Does the interest-free economy discourage savings?

In-Depth Analysis

Another charge brought against the interest-free economic theory is that it is most likely to corrode the centuries-old motivation of savings which leads to massive capital formation which in turn is utilized for lending on interest for developmental purposes. Under this established system, the savers are paid interest out of the interest payment received from the borrowers. The basis of such an argument is that the non-payment of interest on savings in an interest-free economy will reduce the value of the original capital over a period of time due to inflationary effects. Believers of the interest rate doctrine also state that on one hand, interest functions as an inducement to save and on the other it serves as a shield against the decline in the value of the original capital. Analysis: Is it true that people save only because they get paid interest on their savings? With interest on saving accounts at around 1% or below and on term deposits at less than 2% per annum in most jurisdictions for the last several years, the non-payment of interest is almost a reality in the current scenario. Have the people stopped saving due to utterly unattractive interest rates? By nature, man is inclined to save because God has not bestowed upon him the ability to envision the future. The urge to save in man not only revolves around his present income and expenditure but also on the expected but uncertain future income and his growing financial needs. In the Quran, the representative of the king at the time to save the grains in the ears for use during the severe drought is referenced (Chapter 12, Verse 47). This establishes the primacy of saving in Islamic thought independent of interest. An Islamic economy generates savings through Shariah compliant investments including Murabahah, Musharakah, Mudarabah, Istisna, Ijarah, Sukuk, and equity markets, allowing investors to diversify their savings and spread the risk across multiple productive channels.