The shadow banking system refers to financial institutions and activities that perform bank-like functions — lending and fund-gathering — but operate outside traditional banking regulations.
Shadow banking entities include money market funds, hedge funds, private equity firms, peer-to-peer lenders, and special purpose vehicles.
Benefits include expanded credit sources, increased market efficiency, and financial innovation. Risks include lack of regulatory oversight, systemic risk (one institution's failure can cascade through the financial system), and liquidity risk.
In Bangladesh, while large-scale shadow banking as defined internationally is limited, some non-bank financial institutions (NBFIs) engage in activities comparable to shadow banking.