Q: What is the basis of the heter iska? Can it be used for all loans?
A: The heter iska is based on the distinction between a loan and a business venture. Only interest on a loan is prohibited, whereas profits from a business venture are permitted. Conversely, a loan must always be repaid by the borrower and carries no risk of loss (other than default), whereas a business venture bears the risk of loss of capital and carries no guarantee of gain.
Therefore, the basic idea of the heter iska is to redefine the interest-bearing loan as a (joint) profit-bearing business venture, similar to the “iska” arrangement mentioned last week, with built-in clauses to protect the capital of the financier and facilitate the expected profit. We will explain this further next week, IY”H. (Y.D. 177; The Law of Ribbis, Rabbi Reisman, ch. 22)
As such, the heter iska is most appropriate for commercial loans or real-estate mortgages, where there is a real expectation of profit or capital appreciation. The validity of the heter iska for personal loans is questionable, especially when the borrower does not have other profit-bearing assets. (TLOR 22:31-35) Modern Jewish banks and financial institutions usually have an “all-purpose” heter iska that covers all their transactions. (TLOR 23:12-13)
Authored by Rabbi Meir Orlian
These articles are for learning purposes only and cannot be used for final halachic decision. The Business Halacha email is a project of Business Halacha Institute (www.businesshalacha.com) and is under the auspices of Rav Chaim Kohn.
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