Mishpatim: Ribbis- Lending with Interest

The Journal of Talmudic Law & Finance

 Ribbis: Lending with Interest

This week’s Parshah discusses many Mitzvos pertaining to the dealings between man and his fellow. One of these Mitzvos is the prohibition of taking interest when loaning one’s friend. When referring to the concept of interest, the Torah uses the word “Neshech,” which literally translates as a bite. Rashi explains that interest is similar to the bite of snake. Just as when a snake 

Feature Audio: Ribbis: Halacha and Hashkafa

bites someone’s foot it often doesn’t cause him immediate pain, but as the poison flows through his body he begins to feel pain, and can gradually deteriorate to a life-threatening condition, so too with interest payments on a loan, the borrower doesn’t feel the pain until it accumulates to an unbearable debt.


This week’s Journal will explore some of the Halachos of the prohibition of Ribbis – taking interest on a loan.


 Click here for this week’s Featured Audio Shiur by Rav Pinchas Fuhrer, Shlit”a:

Ribbis: Halacha & Hashkafa

Choshen Mishpat Chiddush

Choshen Mishpat ChiddushCharging a Late Fee

A vendor which offers goods or services on credit may be allowed to charge a late fee if the debt is not satisfied on time. 


Click here for a written in depth analysis. 

Click here for an audio in depth analysis.

Parsha Perspectives from the Archives
Parsha Perspectives Parshas Mishpatim:
The Jewish Idea of Prison: Teaching the Thief a Thing or Two
From the Yerushalayim Second Seder Program: And These are the Laws by Rav Yosef Greenwald
“And These are the Laws…”

By Rav Yosef Greenwald


Feature Article: Heter Iska

Heter Iska

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 rabbis;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.


In this Issue:

Choshen Mishpat Chiddush

Feature Article: Heter Iska

Related Video
Ribbis in Partnerships
Ribbis in Partnerships
OU Choshen Mishpat Series
Related Audio
Ribbis & Returns
Ribbis and Returns
By: Rav Ari Marburger
Heter Iska
Heter Iska
By: Rav Ari Marburger
Yerushalayim Second Seder Shiurim
Shiurim from the Yerushalayiim Second Seder Program

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 involves 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.”


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?

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.


Let me explain how a heter iska accomplishes both of 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.


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.

Since observant people would rather pay a substantial sum of money to avoid swearing an oath the money is safely secured. 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.”

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.


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.


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.

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.

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.

Now I will explain how the Terumas HaDeshen’s money lender would use a heter iska. 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.

This was written by Rabbi Yirmiyahu Kaganoff Shlit”a and is being reprinted with his permission. To see more of his articles or for any questions you can visit his website http://rabbikaganoff.com/ 

* * *

To dedicate an issue of the Journal or
for other dedication opportunities, please contact the Bais HaVaad at info@thehalachacenter.org

Join Our Mailing List

Leave a Reply

You must be logged in to post a comment.