Introduction
The Torah's
prohibition on taking interest is well known. Seen by Chazal as a stealthy form
of robbery,[1] one
may question whether seeking ways to circumvent the issue is similar to finding
ways to give a hechsher to pork.
Nevertheless,
not only are leniencies found and implemented widely, but there is very little
opposition to them. I have yet to see any recognised poskim who have rejected
'Heter Iska' (the mechanism used to evade the prohibition of interest)
outright, although some impose certain limitations.
The reason for
this is clear. World business revolves around interest. New discoveries and
technology often need substantial funds, which could not be raised by
generosity alone. The same is true on a smaller scale for private businesses.
Perhaps more
critically in some eyes, most individuals in Eretz Yisrael also need to make
use of heter iska when they take a mortgage on a home (if the loan is from a
'Jewish' bank). Even for those who don't, avoiding heter iska entirely is
almost impossible. Almost every contract signed with a bank or other service
provider contains clauses that involve the possibility of paying interest,
halachically problematic even if it never ends up being paid.
The most
fundamental question that needs to be addressed is whether ideally we would
like to change all of this, and abolish interest payments entirely. Secondary
issues are the validity of heter iska itself, and whether better alternatives
could be found for those interested in the world as it is today.
Iska
Before we
attempt to answer these questions, we need to describe the way that Chazal
proposed to invest money for profit. If one person has a business idea but is
short of capital for it, he can enter a partnership with an acquaintance who
has the money. Both will take a share in any profits, but both will also have
to absorb a share of any losses. As the 'borrower' is the one doing the actual
work, he must be paid for this. Subsequently, his share in the losses must be
lower than his share in potential gains.[2]
The halachic
mechanism that this is based on is known
as an iska. Part of the money is taken as a loan, and this part must
always be paid back in full with no interest. The other part is a deposit and
not a loan.[3] It
remains the property of the investor, and profits or deficits made on it are
his.
For example, the
agreement could be that half will be a loan and half will be a deposit, and the
payment the borrower receives for his time could be 10% of the profits. The net
result is that the investor receives 40% of the profits, but must absorb 50% of
any losses. If he doesn't want to take such a big risk, he could agree to take
just 5% of the profits, or 10% of the losses (90% loan and 10% deposit, with 5%
of the profits as the fee for the borrower's time).
The major
difference between this system and loans with fixed interest is the risk factor
for the lender. With a pure loan, the only risk involved is the potential
inability of the borrower to pay back. The debt itself will always remain
fixed, and can only be completely lost if the borrower dies or is bankrupted.[4]
Even this risk can be decreased dramatically in the case of a mortgage.
With an iska,
the 'lender' is really an investor. He enters into a business partnership with
the 'borrower,' and if he has any sense he will only do this if he has great
confidence in his partner. He may lose a large percentage of his investment,
although he also has the potential to profit without limit.
In a world that
only had iska arrangements and no loans with interest, one great advantage
would be the care that people would have to take before investing. Worldwide
financial crashes would probably not exist. Large companies would also have no
incentive to exploit the more vulnerable by persuading them to take loans that
they can't afford.
The possible
disadvantage is that the hugely increased risk factor would mean that investors
would not be nearly as free with their money. A person who does not have the
funds to buy a house outright would not be able to take a mortgage as we know
it. Payments of any money 'lent' for the house would be dependent on the
property price, and such risk would make it impossible for banks to offer 50%
mortgages.
I say that this
is only a possible disadvantage, as lack of availability of mortgages would
also drive house prices down. I invite the economists out there to describe
more fully and clearly what all the results would be.[5]
At the moment, I am unconvinced that the world with loan interest is better
than it would be without.[6]
Heter Iska
However, this
doesn't mean that we can ignore the situation around us. Whether we like it or
not, the financial world of today revolves around interest. If only religious
Jews stopped using heter iska, they would not get most of the benefits
described above. We need to explain how heter iska works, and try to clarify
when it can be used.
Heter Iska is an
extension of the Iska principle described above. Let's say that someone needs a
loan of twelve thousand shekel to start a business, to be paid back over a
year. The lender wants total interest of 5%, so the twelve monthly repayments
will be 1,050 shekels each. A similar result could be achieved by an iska, if
for example the agreement is that the lender/investor takes a third of the
profits, and the actual profit made by the business is 15%.
Obviously, the
problem is that no business can guarantee to make a profit of 15%. Furthermore,
the business could also lose money, in which case the investor would have to
agree to absorb more than a third of the losses (let's say 50%). How can we
come to arrangement when the lender does not want this risk (the normal
situation)?
Heter Iska takes
advantage of the fact that the amount of profit (or loss) made by the receiver
of the money is often not provable. The two sides agree to an Iska with an
additional agreement, that if the receiver cannot prove the contrary, the
assumption will be that he made a certain profit (in our example, this would be
15%). Furthermore, any proof brought will only be valid if the receiver is
willing to take an oath to ascertain the truth of his claim.[7][8]
The assumption
is that given such conditions, the chances of the 'borrower' being able to
prove a loss or a low profit are minimal. Thus under normal circumstances, the
'iska' will yield the same result as a loan with interest. Nevertheless, as I
mentioned before, it is hard to find any condemnation of this as halachic
trickery.[9]
I believe that
heter iska is generally accepted because a situation where the investor loses
out shouldn't really be that far-fetched. In some cases the 'borrower' is a
company whose income and expenditure are meticulously recorded, and verified by
auditors. It is true that even in these cases, the investor may be able to
claim that a small element of doubt exists, and insist on the receiver taking
an oath. But what if the receiver is willing to take an oath? And what if the
investor believes the receiver?[10]
Theoretically,
these cases are the ones that save heter iska from a halachic perspective.
However, practically they could destroy its effectiveness. An honest investor
who understands how heter iska works will be concerned at the fact that his
profit is by no means guaranteed. As with other investments, he may well lose.
What actually
happens?
The reality is
that even when heter iska is used, the investor losing is unheard of. Whether
cases have been brought before batei din or secular courts, the rulings have
been similar. Although usually the validity of the heter iska itself has not
been questioned, the courts have always found technical ways to reject the
claims of the 'borrower' who suffered a loss. Such borrowers have even been
criticised for trying to find excuses to get out of paying interest, and
causing chilul Hashem!![11]
The reason that
this happens is clear. If the borrower could avoid paying interest in these
circumstances, the banks would soon stop using heter iska. 'Kosher' banks would
not be financially viable, a situation that nobody wants.
It is hard to
say whether this means that heter iska nowadays is null and void. Not enough
has been written, either by batei din or by secular courts, to clarify exactly
how it is viewed. Therefore my position is that although using heter iska is
far from ideal, we cannot forbid it outright. Alternatives should always be
pursued, but if there are none, those who need to use heter iska (i.e. almost
everyone in Eretz Yisrael) are not transgressors.
To be
continued
I still need to
discuss possible alternatives to heter iska, and how we might be able to work
to improve the situation. However, doing this now this would make this post too
long, so it will have to wait for next time.
[1] See Bava Metsia 61a (the question of Rava there is difficult and
not necessarily agreed upon, but at least after the Torah forbade taking
interest it is considered equivalent to robbery).
[4] Under secular law. In Torah law, bankruptcy never absolves the
borrower from paying (although it can delay payment until he is able to survive
paying).
[6] See also this article (in
Hebrew), which concludes that is impossible to calculate which system would be
better economically.
[7] Historically, many people were scared to take oaths even when they
knew that they were telling the truth, and even when money was at stake. See
the Ramban's critiques to Sefer Hamitzvos, Mitzvas Asei 7.
[8] See Terumas HaDeshen siman 302, the earliest source of such an
arrangement (fifteenth century).
[9] See Shu"t Minchas Shlomo 1:26-8 where R' Shlomo Zalman
Auerbach raises various problems he has with heter iska, but nevertheless
states that he does not doubt the legitimacy of it at all.
[10] Another potential problem is that many loans are taken out to cover
costs of non-profitable items. A mortgage on a home can definitely be considered
an investment, whereas a loan needed to buy a car certainly cannot. This
problem is circumvented by writing in the contract that the loan is also for
the purposes of maintenance of all existing property of the 'borrower.' So even
if the real reason for the loan is the purchase of a new car, we view it as
covering the costs of the 'borrower' not selling his house to pay for the car.
See also Shu"t Sho'el u'Meshiv, volume 1, part 3, siman 160.
[11] See this
article (in Hebrew)
