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The dictionary definition is wrong. "Muslim" is translated as "Musulmán", which means somebody belonging to a specific religion. "Moro" means somebody belonging to a specific race: those who invaded Iberian Peninsule and its descendants, part of the current non-bereber population of Morocco. The expression "(No) haber moros en la costa" is in no way ...
This is actually used but It is not used to offend anybody. Actually I didn't know the origin of this but it seems to have one related with invasions as this blog says http://mariopiccone.blogspot.com/2007/09/el-origen-de-la-frase-no-hay-moros-en.html and also this one http://www.hispanoteca.eu/Foro-preguntas/ARCHIVO-Foro/Moros%20en%20la%20costa.htm
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