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Question: Is it halaal (permissible) to take interest from the bank and give it to the poor, to the needy and/or to charity organizations just because it is free money? And why not give it to those who need it most? I am assuming that taking interest on one’s deposit is haraam. I have heard that interest is halaal in Darul harb (abode of war), which I don’t agree to.
Answer:

Interest is Haraam (forbidden) for you to take or use for yourself. Since this is common knowledge, we do not need to belabor this point.

But if the question is, what should we do with the interest that accrues in a saving account? Should we leave it to the bank or should we take it out? The answer is certainly, yes, we must take it out. Because by leaving the interest to the bank we are committing a graver sin: i.e. fattening an institution which thrives on interest. Therefore, the only valid option for us is to take the interest out from the bank, but while doing so, we must make sure to keep track of every penny we have thus received, and give it all away.

We are not supposed to spend a penny out of such funds on ourselves or our dependents; we can, however, spend them on our other poor relatives—who are not our dependents--, if they do not have sufficiency of means, or to help refugees or humanitarian causes. We must also take care not spend out of such funds on building mosques.

The above ruling of scholars has been based on a valid principle of Islamic Jurisprudence which states, when there is a conflict of two considerations, both of which are evil, and we are left with no third option, we must choose the lesser of the two. Thus in the case of interest accruing in saving accounts, the option of taking it out and giving it away is definitely the lesser of the two evils as compared to leaving it to the bank.

Coming to the so-called Fataawa (rulings) about Darul Harb, they are irrelevant to our situation today- even if, for argument’s sake, one were to accept the inferences based on them. We are definitely not living in Daar al-harb here in North America; rather we are living in an open and free society where we Muslims enjoy full freedoms to practice our religion like every one else. Hence, such medieval distinctions and categories of thought should be dismissed outright as anachronisms.

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