In the vast tapestry of Jewish legal tradition, the prohibition of charging and accepting interest, ‘ribbis’, stands as a testament to the ethical and moral underpinnings of economic transactions within the Jewish community. At its core, the prohibition of ribbis is derived from several biblical injunctions¹, which forbid the charging of interest on loans made to fellow Jews. The rationale behind this prohibition is multifaceted, encompassing both economic and ethical considerations. 

Sefer Tehillim reveals the intent with which Hashem created the world. It teaches us that “the world was built on a foundation of kindness².” Extending an interest-free loan is a tremendous act of kindness and since kindness is the foundation of the world, the Torah goes as far as prohibiting the Jewish People from charging interest, which would mean losing an opportunity to act with kindness.³  An additional reason for the prohibition of ribbis is that Hashem wants Jewish society to be prosperous and harmonious, therefore ribbis is prohibited in order to ensure that the less fortunates’ wealth is not entirely consumed by paying back interest.⁴

We now need to define ‘interest’ in order to understand the parameters of this prohibition. Interest only applies to loans. A loan is something which the borrower fully acquires and bears the sole responsibility of paying it back to the lender. Conversely, when renting an item or looking after it, there is no transfer of ownership and there is, therefore, no concern of ribbis. Another point to bear in mind is that the prohibition of interest applies not only to money one earns from a loan, but to any benefit, such as a borrower allowing the lender to occupy a property free of charge in return for the loan. 
In light of the prohibition of ribbis, Jewish legal scholars have shown how to facilitate legitimate economic transactions while adhering to the principles of halachah, Jewish law. An example of this is the institution of ‘heter iska’ (dispensation of investment), which provides a framework for structuring financial agreements in a manner that is both halachically permissible and commercially viable. Heter iska refers to a legal instrument that transforms a conventional loan into a business partnership. Under a heter iska arrangement, the lender and borrower enter into a mutually beneficial partnership wherein profits are shared. This partnership model allows for the lender to receive a return on his investment without running afoul of the prohibition of charging interest.⁵

Technically speaking, how does the heter iska work? A standard heter iska transforms a loan into a mutually beneficial investment-management scheme in which the lender is the investing partner and the borrower is the managing partner. Half the money given by the investing partner is a loan, which as explained previously, becomes the sole property of the borrower and justifies his share in the investment, which he then manages as a partner. The other half of the money is given as a deposit which remains the sole property of the investing partner (lender) and naturally entitles him to half of the profits.⁶ Both parties then have an equal stake in the investment. 

The big question, however, is that since the borrower is handling the lender’s money in return for a loan, why does this not constitute a transgression of the prohibition of ribbis? The answer is that the borrower is paid a nominal fee⁷ to become the managing partner of the money which is supposed to generate profits for both partners. The borrower is then no longer simply borrowing money but is a paid agent of the investing partner (lender) to make their shared investment generate profit. 

But what if the investment venture fails and the managing partner loses the capital or does not make any profit? The agreement, signed by both parties beforehand, compels the managing partner, in such a case, to take an oath using the name of Hashem⁸ and bring witnesses who will attest that there was no profit generated and that he has not invested the money elsewhere. Taking an oath using the name of Hashem is a very serious and solemn religious ritual and most people are unwilling to take the oath and would rather simply pay the principal amount as well as the expected profit⁹ which is being claimed by the investing partner. Witnesses who are able to attest to the managing partner’s innocence are also very difficult to find and so the managing partner will pay instead.

How is the loan actually converted into an iska (investment)? Many halachic authorities are of the opinion that this is done through an act of kinyan (acquisition) by means of a signed document or by the very act of transferring the money. If this transformation from loan to iska is done orally then this can only be done at the time of the transaction. Many halachic authorities maintain that if either party to this transaction does not understand the concept of iska then the entire construct is invalid, however, other authorities are of the opinion that so long as the lender understands then the transaction is valid. If the two parties had already contracted an interest bearing loan (against halachah) or an interest free loan, they are still able to transform the loan into an iska by means of a kinyan. 

It is important to note that there is a dispute amongst halachic authorities in a situation where the borrower uses the money rather than investing it. Some are of the opinion that if the borrower does not invest it then the whole agreement is a scam and is therefore invalid.¹⁰ Others maintain that since the lender gave money specifically for the purpose of investment it does not matter what the borrower does in actuality and the transaction remains valid.¹¹

Should one avoid making use of the heter iska? Some say it should be avoided,¹² others permit it to be used only in extenuating circumstances¹³ and yet others say it may be used if done properly.¹⁴ It must be stated that the heter iska should not replace the true kindness of interest free loans.¹⁵

The enduring relevance of the prohibition of ribbis and the institution of the heter iska underscores the eternal power of the Torah in addressing contemporary ethical dilemmas.  Through the heter iska, Jewish individuals are able to engage in financial transactions that align with their religious principles, fostering economic relationships grounded in ethical integrity and mutual benefit.

Footnotes

1. Notably found in Exodus 22:24 and Leviticus 25:36-37. ↩︎
2.  Psalms 89:3 ↩︎
3. Ahavas Chesed, Part II 15:3 ↩︎
4. Sefer HaChinuch 68 ↩︎
5. The earliest recordings of heter iska can be found in: Piskei HaRosh 144c, Rosh: Bava Metzia 5:23 (1250 – 1327); Mordechai, chapter 5 of Bava Metza (1240 – 1298); HaGo’as Maimoniyos, chapter 5 of Bava Metza (1260 – 1298); Terumas HaDeshen 302 (1390 – 1460). All are based on Talmud, Bava Metzia 65a. The Rosh and the Mordechai quote Rabbi Meir of Rottenburg, the Maharam (1215 – 1293) as a source for this. Later versions of the heter iska are attributed to the Sema (Rabbi Yehoshua Falk, 1555 – 1614) and Rabbi Menachem Mendel Avigdoris (also known as the Maharam of Krakow, d. 1599). See also Shulchan Aruch Y.D 167:1, 177:18. ↩︎
6. An alternate method of heter iska employed today converts the entire sum into an investment-deposit and there is no loan component at all. However, some are of the opinion that this method should not be employed. Bris Yehudah, ch. 40 fnt. 2. ↩︎
7.  Known as s’char batalah (getting paid in compensation for time invested). ↩︎
8. See: Bach on Tur; Shach 1. ↩︎
9. Determined by evaluation beforehand and included in the signed agreement. ↩︎
10. See Shulchan Aruch HaRav, Ribbis 42, 46; Kitzur Shulchan Aruch 66:10; Chut Shani 18:3. ↩︎
11. See Sema, Derech Arukah n. 22.  ↩︎
12. Maaseh Rav n. 108. However, see Tosefes Maaseh Rav n. 28 which quotes Rav Chaim Volozhin as permitting it. ↩︎
13. See Sma, Derech Aruka n. 22; Malveh Hashem 13:27; Mishpetei Ribbis 28:2. ↩︎
14. See Chasam Sofer 4:48; Imrei Yosher 2:192; Bris Yehudah ch. 40 fnt. 1; Horaah Berurah (Kuntres Heter Iska ch. 2). Bris Yehudah concludes that one may be lenient, however, one who is strict will be blessed. ↩︎
15. See Chofetz Chaim, Ahavas Chesed (Gemilus Chesed 15). ↩︎