The Quick Answer
No.
Allah, Most High, and His Messenger Muhammad, on him be peace, have emphatically forbidden and declared equal to unbelief (kufr) the consumption of all riba — that is interest-wealth — whether this increase is called “interest,” “usury,” or by any other name.
Muslim scholars universally affirm the unlawfulness of all riba-interest dealings.
What Is Riba?
Riba is defined as money paid at a particular rate of increase over time:
For the use of money lent
For delay in debt repayment beyond a loan or debt’s specified life
Or any unequal exchange of the same forms of wealth, gold for gold, silver for silver, wheat for wheat, etc.
For detailed descriptions of these kinds of riba, or interest, and their prohibition read What Is Riba and Why Is It Forbidden? and What Types of Riba Are There?
Why do Muslim scholars say Zakat cannot be paid from interest?
Zakat is the only hybrid Pillar of Islam. As an obligatory sadaqah, or charity (by which name it is often called by Allah in the Quran), it is simultaneously a transaction and worship.
As an obligatory rite of worship, Zakat purifies wealth. Yet no amount of purification or good doing with ill-gotten, unlawful wealth of any kind can launder the taint of its wrongful possessor. Nor can it remove the stain of haram, divine prohibition, from it, nor from the one who wrongfully obtains the wealth that mixes with the provision that ultimately sustains him, nor from any accomplice to such unlawful transactions.
The Prophet, on him be peace, said:
O people! Indeed, Allah is good. He does not accept save what is good. And, indeed, Allah has commanded the believers with what He has commanded His Messengers. Hence, He has said: ‘O Messengers! Eat of all that is wholesome and do righteous deeds. Indeed, I am all-knowing of all that you do’ (Surat Al-Mu’minun, 23:51). And He said: ‘O you who believe! Eat of the wholesome foods which We have provided for you. And give thanks to Allah, if, indeed, it is He alone whom you worship.’”
Then he mentioned a man of long travels, utterly disheveled and dust-covered, stretching forth his hands to the heavens: “‘O my Lord! O my Lord!’ Yet his food is unlawful. And his drink is unlawful. And his clothes are unlawful. And he is sustained with the unlawful. How, then, shall he be answered with all this?” (Muslim)
Muslim, the identifying name of the celebrated scholar and his collection of authentic prophetic reports (hadith), included this report in his section on Zakat donations.
For the issue here is consumption of the unlawful, even as riba-interest is, in the revealed words of the Divine, said to be “consumed” or “eaten” (akala). That is because people sustain themselves by means of these unlawful gains, which taints all their wealth — what they eat, drink, clothe, and nourish themselves and their families with.
The point is that such forbidden wealth unlawfully acquired severs one from the grace of Allah and His help, even if that person seems to be striving for Allah and calling sincerely upon him, like our traveler in the prophetic example. How can giving, in compliance with Allah’s command of Zakat, a small bit of what you have unlawfully gained by going against Allah’s severe prohibition on interest purify you and draw you close to Him?
Thus, Zakat donations cannot be paid from unlawful wealth. This includes wealth obtained by means of interest, theft, bribery, kickbacks, monopoly, counterfeiting, cheating, transacting in sinful substances or practices, etc.
More directly, the Prophet, on him be peace, said:
Allah does not accept sadaqah from stolen property” (Muslim).
Interest falls in the same category of unlawful wealth as stolen property.
As a transaction, Zakat donations require, as a matter of justice for us, that we have absolute undivided and rightful ownership of the wealth we pay it from. Unlawfully obtained wealth violates this condition of zakatable wealth on both counts. It is neither indivisibly nor rightfully owned by the would-be Zakat payer, rendering such Zakat “meaningless,” in the words of the great Andalusian Maliki scholar Ibn Rushd (1126-1198), commenting on this qualifying Zakat principle in Bidyat Al-Mujtahid.
What part of dealing in interest transactions are specifically forbidden?
All aspects of willful participation in an interest transaction are forbidden, and the sin for it is equal on all its participants.
The Prophet Muhammad, on him be peace, classified riba — paying it, receiving it, writing a contract for it, and being a witness to an interest contract — as the fourth of the “seven deadly deeds,” the sins that land their perpetrators in Hellfire (Nasa’i).
He said:
A single coin of riba that a man receives knowingly is worse than committing adultery 36 times” (Ahmad).
What do you do if you have interest wealth?
We live in a human era built upon a pervasive international monetary system that is itself flagrantly and meticulously woven together by riba-interest. No one in the world today who uses even the most basic financial instruments (cash, securities, or derivatives), institutions and services (banks, credit unions, and insurance, investment, and payment processing companies), or structures (capital, debt, equity, working, and trading) escapes participating in riba-interest transactions.
The Prophet, on him be peace, foretold the coming of this tribulation as a sign of the coming of the end of time:
Most surely, a time shall overtake humanity when none shall remain but that he consumes riba-interest, and if one consumes it not, something of its fumes shall afflict him” (Abu Dawud, verified as authentic (sahih) by Al-Suyuti).
The global Muslim Ummah (Community), economically united, could perhaps institutionalize an alternative lawful international financial union extensive and dynamic enough to compel the current riba-based system (or any of the also riba-based competitors, like BRIC, now vying to supplant the American-run financial world order) to evolve in accommodation of an Islamic financial community.
But as of now, no Muslim community formed in the calcifying nation-state paradigm can liberate itself or its people economically from the consumption and toxic vapor of riba.
The best we can do now as individual believers is to renounce our direct use of interest. We should (1) immediately forsake our interest if we are charging it, (2) give it up if we are receiving it, (3) not write its contracts, (4) not verify its transactions as witnesses, and (5) repent from our past participation in it. (Many valued Muslim professionals in the legal and other systems are in a difficult predicament in this regard. Allah aid and forgive them.)
Yet, unlawfully obtained wealth is evil wealth. It must be returned to its rightful owners. In the case of interest, it can only be dispensed by giving it away to the poor or for their utility, with no blessing received for this act, and with a person’s commitment to keep away from all knowing future interest transactions and to repent for whatever transactions have passed.
O you who believe! Be ever God-fearing and forsake all that remains due to you from interest, if, indeed, you are believers” (Surat Al-Baqarah, 2:278).
If you are unable to prevent interest from coming to you or your institution for some reason beyond your control, then dispense it to the poor for their use immediately when it accrues or when you gain the control to do so.