Thursday, 1 November 2018

Loan Interest in the Modern World (part 2)

In part 1 I discussed heter iska, and whether it is a genuine solution to the problem of taking interest. Here I will try to clarify whether the provision of loans with interest may be permissible under certain circumstances, without the need for heter iska.

Limited Companies

Different alternatives to heter iska exist, although they are mostly applicable only in localised cases.[1] I am aware of only one that could cover a large percentage of the problems- the use of companies limited by shares. As almost all banks fall into this category, there is the potential here to find far-reaching leniencies.

In a limited company, the liability of members or subscribers of the company is limited to what they have invested in it. In other words, the company is an abstract legal entity of its own which can have assets, and owe or be owed money. The members are not independently obligated by the debts of the company (nor do they have an independent claim to the debts owed to the company). The big question is whether halacha recognises such an entity, or if not, how does halacha relate to a situation where such an entity has been created by secular law.

R' Moshe Feinstein understands that halacha also recognises the concept of a limited company. Therefore he writes that there is no problem to receive interest from a limited company, as no individual has any personal obligation to pay this debt. However, the prohibition of interest does apply when the borrower is an individual, even if the lender is a limited company.[2]

R' Shlomo Zalman Auerbach disagrees. His assumption is that even when the borrower is a limited company, the obligation to pay is equivalent to the owners (shareholders) having an obligation to pay from specific assets. He proves from various cases in the gemara that even when the obligation of the borrower to pay is limited to specific property, taking interest is forbidden.[3]

I believe that the basis of this dispute is the question of how far we take the principle that 'any condition to a monetary agreement is valid.'[4] R' Shlomo Zalman understands that although two parties can stipulate any condition, no-one can create a new type of independent halachic entity (in this case an inanimate, abstract body that has independent financial obligations). R' Moshe Feinstein assumes that this possibility does exist, and in the case of a limited company there is no human who has any obligation to pay the debt from any property whatsoever.[5]

Futures Trading

To decide how to rule in this dispute, it helps to find precedents based on similar principles. One such example is the issue of the purchase of something that does not yet exist (e.g. produce that has not yet grown). In the gemara there are two opinions about whether such a purchase is valid, but the halacha clearly follows the view that it is not valid.[6]

The question is whether this rule is set in stone and unchangeable. We know that although the gemara has rules for how transactions can be carried out, when the custom is to use alternative acts of acquisition, this is recognised by halacha.[7] What happens when the custom is to acquire things that do not yet exist?

This question was already raised by early authorities. The Mordechai quotes Rabbeinu Yechiel (13th century, Paris/Eretz Yisrael) who says that there is no way that something that does not yet exist can be acquired.[8] However, the Rosh (1250-1327, Germany/Spain) writes straightforwardly that when the clear custom is to buy things that do not yet exist, it works.[9]

The Chasam Sofer (1762-1839, Germany/Hungary) writes that really all agree that the custom is binding here. The transaction that Rabbeinu Yechiel ruled was invalid was not done in accordance with the custom at the time. He explains that the only reason that the gemara said that one cannot acquire something that does not exist is because of a lack of full understanding on behalf of the parties involved. When the custom is to carry out such transactions, the required understanding does exist and thus the acquisition is valid.[10]

Although not all agree with the Chasam Sofer,[11] the existence of advance purchase of things that do not yet exist has long since been recognised as valid by all batei din. In a world where such transactions happen every minute of the day, it simply would not make sense to fight this reality. The entire concept of ownership and transactions preceded the Torah and was based on custom, and it would not be logical to think that the Torah wanted to stop this.

I believe that the same is true when it comes to limited companies. When the whole concept of a limited company was new and had little effect on everyday life, it may have been relevant to debate whether halacha recognises such an entity. Nowadays, when every individual has dealings with such companies, it is not relevant. The clear understanding when opening accounts with banks, the electricity company etc. is that they will be dealt with in the way that civil law defines them, and there is no reason for halacha to treat them differently.

Can a limited company be Jewish?

R' Moshe Feinstein's leniency only helps us with a small part of the problem. While savers can relax if they know it is ok to take interest from banks, borrowing from banks is a problem on a much larger scale. However, if we are consistent with our acceptance of the legal definition of a limited company, we can question why it should be a problem to pay interest to a limited company.

The prohibition of borrowing with interest only applies if the lender is Jewish.[12] According to what we have seen so far, a limited company is not even human. How then can paying interest to it be prohibited?[13]

To answer this, it helps to consider the relative ease in starting a limited company. Two Jewish partners could make their company limited, becoming the only shareholders and appointing a director. If this company lends money, it would be hard to argue that the interest is merely being paid to an independent, inhuman entity. The two partners have full control, and the director runs the company is merely their agent. If he acts against their wishes, he could be fired at any time.[14] Clearly then, taking interest under such circumstances is forbidden.

The same should be true with a thousand or a million equal shareholders, as being in a partnership does not exempt us from the prohibitions of the Torah. Theoretically, it could be forbidden for a Jew to own shares in a company that lends to Jews with interest (or a company that owns chametz on Pesach, as well as other examples).

Elsewhere, R' Moshe Feinstein explains why in reality this is not the case. As the main owners of the company usually keep enough shares for themselves to ensure that they maintain control, the vote that a regular shareholder gets is merely a fictitious pretence. Thus the regular shareholders do not really own part of the company, and all they have bought is the right to a share in the profits. Buying enough shares to get a significant say is indeed forbidden.[15]

It is clear to me that this is also the reason that R' Moshe does not allow borrowing from a 'Jewish' limited company with interest. If the majority shareholder or some of the significant shareholders are Jewish, he or they own part of the loan. Only the portion of the company 'owned' by the insignificant shareholders can be described as a loan from an inhuman entity.

Thus a person looking for a mortgage who does not want to rely on heter iska needs to find a bank whose significant shareholders are not Jewish. This is no easy task in Israel,[16] so we need to be a bit more creative. A bank with no major shareholders would not help, as then even the shares of the regular shareholders would be meaningful.[17]

Communal bodies

The only real solution I can think of is the use of a limited company whose major shareholders themselves are abstract, inhuman entities. The classic example is the government, whose funds should not be extractable by any individuals under any circumstances. One who borrows from the government is genuinely not borrowing from a Jew, irrespective of how religious the ministers may or may not be.

To the best of my knowledge, nowadays none of the Israeli banks are government owned. This is unlikely to change in the near future (nor would I want it to), but we don't need the government to help us here. All we need is to create a similar model, a body that has no real owners who can dissolve the company and take the funds for themselves. Any institution like a shul or community centre, or a network of such institutions, could be used.

It may sound unrealistic, but I believe that if there was enough will for it from serious religious Jews, it could be done. If such a plan was implemented and banks relying on heter iska lost some of their income, it may also encourage a more serious application of the 'iska' rules (see part 1).

[1] For example, if the main intention is for a payment to be made on time with no interest, penalties for late payment may be justifiable halachically.
[2] Igros Moshe, Yoreh Deah 2, siman 62
[3] Minchas Shlomo, part 1, siman 28. The proofs seem watertight, but are only relevant according to his understanding of how to view limited companies.
[4] See Kiddushin 19b
[5] Although the person employed by the company responsible for this area must carry out his responsibility, this is not a personal debt. If he resigns from his job before the payment date, this responsibility will pass to someone else. There is not even any person who is ultimately responsible, as the shareholders can also sell their shares to others.
[6] See for example Yevamos 93a, and Shulchan Aruch Choshen Mishpat 209:4.
[7] This principle is known as situmta, based on the custom mentioned in the gemara in Bava Metsia 74a.
[8] Hagahos Mordechai, Shabbos section 473.
[9] Responsa of the Rosh 13:20.
[10] Responsa of the Chasam Sofer 5:65.
[11] See Pischei Teshuva, Choshen Mishpat 201:2.
[12] Mishna Bava Metsia 70b. Lending to a non-Jew with interest is forbidden rabbinically, although here many leniencies exist which are beyond the scope of this post.
[13] In fact some write that it is permitted. See R' Osher Weiss's article in T'chumin, volume 33.
[14] They also can dissolve the company at any time, taking the interest for themselves. In contrast, if the company borrows money, the lender cannot demand payment from the partners. The responsibility to pay (from the funds of the company) is the director's, and even if the director resigns all the shareholders have to do is to appoint a new director.
[15] Igros Moshe, Even Haezer 1:7
[16] Information about ownership of banks in Israel is available here (in Hebrew).
[17] If such a bank existed even outside Israel it would be problematic to borrow from it, as even one Jewish shareholder would be considered a genuine part-owner.

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