Question :

Dear scholars, As-Salamu `alaykum. I want to know about the interest that the bank gives us when we deposit money. Is it considered haram? If so, what should we do with the interest we get from the bank? Jazakum Allah khayran.

Answer (Sheikh Ahmad Kutty) :

Wa `alaykum As-Salamu wa Rahmatullahi wa Barakatuh.
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.

Dear questioner, we would like to thank you for the great confidence you place in us, and we implore Allah Almighty to help us serve His cause and render our work for His Sake.

Interest (riba) is forbidden in Islam. Scholars have given fatwas that interest money paid by banks should be withdrawn and given to some charitable purpose. One should not use it for one's own expenses, and it is not considered in the payment of one's Zakah. Thus, one is allowed to give charity out of bank interest but will not be rewarded for it as an act of charity. Rather, one will be rewarded in sha’ Allah for an act of repentance and for cleansing one’s money from haram sources.

The Shari`ah position is that earned interest is not earned, but it is still owned by the payer. But since the payer is a bank whose business is to give loans on interest, you must not return it to the payer, as such an action increases the evil of interest and empowers the evil
doers. Thus, you need to dispose of this interest money by giving it to some Muslim charitable purposes to keep your own money clean.

In his response to your question, Sheikh Ahmad Kutty, a senior lecturer and Islamic scholar at the Islamic Institute of Toronto, Ontario, Canada, states:

Since interest money is considered haram (unlawful) in Islam, you are not supposed to use it either on yourself or on those who are considered your dependents. On the other hand, you are also not supposed to leave the interest thus accumulated to the bank either, for to do so is akin to fattening an institution that thrives on interest.

Therefore, the only permissible option left to consider for you is to take out the amount thus accumulated and give it all away to public charities such as hospitals, orphanages, refugees, and welfare. By doing so you have discharged your obligation and you are absolved of any sin or guilt, in sha’ Allah.

(Source: Islamonline)