What is Shadow Banking?

Do you know what credit default swaps, hedge funds, hundi, hawala, payday loan lenders and the derivatives market have in common? They all are a form of shadow banking.

Here is a quick, short video explaining shadow banking.


Have you ever wondered what the term ‘shadow banking’ means? My name is Faisal Khan. I’m a banking and a payment consultant and I will explain that term to you today.

Most of the financial transactions that happen in the world today including credit, debits, payments etc. are all happening in a license and a regulated environment. Whenever you have credit that is for example made outside the regulated environment hedge funds, derivatives, credit default swaps, payday lenders etc. all that encompasses as shadow banking.

When you have banking or pseudo banking functions being offered outside the regulated environment, it is termed as shadow banking. Hawala is shadow banking, hundi is shadow banking. You know, payday loans are shadow banking. Your credit default swaps which bought the 2008 crisis, shadow banking. So, anything that is outside the regulated environment where the regulator does not have its ‘claws in’, is termed as shadow banking.

I hope I was able to answer that concept. As always if you have any questions or comments. Feel free to ask below and I’ll be happy to answer them. Till next time, thank you.

This page was last updated on December 10, 2019.

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