Islam encourages to give money on loan. The best is to lend money with no time limit on the borrower. It is difficult I understand but when we lend money we don't do it only to help our brothers and sisters who are in need but we do so to please our God. God knows that love for money and worldly things is a disease and He wants us to purify ourselves by loving only what deserves to be loved and that is our Creator. We come in this world empty handed and whatever we earn is given by God so we should not think twice when spending in the way of Allah.
True, but it only works if you are spending/investing/lending to people who are going to use the money righteously and not use it to fuel indulgent lifestyles and otherwise waste resources. Although this verse doesn't refer to money/economics, I think it applies here:
6Do not give dogs what is holy; do not throw your pearls before swine. If you do, they may trample them under their feet, and then turn and tear you to pieces.
Sometimes, it is good to invest resources but sometimes it is better to withhold money to prevent it from tempting exploitation the way blood in the water tempts sharks into a feeding frenzy.
It is always good to take a step back economically and ask, "what do people really need to live healthy, prosperous lives?" Usually, people struggle with money not because of hunger or lack of access to clothing and shelter but because they overspend on unnecessary things for the sake of pleasure, fun, status-attainment, etc. They could live a humbler life and still be blessed and experience great joy and happiness, but they foresake that in order to waste money and resources in pursuit of desires that don't align with right living.
“Indeed, the men who practice charity and the women who practice charity and [they who] have loaned Allah a goodly loan – it will be multiplied for them, and they will have a noble reward.” [Al-Hadid (57:18)]
Charity doesn't have to involve money. You can help people by setting an example of how to live humbly, so that they can see choices they are free to make that will give them peace of mind and keep them out of debt. Often people have been tricked by their minds or others around them into thinking they need things that they don't really need, and those false needs drag them into debt and keep them from realizing a prosperous state in which their income, however modest, exceeds their costs.
Notice in this verses Allah is asking to loan to Allah. Imagine of your mother asks you to borrow $100 for you, would not you think that why my mother is asking me to lend her money? After all she raised me and she deserves to demand her rights. But if she is asking you too lend her money then she probably knows that you are a stingy person and love money more than your mother.
Some people have mothers who are addicted to drugs or other costly expenditures. Sometimes honoring someone, even a parent, means rebuking and disciplining them with love, i.e. because you want to help them overcome sin, not fund it by just giving them money.
Similarly when Allah is asking us to lend Him money, He is indirectly also telling us that He knows that we love material things and for that reason He wants to help us out so that by spending our money in His cause we can get benefit in both worlds.
Money is not a material thing. It is a means of getting material things. When you save money instead of spending it, you are foregoing material things that you don't need in the present. The money you save gives you peace of mind that you will not have to beg or otherwise lack of material things in the event that your income decreases in the future for whatever reason. If you can save money until you die, you can leave the money for your children, who have hopefully also learned to save for the future by foregoing unnecessary/wasteful expenditures in the present.
On a larger economic scale, the more people save and avoid spending, the less impetus there is for inflation, which is a tax on saved money. If someone with even the most modest income can learn to spend less than their income, they can save money and even that small amount of money will give them security and peace of mind for the future if inflation is kept to a minimum. Deflation would be the most charitable economic state, but as you may realize, central banks are always setting inflation targets and manipulating interest rates to achieve those.
In another place Allah says:
Believe in Allah and His Messenger and spend out of that in which He has made you successors. For those who have believed among you and spent, there will be a great reward. [Quran 57:7]
Well, you have to spend what is necessary, but overspending is waste and I don't know of anyone righteous who encourages waste. Do you?
Notice here Allah directly says that He made us successors of what we own today and should not shy to spend on needy people.
Oftentimes, needy people lie because they want money for alcohol/drugs/etc. It is best to give food directly and allow people to camp or build their own housing somewhere if they can do so without causing environmental and social harm.