957, when Malaysia gained independence. George Town was accorded city status by Queen Elizabeth II on 1 January 1957, thereby becoming the first town in the Federation of Malaya, after Singapore, to become a city.

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