Q. Question regarding Ribbis. If one jew lends money to another jew and the other jew who is not observant wants to pay back the favor with money or a sizable gift. The lender explains to the the the other jew that it is strictly prohibited as its considered interest. Since the jew who was loaned the money is demanding to pay back some type of favor, can the lender suggest that she donate money for a shul or sefarim, or can he ask her to repay the favor by starting to keep Shabbos or kosher.

A. Although in principle the prohibition of collecting interest applies only when monies are transferred from the borrower to the lender (Baba Metzia 69b), Poskim maintain that if at the time of borrowing a condition was made, that besides the loan repayment, a sum of money should be donated by the borrower to an institution or to the needy, there could be an issue of ribbis ketzutza (pre-established interest) and may even be Biblically prohibited. (Minchas Yitzchok 6: 78, Lev Aryeh 16, Beis Yehuda 6: 14 and others). In no condition was stipulated at the time of borrowing and the borrower, from his own free will wants to donate to tzedaka, Poskim seem to agree that it is permitted, as would also be starting to keep Shabbos or kosher, which are obligations that one must anyway keep.
In regards to instructing or suggesting to the volunteering borrower to donate to an institution preferred by the lender, Horav Shlomo Miller’s Shlit’a opinion is that he should not demand, request or even expect that a contribution should be given to an institution or needy individual the lender has a vested interest to benefit.
However, he may simply suggest that since everyone has a mitzva to contribute tzedaka or help Torah institutions, if the borrower voluntarily so desires, the lender can suggest some that are worthwhile or provide the name of a competent Rabbi who can advise correctly.

Rabbi A. Bartfeld as revised by Horav Shlomo Miller Shlit’a