The eminent Muslim scholar Sheikh Yusuf Al-Qaradawi, states the following: “The interest on bank accounts is unlawful or haram because such interest is an increase of money made without effort or trade. Allah says, “O you who believe! Fear Allah and give up what remains of your demand for usury if you are indeed believers. If you don’t, take notice of war from Allah and His messenger. But if you turn back, you shall have your capital sums. Deal not unjustly and you shall not be dealt with unjustly.” (Al-Baqarah: 278-279)
The repentance meant here is keeping original capital and refraining from taking any increase made without effort or joint investment.
Islam prohibited depositing one’s wealth and taking specified increase without the risk of either loss or profit making. Therefore, the type of investment allowed is where a person deposits money in an account and shares both the risk of making profit or losing. This is the definition of the Islamic investment method.
The question now remains. If someone deposited some amount of money in a bank and he/she is entitled to interest, would he/she take it or leave it?
First, interest is unlawful to him/her, so taking it and paying Zakah would not purify the money. In this case, what would he/she take it or leave it to the bank? I would say take it so long as it is neither your property nor the property of the bank. Because it is unlawful, you should donate it to the poor or to charitable projects and organizations.
Accordingly, interest is not the property of either you or the bank. It is the property of the public and should be spent on public projects. This is the rule for unlawful money in Islam. Again, giving Zakah on this money does not purify it. If this money is unlawful he/she should not leave it for the bank. This will strengthen banks that deal with usury. It should be taken and spent on public projects.
Someone may say that the money deposited is at risk of being lost if the bank declares its bankruptcy. This situation does not invalidate the rule. Rules in Islam are not built on exceptions and this is an exception. Usually, whoever deposits his money makes money. They don’t lose. If they do one time, this is a deviance from the rule.
Someone may also say that the bank trades with the deposited money. The answer is yes. However, when you deposited your money, have you entered a commercial contract with the bank? Of course not! If you entered in a partnership contract from the beginning and the bank lost and declared bankruptcy, then the rule is different. However, depositors usually demand their money when a bank loses and banks do not deny them that right. They usually pay it back even if they declare bankruptcy on the payment basis. Depositors usually do not look at themselves as responsible, as partners in the loss. They demand that their money, even if it has interest with it, be paid fully even though the bank has declared its bankruptcy.”