Donating Interest Money

Interest is forbidden in Islam. Scholars have given many fatwas that interest money paid by banks should be withdrawn and given to some charitable purposes. 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.
Dr. Monzer Kahf, a prominent economist and counselor, states the following: The principle is that interest, being the most common kind of riba, is prohibited to take and give. This is well established in the Qur’an, especially verse 2:279 and in many authentic sayings of the Prophet (peace and blessings be upon him). According to the Shari`ah, interest is not due to begin with. This means that a Muslim must not charge interest on a debt he/she may have on others and, consequently, it should not be taken.

But while this applies to individual interest payers, applying it to a bank is problematic because the bank takes it as a business to lend the money you deposit on interest basis to other people, and leaving interest to the bank allows it to make more of its unjust dealings and transactions. Besides the bank will make a fool of you, taking your money free and gaining more from your account!
therefore, the fatwa is to discourage banks from making interest transactions, at least by not leaving this amount of interest it gives you to the bank, and treating this money, which is not permissible for you to use as your own money, in a way similar to treating any haram (forbidden) money that happens to come under your hand, giving it to charity. In other words, while it is haram for you it is not haram for the poor and orphans, etc.
Consequently, yes, one can use it to give food to the poor and the needy and orphanages, etc. and you can add to it from your own money as sadaqah and zakah as long as you give it to deserving poor, etc. Mosques and copies of the Qur’an should be kept more sacred by not using such money for them.