Dr. Muzammil Siddiqi, former president of the Islamic Society of North America, states the following: “The general rule in Islam is that haram money should not be used for charity. Allah says in the Qur’an, “O you who believe! Give of the good things which you have (honorably) earned, and of the fruits of the earth which We have produced for you, and do not even aim at getting anything which is bad, in order that out of it you may give away something.” (Al-Baqarah: 267)
The Prophet (peace and blessings be upon him) also said, “Allah is good and accepts nothing but that which is good.” (Reported by Muslim)
However, since Islamic banks are not available in this country and some banks give interest even on checking accounts, one should take this money and give it in charity without counting it as Zakah. A number of Muslim jurists (from Egypt, Saudi Arabia, India and Pakistan etc..) have given this Fatwa. The late Grand Sheikh of Al-Azhar Jadul-Haq `Ali Jadul-Haq mentioned that Muslim jurists in the past also used to allow giving in charity the money whose owner was not known.
As an analogy, they mentioned that someone brought the meat of a goat to the Prophet (peace and blessings be upon him). The Prophet took a bite then he set it aside and said, “I feel that this goat was taken from its owner without permission.” The Prophet then told them to distribute the meat among the prisoners of war. (See Musnad Ahmad, Hadith 21471)
Imam al-Ghazali argued against those who said that it was not right to use haram money in charity. He said, “We are not giving it in charity to seek reward for ourselves, but we are giving it to get rid of it. We had a choice either to destroy this money or to use it to help someone. So we preferred helping someone instead of destroying it.
If someone says that how can we give to others what we do not like to take ourselves. We say to them that we do not take it because we do not need it, but it is permissible for the poor to take it because they are in need.” (See al-Buhuth wa al-Fatawa, 1992, p. 284).”