My paternal uncle has money in the bank that earns interest; he used to take it and distribute it among his siblings to buy paraffin for the stove, and said that this interest must only be used for heating, and he gave us our share on condition that it be used for buying paraffin. Is it permissible to spend the money on something else?.
It is not permissible to deal with riba (usury, interest) either by putting money in the bank or taking out a loan, because of the stern warning on the consequences of dealing with riba in this world and in the Hereafter. Allah, may He be exalted, says (interpretation of the meaning):
“O you who believe! Fear Allaah and give up what remains (due to you) from Ribaa (from now onward) if you are (really) believers.
279. And if you do not do it, then take a notice of war from Allaah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums)”
And Muslim (1598) narrated that Jaabir (may Allah be pleased with him) said: The Messenger of Allaah (peace and blessings of Allaah be upon him) cursed the one who consumes riba and the one who pays it, the one who writes it down and the two who witness it, and he said: they are all the same.
The one who has fallen into that has to repent to Allah, may He be exalted, and take his money out of the riba-based bank, unless he has no choice in order to protect his money because there is no Islamic bank in his country. In that case, he should limit it to using a current account only; it is not permissible for him to use interest-bearing accounts on the basis that he will get rid of the interest, because the main aim is to give up the major sin of riba.
It is not permissible for the one who is dealing with riba to benefit from the interest; rather he should get rid of it and spend it on charitable causes, such as giving it to the poor and needy. It is permissible for him to give it to his relatives on whom he is not obliged to spend, and they may make use of it in whatever way they want, such as buying food or clothing or anything else. It it does not have to spent specifically on paraffin or paving stones; rather it may be spent on any permissible thing, because if a poor person takes it, it is permissible for him and it becomes part of his wealth; the prohibition only applies to the one who deals with riba.
And Allah knows best.