Q: How does a “heter iska” operate?
A: A full explanation of the heter iska is beyond the scope of this column; we will suffice with a brief summary of the four essential parts of any heter iska.
1. As mentioned last week, only interest on a loan is prohibited, but profits on an investment are permitted. Therefore, the loan is redefined as a “(joint) business investment venture.” The lender becomes the “investor;” the borrower becomes the “active partner” or “manager” of the venture; the principal becomes the “invested capital,” half or all of which remains the financier’s; and the interest becomes the “anticipated profit” of the financier.
2. To protect the principal, conditions are stipulated that make it difficult for the “manager” (i.e., borrower) to claim that the capital of the “investor” (i.e., lender) was lost in a failed business venture. This is usually done by requiring full testimony of halachically valid witnesses to claim a loss.
3. To facilitate the anticipated return, a stipulation is made that the “manager” (i.e., borrower) will not be believed that the “anticipated profit” of the financier was not realized unless he takes a severe oath. He is given the alternative of paying the amount of “anticipated profit” (i.e., interest) in lieu of his responsibility to take this oath.
4. If only half of the capital remains the investor’s and half is a loan, a provision is included to provide a nominal salary, often a dollar, to the “active partner” (i.e., borrower) for his efforts in managing the investment venture. Otherwise, his free service in managing the financier’s half would be a form of interest on the half that is a loan.
Ideally, this agreement should be attached to, or incorporated though reference, in the loan document.
(For further elaboration, see my article, “The Usury Suspects,” and The Laws of Ribbis, Rabbi Reisman, 22:24-29; 23:1-5)
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.
