Dr. Monzer Kahf, Scholar in Islamic Economics & Financial Expert, states the following:
1. Earning interest is not permitted according to the Shari’ah, and normally there are no reasons why a Muslim should earn interest. Muslims are required to use their money, funds and properties in businesses and investments that are compatible with the Islamic Shari’ah. Earned interest does not become a property of its earner because an interest-generating contract is not a means for earning. In other words earned interest is not yours and the principle is that you must return it to the person who paid it.
2. If for any reason a Muslim happens to have earned interest we must look at the ruling on returning it within the realm of the objectives of Shari’ah as well as the specific positions of the minute issue at hand. Earning interest from a person who sells Halal goods is different from earning it from a person whose business is to lend money on interest, especially banks whose basic and dominant activity is to earn interest from people with whom they deal.
Thus, retiring earned interest to a person (a bank is also a legal person) who makes his income from lending on interest, defeats the very purpose for which interest is prohibited and increases the power and income of those who actively spread the evil of interest.
3. Therefore, the ruling of the Second International Conference on Islamic Banking held in Kuwait in 1987 (may be earlier) which was attended by many Shari’ah scholars concluded that it is not permitted to return earned interest to conventional bankers; instead we must apply to such earned interest another Shari’ah rule that requires giving away to general charity any haram money, that happens to come under the hand of a Muslim (remember that it does not become a property of the Muslim, so it is not his), and it is better that such haram money should not be given to a Mosque just for keeping it clean of this dirty money (i.e. interest).
4. Buying cars, houses and other properties on interest-based financing is also not permitted in the Shari’ah, and all Muslims in an area are required by the Shari’ah to establish financial institutions that provide financing on Islamically acceptable grounds. Actually, this is regarded as a fard kifayah (collective obligation) in nowadays since financing has become a necessary part of contemporary life.
Until such institutions exist, the First International Conference on Fiqh in the USA held in Oct. 1999 rightly resolved that for important things like housing for families who are in a dire need of them, interest-based borrowing is tolerated until Islamically compatible institutions are established.