Tidbits of Interest

Some Aspects of the Halachos of Ribbis

Question #1: Small Thanks

“May I give a small present of thanks to someone who helped me out with a loan?”

Question #2: Doing a chesed

“Can I violate ribbis by doing a chesed?”

Question #3: Lending my Credit Card

“How can you violate ribbis by letting someone use your credit card?”

There are a total of six different prohibitions that can be violated when creating and paying a loan in which there is interest. Someone who loans money for interest is in violation of the Torah’s prohibition, even before any interest is, indeed, charged or collected (see Bava Metzia 62a; Shu”t Mahar”a Sasson #162).

According to the Mishnah, not only do the borrower and the lender violate the prohibition against ribbis, but the witnesses to the loan, the co-signer on the loan and the scribe who writes up the loan document are also in violation of the prohibition (Bava Metzia 75b). Thus, anyone causing the loan to be finalized is in violation of this mitzvah. This would include someone who notarizes a loan document that includes a ribbis provision, and might even include a lawyer who draws up a document that includes provisions for ribbis (Bris Yehudah 1:6).

The halachos of ribbis are quite complex, and a review of some of the halachos is always in order. From my experience, even seasoned Torah scholars make mistakes about these halachos and may even have business activities that violate the prohibition of ribbis. What makes these matters even more regrettable is that virtually every one of these situations can be alleviated easily by usage of a heter iska, which will be explained later in this article.

Chazal were so concerned that someone would violate the prohibition of ribbis that they wanted the lender to gain no perceived advantages from the loan, even when the gains are completely of a non-monetary nature. Thus, the lender may not ask the borrower to do him a favor that he would not have asked had he not loaned him money (Tosafos, Bava Metzia 64b s.v. Avol). Similarly, the borrower may not invite the lender to his simcha, if he would not have invited him otherwise.  It is even prohibited for the borrower to thank the lender for the loan (Graz, Hilchos Ribbis #9).

Chazal also prohibited ribbis that occurs before or after the loan exists. For example, it is prohibited for the borrower to bring a small gift to the lender, as a token of thanks for the loan (Mishnah Bava Metzia 75b). This is prohibited, even after the loan has been paid off, and even many years later.

Ribbis Without a Loan

The halacha prohibits charging for the use of one’s money, even when a loan did not actually take place. Thus, a merchant may not add interest charges to a bill (sent to a Jew), because it is past due. He is permitted to bill for the actual expenses accrued due to his having had to send an additional bill, as well as any other collection costs he incurs. However, the merchant may not add service charges because he was forced to borrow money off his credit line to cover the shortfall.

The prohibition against charging for delay of payment also applies to acquisitions. Thus, a store may not charge one price for cash and a different price for credit or delayed payment.

The borrower may pay a co-signer to guarantee a gemach loan. In a situation where the borrower defaults and the co-signer has to pay off the loan, the co-signer may collect what he paid from the borrower (Taz to Yoreh Deah 170:3).

Neighborly Loans

When neighbors borrow small items such as flour, sugar, or eggs, a loan has taken place. They may not intentionally return more than was borrowed, which would be considered ribbis. However, if they are uncertain exactly how much flour or sugar they borrowed, they are permitted to return enough to be certain that they have definitely returned as much as they borrowed (see Bava Metzia 75a). One may return an item that is similar, but not identical, to what was borrowed, if the buyer and seller are not concerned about the difference. Thus, one who borrowed a loaf of bread of one brand need not be concerned whether the loaf of bread that he returns is the same brand or the identical size (Rema, Yoreh Deah 162:1). Similarly, one need not be concerned that the price may have fluctuated in the interim (Shaar HaTziyun 450:4). .

Ribbis Without any Benefit to the Lender

The Torah prohibits ribbis if the borrower pays more than he borrowed, even when no benefit is gained by the lender.

An actual case will show us how people can be guilty of this violation without realizing it. Reuvain is involved in many chesed projects, including raising money for tzedakah. Yankel had an excellent business opportunity and asked Reuvain to help him finance his new endeavor, of course in a permitted fashion. Reuvain decided that he would rather utilize this opportunity for a different mitzvah. He tells Yankel, “Instead of becoming a partner in your business, I will lend you the money interest free, but I’d like to make a condition that some of the maaser from the profits goes to support a yeshiva.”

Reuvain assumes that by making the arrangements this way, he fulfills the mitzvah of lending someone money, which, indeed, is a big mitzvah of chesed, and, in addition, he will be causing someone else to give tzedakah, which is also a tremendous mitzvah. Unfortunately for both Reuvain and Yaakov, since giving the tzedakah was a condition of the loan, this arrangement incurs a Biblical prohibition of ribbis. Although the lender, Reuvain, does not gain from the loan, since a condition of the loan was that Yankel pay more money than he borrowed, this is considered a Torah violation of ribbis (Rema, Yoreh Deah 160:14). (In this instance, there would be no violation of ribbis if he asked Yankel as a favor to donate to the tzedakah cause. Alternatively, they could arrange some form of heter iska, as will be explained later.)

Borrowing Credit or Credit Cards

Here is another instance that occurs frequently, in which people wish to do a tremendous chesed but in reality they are involved in a serious infraction of ribbis. Mrs. Friedman and Mrs. Goldstein meet at a closeout sale where top quality mattresses are available at an unbelievable price. Members of Mrs. Friedman’s family need new mattresses, and she realizes that by purchasing them at the closeout prices she will be saving hundreds of dollars.

Unfortunately, Mrs. Friedman does not have the money to purchase the mattresses, nor does she have any credit cards at her disposal. As she is bemoaning the fact that she will have to forgo this opportunity to save so much money, Mrs. Goldstein, always eager to do a chesed, offers Mrs. Friedman to charge the mattresses on her credit card. A very grateful Mrs. Friedman gladly takes up the opportunity and purchases the mattresses. Her intention is to make the credit card payments accrued to Mrs. Goldstein’s card until she can pay off the balance and interest for the mattresses.

Without either lady realizing it, they have now created a major halachic problem. The credit card company did not lend the money to Mrs. Friedman, but to Mrs. Goldstein, whose name is on the card. For this reason, what has transpired here is that two loans have taken place, both with interest: one from the credit card company to Mrs. Goldstein, and a second from Mrs. Goldstein to Mrs. Friedman. If Mrs. Friedman makes payments directly to the credit card company, she will be repaying Mrs. Goldstein’s loan to the credit company and her own loan to Mrs. Goldstein simultaneously. Thus, she is now paying her loan to Mrs.Goldstein with interest and  both well-meaning ladies will have violated the laws against ribbis (Shulchan Aruch Yoreh Deah 168:17). The parties involved should immediately consult a halachic authority who understands the halachos of ribbis well, since there are several ways that the situation described above can be rectified. (The different ways to alleviate the problem might depend on the individual’s circumstances, and are beyond the scope and length of this article.)

A similar problem often happens in a business partnership, in which one partner has access to a credit line and borrows money from the credit line for the benefit of the business. Since the credit line is in his name and not that of the business, without realizing it, he has borrowed money from the bank and then loaned it to the business, in which he is only one partner. Thus, he is now considered to be charging his partners for interest on a loan he has made to them. Again, this problem can be alleviated with a heter iska.

What is a heter iska?

A heter iska is a halachically approved way of restructuring a loan or debt so that it is some form of business deal that is not a loan. There are numerous ways of making a heter iska, and, indeed, different situations call for different types of heter iska. It is important for everyone who is involved in any type of business dealings to understand the fundamental principle of every heter iska: That a heter iska restructures the loan so that it is an investment or acquisition, rather than a loan.

Borrowing from Jewish-owned banks

Many people borrow money from banks, mortgage companies, credit card companies (including stores), brokerages, and credit unions, without verifying whether they are owned by a Jewish controlling interest. Without using a heter iska, it is forbidden to borrow money with interest from any Jewish-owned business, even if it is incorporated. Although there are some poskim who permit lending money to a corporation without a heter iska, as will be explained later in this article, this author is unaware of any posek who permits borrowing from a Jewish-owned corporation, without a heter iska.

Corporations

Rav Moshe Feinstein ruled that it is permitted to lend money to a Jewish-owned corporation, without incurring a problem of ribbis. In Rav Moshe’s opinion, a loan must have an individual who is responsible to pay for it. When a corporation borrows, no individual is responsible to pay for the loan. Therefore, Rav Moshe contends that a loan to a corporation does not incur the prohibition of ribbis, provided that no individual personally guarantees the loan (Shu”t Igros Moshe, Yoreh Deah 2:63). It should be noted that many other poskim do not agree with this lenience of Rav Moshe, contending that there can be ribbis even when a corporation borrows money (see extensive discussion in Bris Yehudah pg. 138). One practical difference is that, according to Rav Moshe, it is permitted to have a savings account in a Jewish-owned bank without having a heter iska, whereas, according to the other opinions, it is forbidden. However, according to all opinions it is forbidden to borrow from a Jewish-owned bank, credit union or brokerage without a heter iska. Thus, one may not buy stocks on margin from a Jewish-owned brokerage without a heter iska.

Hashkafah of Ribbis

The mitzvah of Ribbis poses an interesting hashkafah question. Why does the Torah forbid making a profit from my money? The Torah encourages earning a livelihood, so what is wrong with earning a profit from lending out money?

Many answers are offered to this question. Kli Yakar presents the following approach: When a farmer plows and plants his field, he knows well that if it does not rain sufficiently or if a blight attacks his crop, he will have nothing to show for his efforts. Thus, even with all his hishtadlus, he knows that he must daven for Hashem to help his efforts. Similarly, a person who opens a business knows well that even with all his planning, his business may not be successful. Thus, he also knows that he must daven for Hashem to help his efforts. However, someone who makes his parnasah from lending out money seems to have his entire livelihood totally secure. He has no daily reminder forcing him to pray for his daily livelihood. For this reason, explains the Kli Yakar, Hashem did not want a person to make his livelihood this way. By banning this method of parnasah, the Torah forced a person to make parnasah in a way that he must be reminded daily of his need for Hashem’s help.

How Does a Heter Iska Work?

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Andy Gross, a businessman who is proud that he is now observing mitzvos, is on time for his appointment. After a brief greeting, I ask him what brings him to my office on this beautiful morning.

“I recently learned that even though the Torah prohibits paying or receiving interest, there is something called a heter iska that legalizes it. How can we legitimize something that the Torah expressly prohibits?”

Indeed, Andy’s question is both insightful and important, and deserves a thorough explanation. Why don’t you join us!

I noted that this week’s parsha discusses the prohibition of interest:

Do not collect interest from him, for you shall fear Hashem and allow your brother to live. Therefore, do not provide him money with interest (Chapter 25:36- 37).

This verse teaches three different mitzvos:

1. Do not collect interest from him. This entails a prohibition on the lender against collecting interest (Bava Metzia 75b).

2. Allow your brother to live. From the words allow your brother to live we derive a positive commandment that one who did collect interest is required to return it (Bava Metzia 62a).

3. Do not provide him money with interest prohibits creating a loan that involves interest, even if the lender never collects it (Bava Metzia 62a). A lender who later collects the interest also violates the first prohibition, and if he subsequently refuses to return it, he violates the positive commandment.

Not only does the lender violate the prohibition against ribbis, but also the borrower, the witnesses, the broker, the co-signer, the scribe who writes up the loan document (Mishnah Bava Metzia 75b), the notary public who notarizes it, and possibly even the attorney who drafts a document that includes provisions for ribbis all violate the laws of ribbis (Bris Yehudah 1:6). Thus, anyone causing the loan to be either finalized or collected violates the Torah’s law.

“The halachos of ribbis are quite complex,” I told Andy. “From my experience, even seasoned Torah scholars sometimes mistakenly violate the prohibition of ribbis. For example, having a margin account at a Jewish owned brokerage, charging a Jewish customer for late payment, or borrowing off someone else’s credit line usually entail violations of ribbis. I even know of Torah institutions that ‘borrow’ the use of someone’s credit card in order to meet their payroll, intending to gradually pay back the interest charges.”

“Why does the last case involve ribbis?” inquired an inquisitive Andy.

“Let me present a case where I was involved. A Torah institution was behind on its payroll, and had no one available from whom to borrow money. The director asked a backer of the institution if the institution could borrow money through his bank credit line.”

“I still do not see any ribbis problem here” replied Andy, “just a chesed that costs him nothing.”

“To whom did the bank lend money?” I asked Andy.

“As far as they are concerned, they are lending money to the backer, since it was his credit line.”

“So from whom did the institution borrow? The bank did not lend to them. Doesn’t this mean that really two loans have taken place: one from the bank to Mr. Chesed, and another from him to the institution? The loan from the bank incurs interest charges that Mr. Chesed is obligated to pay. Who is paying those charges?”

“It would only be fair for the institution to pay them,” responded Andy.

“However, if the institution pays those charges, they are in effect paying more money to Mr. Chesed than they borrowed from him since they are also paying his debt to the bank. This violates ribbis. The fact that the institution pays the bank directly does not mitigate the problem (see Gemara Bava Metzia 71b).”

Andy was noticeably stunned. “I have always thought of interest as a prohibition against usury – or taking advantage of a desperate borrower. Here the ‘usurer’ did not even lend any money, and thought he was doing a tremendous chesed for tzedakah; he did not realize that his assistance caused both of them to violate a serious prohibition!”

“What is even more tragic,” I continued, “is that one can convert most of these prohibited transactions into a heter iska that is perfectly permitted.

WHAT IS A HETER ISKA?

“A heter iska is a halachically approved way of restructuring a loan or debt so that it becomes an investment instead of a loan. This presumes that the investor assumes some element of risk should the business fail, which is one basic difference between an investment and a loan. An investor could potentially lose money, whereas a borrower always remains responsible to pay.

“One is permitted to create a heter iska even when the goal of both parties is only to find a kosher way of creating a transaction that is very similar to an interest- bearing loan (Terumas HaDeshen #302). The words heter iska mean exactly that: performing an allowable business deal that is similar to a prohibited transaction. As we will see, the structure must still allow for an element of risk and loss as accepted by halacha, otherwise it fails the test of being an investment.

“There are several ways of structuring a heter iska, and indeed different situations may call for different types of heter iska. In order to explain how a basic heter iska operates, I must first explain an investment that involve no ribbis, so that we can understand how a heter iska was developed. For the balance of this article, we will no longer refer to “borrowers” and “lenders.” Instead, I will refer to a “managing partner” or “manager” and an “investor.”

Andy interrupts my monologue. “Was heter iska used in earlier generations?”

THE EARLIEST HETER ISKA

“The concept of heter iska is hundreds of years old. The earliest heter iska of which I am aware is suggested by the Terumas HaDeshen (1390- 1460). His case involves Reuven, who wishes to invest in interest-bearing loans to gentile customers, but does not want to take any risk. Shimon, who is an experienced broker of such loans, is willing to take the risk in return for some of the profit on Reuven’s money.

“Reuven wants a guarantee that he will receive back all his capital regardless of what actually happens in the business venture. Essentially, this means that Shimon is borrowing money from Reuven and then lending it out to the gentiles; this would result in a straightforward Torah prohibition of ribbis, since Shimon is paying Reuven a return on the loan. Is there any way that Reuven and Shimon can structure the deal without violating the Torah’s prohibitions against paying and receiving interest?”

At this point, Andy exclaims: “Either this is a loan, and Reuven’s money is protected, or it is an investment, and it is not. How can Reuven have his cake and eat it too!”

“Actually, all the attempts at creating heter iska are attempts to find a balance whereby the investor is fairly secure that his assets are safe, and yet can generate profit.

PIKADON – INVESTING

“Let me explain how a heter iska accomplishes both these goals, by developing a case: Mr. Sweat has a business idea, but he lacks the capital to implement it. He approaches Mr. Bucks for investment capital. If Bucks has sufficient confidence in Sweat’s acumen to build a business, he might decide to invest even without knowing any details about it in the hope that Sweat’s idea will provide handsome profits. None of this involves any ribbis issues since there is no loan and no one is paying to use the other person’s capital. This business venture is called a pikadon.

GUARANTEEING THE INVESTMENT

“Your model is highly theoretical,” Andy points out, “since it assumes that Mr. Bucks invests without much assurance. Few people I know would entrust someone with their money without some type of guarantee.”

“You have hit on a key point – let us see how halacha deals with this. Whenever an investor entrusts someone with funds, the Torah permits him to demand an oath afterwards that the manager was not negligent. Therefore, Bucks may insist that Sweat swears an oath that he was not negligent with the money and also that he reported exactly how much money Bucks is due. The heter iska agreement may even require that Sweat swears this oath by using G-d’s name and while holding a Sefer Torah in front of the entire congregation.”

“That should certainly get Mr. Sweat to sweat,” quipped Andy. “But then again, assuming Mr. Sweat is a frum Jew, is he going to want to swear any oath at all?”

“That is exactly the point that secures Bucks’ bucks, since observant people would rather pay a substantial sum of money to avoid swearing an oath. The heter iska specifies that the manager has the option of swearing the oath and paying only what the investor is entitled. However, the manager has the option of substituting an agreed upon payment for the oath. Since observant Jews would rather pay the fixed return rather than swear an oath, we accomplish that the investor is reasonably secure, although no loan and no ribbis transpired. The result is not a loan, but a cleverly structured investment.”

After waiting a few seconds and absorbing what he just learned, Andy continued:

“Is there anything else I need to know about a heter iska before I use one?”

“I need to explain one other very important detail that people often, unfortunately, overlook. Most forms of heter iska state that the investor paid the manager a specific sum of money, say one dollar, for his time involved in the business venture. It is vitally important that this dollar be actually paid; otherwise there is a ribbis prohibition involved. Yet I know that many people overlook this requirement and do not understand its importance.”

“Could you explain why this is important?”

STANDARD ISKA – A SILENT PARTNERSHIP

“The standard heter iska assumes that the arrangement is half loan and half pikadon. This means that if Mr. Bucks invests $100,000 with Mr. Sweat to open a business, Mr. Bucks and Mr. Sweat become partners in the business because half of the amount is now a $50,000 loan that Mr. Sweat must eventually repay, and the other half is a $50,000 outlay that Mr. Bucks has now invested in a business that Mr. Sweat owns or intends to open. Bucks may receive no profit on the $50,000 loan he extended — if he does, it is prohibited ribbis. However, he may receive as much profit on the investment part of the portfolio as is generated by half the business. As a result, Mr. Bucks and Mr. Sweat are both 50% partners in the business.

RECEIVING PROFIT FROM THE LOAN

“However, there is an interesting problem that we must resolve. Bucks invested a sum with Sweat, for which he received a profit, and he also loaned Sweat money, for which he may not receive any profit. However, the return on the investment was realized only because Mr. Sweat is investing his know how and labor to generate profit for the partnership – know how and labor that Bucks did not pay for. Why is this investment of services not considered payment for Mr. Bucks’ loan, and therefore a ribbis problem?

“Indeed this concern is raised by the Gemara, which presents two methods to resolve the problem.

“The first method is that the investor pays the manager a certain amount for his expertise and effort. As long as both parties agree in advance, we are unconcerned how little (or much) this amount is (Bava Metzia 68b). However, there must be an amount, and it must be actually paid. Even if they agree to a sum as paltry as one dollar, this is an acceptable arrangement, similar to Michael Bloomberg’s accepting one dollar as salary to be mayor of New York.”

“I now understand,” interjected Andy, “why it is so important that this amount be actually paid. If Mr. Sweat receives no compensation for his hard work on behalf of Mr. Bucks’ investment, it demonstrates that he was working because he received a loan, which would be prohibited as ribbis.”

“Precisely,” I replied. “However, there is another way to structure the heter iska so that this is not a problem. This is by having the profit and loss percentages vary. This means that if the business profits, the managing partner makes a larger part of the profit than he loses if there is a loss. For example, in the original deal, let us assume that our silent and managing partners will divide the profits, but in case of loss, our manager is responsible to pay only $30,000. This means that Sweat borrowed only $30,000 and therefore owns only 30% of the business, which should entitle him to only 30% of the profits. The extra 20% of the profits he receives is his salary for managing the business. He is therefore being paid a percentage of Bucks’ profits for his efforts, similar to the way a money manager or financial consultant is often compensated by receiving a percentage of the profits on the funds he manages.

“The heter iska I have seen used by the Jewish owned banks in Israel includes this method. The bank invests 45% in a “business” managed by the mortgage borrower, but the borrower is entitled to 50% of the profits. Thus, he is “paid” five per cent of the bank’s profits for his services in managing the investment.”

“Can you explain to me how the Terumas HaDeshen’s money lender would use a heter iska?” inquired Andy.

“Actually, his heter iska varied slightly from what we use today. Using today’s accepted heter iska, Shimon the manager accepts the money with the understanding that he is borrowing part and managing the balance for Reuven. He is compensated for his efforts according to one of the approaches mentioned above, and agrees in advance to divide the profits. He also agrees that he will swear an oath guaranteeing that he was not negligent in his responsibilities, and the two parties agree that if he subsequently chooses to pay Reuven a certain amount he is absolved of swearing the oath. Thus, Reuven’s return is not interest on a loan, but the amount Shimon had agreed to pay rather than swear how much he actually owes Reuven.

“This approach has been accepted by thousands of halachic authorities as a valid method of receiving a return on one’s investment that looks like interest but is not. The Chofetz Chayim notes that if someone can lend money without compensation, he should certainly do so and not utilize a heter iska, because this is the mitzvah of performing chesed (Ahavas Chesed 2:15). Heter iska is meant for investment situations, and should ideally be limited to them.

“I would like to close by sharing with you a thought from Rav Samson Raphael Hirsch about the reason why the Torah prohibited interest. He notes that if the Torah considered charging interest to be inherently immoral, it would have banned charging interest from non-Jews, and also would have prohibited only the lender and not the borrower. Rather, Rav Hirsch notes, the Torah’s prohibition is to demonstrate that the capital we receive from Hashem is so that we donate tzedakah and provide loans, and thereby fulfill our share in building and maintaining a Torah community. The Torah’s goal in banning the use of capital for interest-paying loans is to direct excess funds to chesed and tzedakah.”

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