SHADOW BANKING AND NEPAL RASTRA BANK: A POLICY REVIEW Journal of International Money, Banking and Finance Vol. 1, No. 2, 2020, 155-177 © ARF India. All Right Reserved URL : www.arfjournals.com Som Raj Nepali * Article History Received : 22 September 2020 Revised : 29 September 2020 Accepted : 28 October 2020 Published : 25 December 2020 Key words Shadow banking, regulation, supervision, central bank and financial stability. JEL Classification G21, G22, G23, G28. © 2020 ARF Journals All Rights Reserved 155 * E-mail: bepositivesom@gmail.com ABSTRACT Economic liberalization, financial inclusion and financial innovation have fueled not only the growth of banking institutions but also non-banking financial institutions called shadow banking. Shadow banks are rendering easy access to financial services and credit availability and supporting Nepalese economy. The study uses exploratory and descriptive research design. The study found that nonbanking sector has occupied 12.7 percentages of the total assets and liability structure of the Nepalese financial system in mid-January 2019 which was 11.5 percentages in mid-June 2018. Shadow banking, however, can raise the systemic risk via reinforcing interconnectedness between financial institutions. This study reviews the national and international financial agencies’ policies that Nepal Rastra Bank (NRB) can refer to and has already responded through various policies for the regulatory framework. As a central bank of Nepal, NRB is in the avenue of setting up the prudential mechanism for the stronger regulation to prevent excessive leverage, deregulation and maturity mismatch of shadow banking in order to achieve financial stability in Nepal. I. INTRODUCTION The term shadow banking was coined by Paul McCulley, from Pacific Investment Management Company-PIMCO, at a Federal Reserve System Annual Symposium in August 2007. In the 2007 economic crisis, many traditional banks conked out owing to the collapse of the real estate market, making room for the shadow banking system to flourish. However, at the epicenter of the financial crisis and after the economic meltdown, it has come under close scrutiny and regulation.