THE ROLE OF FINANCIAL STABILITY IN SUSTAINING ECONOMIC GROWTH: A COMPREHENSIVE REVIEW

Financial stability plays a crucial role in sustaining long-term economic growth by ensuring the efficient functioning of financial institutions, markets, and payment systems. A stable financial system mobilises savings, allocates capital to productive investments, manages risks, and supports consumer and business confidence. This study reviews recent theoretical and empirical literature on the relationship between financial stability and economic growth, with particular attention to evidence from 2020 onward. The review highlights that periods of financial instability—such as banking crises, market dislocations, and excessive credit booms—are associated with significant and persistent output losses. Conversely, resilient financial systems contribute to smoother business cycles, higher investment, and improved productivity. The paper also examines the role of macroprudential regulation, capital buffers, and supervisory frameworks in mitigating systemic risks. While tighter regulation may create short-term trade-offs, the literature generally finds that the long-term benefits of stability outweigh the costs. The study concludes that sustainable economic growth requires a balanced approach combining financial development, prudent regulation, and strong institutional quality. Strengthening financial resilience is therefore not only a policy objective for stability but also a foundation for durable and inclusive economic growth.