Heter Iska

A heter iska is a way to permit lending money to a fellow Jew with interest by transforming the loan into an investment, which is exempt from the prohibition of interest. Nonetheless, several conditions are added into the investment agreement to it makes it very likely and almost ensure that the borrower will repay the lender his capital and fixed expected profits.

Heter Iska FAQ

Does a Heter Iska Permit Charging Interest?

1. While a heter iska functionally is used by Jews to charge each other interest, it definitely alters the loan arrangement so that there isn't an absolutely definite fixed return. It converts the arrangement into an investment, for which the profits should accrue to the investor. To help ensure that the investor gets his money back several conditions are added into the agreement. See further for details.

Is It a Mitzvah To Lend With a Heter Iska?

1. No. Lending with a heter iska is not a fulfillment of the mitzvah of lending to a fellow Jew without interest.

Is Using a Heter Iska Permitted Initially?

1. The overwhelming majority of poskim concur that a heter iska is a permissible option. Some poskim hold that it is only permitted, both for the lender as well as the buyer, in extenuating circumstances where one of the parties needs it to make a living and cannot do without this. Others hold it is totally permitted when done correctly. Nonetheless, one should ensure not to use it at the expense of doing the chesed (kindness) of lending another Jew money without interest when that is possible.

Is a Heter Iska Just a Charade?

1. The poskim work to explain why the heter iska isn't considered a harama, legal subterfuge to avoid ribbit.
2. It is critical that the borrower and lender understand how the heter iska works. The poskim debate whether the heter iska is even valid after the fact if one or both of the parties don't understand the heter iska.
3. If one party asks what a heter iska is and the other party responds that it doesn't do anything and is just a way to permit interest, that statement invalidates the heter iska. Once it is clear from their statements that they mean to borrow with interest and have no intention to follow the conditions of the heter iska, which changes the loan agreement, it is forbidden.

How Does a Heter Iska Work?

1. The Heter Iska splits the money in two portions, half (or another percentage) is a money deposit and half is a loan. The borrower may use the half which is a money deposit for business, but as the deposit is considered the property of its owner wherever it may be, the profit that the borrower makes belongs to the lender. However, with regards to the loan portion of the iska it is considered the borrower's money and the profits from that money belong to the borrower, who is only obligated to return the capital of that loan portion without interest. Aside from the breakup of funds, the iska requires that the lender pay the borrower for his work. Otherwise, the mere fact that the borrower was working to invest the money of the lender is itself interest.
2. One condition of the agreement is that the borrower isn’t trusted to say that he lost money unless he proves it with acceptable witnesses. Additionally, the borrower isn’t trusted about how much profit he made unless he takes a shevuah (biblical oath) to that effect.
3. Another condition is that if the borrower pays the agreed amount (above the original capital) he doesn’t need to verify with witnesses or oath that he didn’t make any more money. Therefore, at the end of term, the borrower returns the half which is a loan (while keeping the profit made from that half) and returns the deposit along with the profit made from that half up to the amount agreed upon.
4. In summary, if the borrower earned a profit up to the agreed amount he must give the agreed amount and is absolved of taking an oath. However, if he did not profit up to the amount agreed upon he must verify that he didn't profit that much with an oath. However, Jews should not take an oath even when it is true. As such, the borrower should agree to pay the agreed amount instead of taking the oath. Effectively, the borrower is paying the lender the capital and profits, even if he didn't make profits, in order to exempt himself from taking an oath.

How Much Can You Charge With a Heter Iska?

1. The amount to pay to avoid the oath can be a fixed dollar amount or a percentage of the capital. It can even be based on current interest rates or inflation.

Usurious Practices

1. The heter iska specifies an anticipated rate of return, though it should be an amount that is reasonable to make for the part of the iska that is an investment. When using a heter iska that is half pikadon the specified return rate should be half of the rate that is normally expected to earn with an investment in that industry that the borrower is going to invest in.
2. One may not use the heter iska to charge an amount that is unreasonable for the borrower to have made in his business or investment. Therefore, when using a regular heter iska, half loan half investment, one can only charge a percent that is reasonable for the borrower to have made with half of the money. That is, if the heter iska is to allow charging 7% for the entire iska transaction, it is only permitted if it is reasonable that the borrower will be able to make 14% on the iska, leaving 7% for the gain of the half investment. Otherwise charging higher rates is forbidden and oppressive to the borrower.
   1. What is considered 'reasonable'? Reasonable is defined by what people think is considered normal to earn that type of industry. Often people make assumptions of what is reasonable to profit in a certain industry based on past performance, even though that isn't an absolutely true indicator of future outcomes. For example, if someone would graph the yearly returns on investment in real estate in the Metropolitan area they would see a normal curve with a certain average and standard deviation. If someone were to assume that he would next year invest in that industry and make the average return rate that would certainly be considered reasonable. Even if someone hoped and expected to make a return that was one standard deviation above the average, most people would consider that reasonable. However, if a person expected to have returns that was more than a standard deviation above the average, most people would consider that unreasonable.
   2. For example, though it is possible to profit 40% in one year investing in large cap index funds, that is considered unreasonable.
3. The rate shouldn't be considered a reasonably expected profit for the industry in which the iska is to be invested in. Even if it is theoretically possible to make a very large profit in almost any industry since it is considered unlikely, charging that type of return rate is forbidden. It is perfectly fine for the return rate of an iska to be higher than regular interest rates.

Why Is Any Rate of Return Permitted?

1. Charging a fixed rate of return for an iska seems to be interest. Nonetheless, this fee is structured as a payment of the investee to avoid having to take the oath, and therefore is permitted. Since it is possible for the investee not to have to pay the fixed rate of return if he did not in fact profit by taking an oath it is not considered interest to pay the return even if he did not earn any profit. This structure is accepted as the minhag and commonly found in heter iska’s.

2. How much interest can you charge with a heter Iska? None. You charge for profits and not interest. How much profit you can charge is based on what is considered reasonable. See above.

Compounding Rate of Return

1. Taz writes that it is forbidden to stipulate in a document that returns for profits are expected on any cyclic basis, such as weekly, monthly, or yearly. The reason is that it appears to be an interest charge. Shach writes that we’re lenient. Many poskim write that the minhag is to be lenient, however, Shulchan Aruch Harav is stringent.
2. Chachmat Adam's heter iska actually stipulated a return for profits determined on a weekly basis. In essence, the iska period was completed each Friday and a new iska was arranged the next week. It is possible to include all future iska agreements in one heter iska and some poskim think that this avoids the issue of the Taz.

Verification and Return Clauses

Requiring Witnesses

1. The investee is not trusted to say that he lost money unless he proves it with two witnesses. This is a condition that was added in the Maharam's heter iska and was adopted in later heter iska documents such as that of the Chachmat Adam.
2. Even though some poskim advised removing this proviso because if the investee were unable to find valid witnesses it would cause the investee to return the capital to the investor even though he actually lost money, that opinion was not accepted. Nonetheless, some contemporary poskim recommend removing this clause.
   1. Many heter iska documents today still include this clause. For example, the heter iska of the bet din of America includes it.
3. It is possible to specify that only specific trustworthy witnesses, such as the local rabbi and shaliach tzibbur, are to be believed as long as it is possible that they're know about the financial dealings of the iska. Even though it is unlikely that they will know about the iska and testify since it is possible it is permissible. However, in heter iska documents today this specification is not employed.
4. It is forbidden to specify that the only witnesses valid to verify losses are specific people who live far away and will almost certainly won't know about the iska.

Requiring an Oath

1. Also, the investee is not trusted to say that he didn’t profit up to the amount specified unless he takes an oath. This is a condition that was added in the Maharam's heter iska and was accepted in later heter iska documents such as that of the Chachmat Adam.
2. There is a dispute whether this oath is obligatory because of the nature of the investment or only because of the stipulation of the heter iska.
3. It is possible to stipulate that the oath should be taken in public in shul at the time of kriyat hatorah, however, if there's a concern that this will certainly inhibit the borrower from taking the oath one should not add this condition.
4. If someone is lending to a Jew who is not trusted to take an oath, the lender cannot require that he verify gains with an oath. Rather, it should be stipulated that he can verify not having profits by bringing in documentation into bet din.
5. Although someone who is obligated to swear is usually given the right to declare that if the litigant imposes an oath upon him in vain he should be excommunicated, that doesn't apply to the oath of a heter iska. There is a discussion if the borrower can flip the oath upon the investor.

Alternative Methods of Verification

1. Some poskim write that it is completely unreasonable to require the borrower to produce witnesses who observed every action of the borrower for the duration of the loan and know with certainty that he didn't make money with the iska funds. If they didn't observe him for a moment, even if it was just to get to the restroom, it is possible that the borrower made money in that break when they weren't watching. Obviously, that is unreasonable to require. Rather, it is understood that it is sufficient to produce witnesses who can verify that there weren't losses based on observing the company's records. That technically isn't a first-hand observation of their total earnings, as it is possible some gains weren't recorded, but nonetheless it is considered admissible testimony for verifying gains and losses of an iska.

Paying to Avoid The Oath

1. In order to taking the oath, the heter iska stipulates that it is possible to pay the specified return rate or a specific amount of money.
2. It is permissible for the investee to pay the fee to avoid taking the oath even if his intention isn’t out of a religious concern with taking an oath.
3. If the borrower knows that he didn't profit or that he lost money, some poskim hold that it is problematic for him to pay the agreed amount to absolve himself of the oath. However, the overwhelming majority of poskim hold that it is perfectly acceptable for the borrower to pay instead of taking the oath. This is a basic premise of the functionality of the heter iska.
4. If the lender knows with certainty that the borrower didn't profit or lost money he may not collect the profits. Since the lender knows with certainty the outcome of the investment he can't require witness or an oath to verify its truth as he already knows its veracity. Therefore, he may not take the payment of the borrower to absolve himself of the loan. To avoid this issue, the heter iska should not specify the specific investment and then the lender won't know whether the investment performed poorly.
5. If the lender doesn't know that the borrower didn't profit, but he just believes the word of the borrower that he didn't profit, nonetheless, he may take the payment of the borrower to absolve himself of the oath.

What Is the Investment Invested In?

Specified Investment

1. The investor may only takes profits if it he owned the business or merchandise used to make profits. He can take ownership either by (a) giving the money to the borrower and the borrower uses that money to invest or (b) purchasing the merchandise that the borrower already has and will do business with. However, if the borrower uses the money he received for the iska for his personal expenses, he may not give any returns to the lender.
   1. If the borrower uses the money he received for the iska for personal uses and then gives some of his own money for the iska, the borrower must make a formal acquisition of that money on behalf of the investor so that he own it and the ensuing profits. If the borrower uses his own money for the iska to replace what he used from the iska funds to buy merchandise on behalf of the investor the purchase itself causes that the investor own the merchandise and no further acquisition is necessary.
2. If the investee already owned merchandise before the heter iska was made and the investor wants to invest his money in that merchandise he can do so. In such a case it is necessary to do a kinyan for the investor to acquire the merchandise. A kinyan sudar can be done for that purchase.
3. If the investee already owned merchandise before the heter iska was made, the investor may not purchase the merchandise for cheaper than the market price, otherwise that is a benefit the borrower would be giving the lender.
4. A question can be asked upon this type of arrangement since the investor at the end of the investment period does not want to be returned merchandise. He wants cash. In effect, he wants to buy the merchandise from the investee for a period and then afterwards sell it back to him. That is considered in halacha to be a loan and not a purchase. If that’s the case the entire heter iska is invalid. Some suggest to avoid this problem it is necessary to stipulate that the investee may return merchandise and not cash. Then after the iska is arranged, money transferred, iska document signed, and accepted with a kinyan, it is possible to sign another document in which the investee would agree to return cash and not merchandise. Others defend the practice without adding such a stipulation.
5. The lender should ensure that the money he invested is being used in a permitted venue. For example, if the borrower is selling non-kosher or working on Shabbat the lender may not invest in such a business. To avoid this issue, the heter iska should stipulate that the lender only means to become an investor in any of the permissible investments of the borrower.

Unspecified Investment

1. It is possible for the investor not to specify what the investment is going to be used for. Nonetheless, the investor must acquire something of the borrower's in order to be able to generate profit. The way to do this is that the investor acquires any of the merchandise, assets, or business ventures that the borrower owns up to the value of the iska.
2. The advantage of having an unspecified investment is that it is generally impossible for the investor to know with certainty that the borrower did not profit. That being the case it is reasonable for him to require the borrower to verify his gains with an oath or pay the agreed amount to avoid having to take an oath.
   1. Within the verification by witnesses condition, if it is an investment in all investments of the borrower it is necessary to clarify that it is only for investments that are known, such as a bank account, or an investment that can be investigated, but not hidden investments, such as those which are made anonymously. Those cannot possibly be verified by witnesses and as such adding that condition into the heter iska for such an investment invalidates it.
   2. Alternatively, it is possible to specify in the heter iska that the borrower is trusted with an oath which investments he made and then trust witnesses about those investments.
   3. A last possibility is to just use the oath verification and not the witnesses verification altogether.
3. This method is viable for a person has merchandise, assets such as a house or car, or business ventures such as stocks, bonds, or the like that could produce revenue, either by themselves or being rented out or sold. This does not cover a personal loan to someone who does not have any investments and his assets do not seem like they are going to produce a profit. See next section for that case.

Heter Iska for Personal Loans

1. A heter iska is really only intended for business loans or where the borrower will use the money for an investment, but it should not be used for a personal loan in order to pay off a bill or pay for household expenses.
   1. Therefore, one shouldn't overdraft from a Jewish or Israeli bank for personal needs since a heter iska doesn't help for that case. This is only permitted one has a business producing profits with which the heter iska can be applied.
2. The minhag is to be lenient use the heter iska even for personal uses. Many poskim permit using a heter iska if the borrower has a business, assets, or savings investment that are making profit. The business, assets, or investment are used in place of the iska money, which is used for personal needs.
   1. Some poskim explain that the lender acquires a portion of the borrower's business, asset, or investment with his heter iska.
   2. This approach only allows a heter iska for personal uses if the borrower has a business, assets, or investments up to the amount of the capital in the heter iska.
   3. Some poskim explain that since the borrower would have had to sell that business, asset, or saving if not for the heter iska. The heter iska could apply to that investment. If the borrower wouldn't have sold the business, asset, or saving either way it is forbidden.
   4. Some poskim allow this if the lender made a kinyan to acquire a portion of the borrower's business, asset, or investments. Without a kinyan neither party thinks that's what is happening and a kinyan cannot be made without their agreement.
3. There are poskim who allow a heter iska even if the borrower has no business, assets, or investments. The heter iska could include a business, asset, or investment that the the borrower will later acquire after the beginning of the loan. Also, the heter iska could include the salary of the borrower. Without the loan the borrower would have had to stop working and since the loan enabled him to work the salary can be the iska.
   1. According to this approach it is permitted even for a teacher with little or no business, asset, or investments to take out a loan to pay off bills or for a wedding. The teacher's salary could be considered the iska.
   2. This is a minority opinion and shouldn't be relied upon.
4. It is permitted to use a heter iska to take out a mortgage for a house. Even though the loan is going towards buying a house and not for investment, nonetheless, the house itself can be considered the investment since it is common for real estate to increase in value.
5. It is problematic to use a heter iska for a car loan where the car is specified as the iska investment. The reason is that a used car doesn't usually increase in value over time.
6. If a yeshiva, shul, or another communal institution needs to take out a loan it is often questionable for them to use a heter iska since they aren't a money making business.

Procedure of Execution of a Heter Iska

Formal Act of Acquisition

1. If the iska specifies an investment in specified merchandise that the borrower already owns, it is necessary to perform a kinyan sudar for the lender to acquire a portion of the merchandise.
2. In every other case of heter iska it isn't absolutely necessary to do a kinyan sudar but it is advisable to do so.
3. The kinyan sudar is done by having the lender hand over his handkerchief, pen, or another functional utensil to the borrower who then picks it up three tefachim. This symbolic act of transferring an item from the lender to the buyer indicates that the lender is buying merchandise or a portion of the investments of the borrower. The borrower should return the item to the lender afterwards. See kinyan sudar page for more details.
4. Some opinions hold that the effective kinyan for a heter iska is the signing of the heter iska document. This is only effective if the borrower understands what he doing when he is signing. If he doesn't realize that his signature is creating an acquisition to the lender that acquisition is null and void.

Signing

1. It is necessary for the borrower to sign the heter iska.
2. The lender does not need to sign the heter iska, but it is nonetheless advisable to do so.
3. If there is already has a separate document loan to which the heter iska going to be attached it is necessary to have the lender sign the copy of the heter iska which is given to the borrower.
4. It is possible to make a heter iska orally without a document at all. However, it is better to write it so that it is more serious and so the parties understand its details.

Witnesses

1. It isn't necessary to have witnesses present but it is better to do so in order to make the procedure more serious.

Multiple Copies

1. It isn't necessary to have more than one copy of a heter iska unless there is a loan document separate from the heter iska. In that case it is necessary for there to be two copies of the heter iska, both of which are signed, one given to the borrower and one to the lender.

Payment to the Investee

1. Chazal instituted that the borrower is considered an investee working on behalf of the investor to invest half of the borrowed funds. Since he is working on behalf of the investor if he wouldn't be compensated for his work that work he is doing is considered ribbit since he also received a loan and would be working for free since he got a loan. To avoid this, Chazal mandated that it is necessary to pay the investee. See iska page for more details.
2. It is sufficient to pay him a minimal amount, such as a dollar or five dollars, if that is stipulated at the time of the loan. See iska page for more details.
3. Alternatively, it is sufficient to pay the investee by giving him a greater percentage of the profits than his percentage of losses.

Choice of Law

1. A heter iska does not need to be binding in secular law for it to be valid halachically. However, if it is not binding in secular law and the parties adjudicate their case in secular court, then the heter iska was useless and did not prevent the prohibitions of ribbit. To avoid this issue the heter iska should specify that it is be adjudicated in a specific bet din, where it is binding.

Versions of the Heter Iska

1. It is important to use a properly constructed heter iska because if it is done improperly the borrower and lender are in violation of very serious prohibitions of interest and are not going to be resurrected at the time of the resurrection of the dead.

Rashi

1. There is a quote from Rashi that he allowed Jews to lend with interest when it is lent through a third party who is Jewish. Since the third party is also obligated to follow the laws of interest, halachically he is not considered an agent, because of the principle that there is no agency for a sin (heb. אין שליח לדבר עבירה; trans. ein shaliach ldvar aveirah). That being the case there is no borrower and lender relationship between the one accepting the money and the one receiving the money and is permitted.
2. However, almost all the poskim strongly reject this solution. In fact, Bet Yosef claims that this account of Rashi's view must be a scribal error. Either way, it is not accepted today.

Rabbenu Tam

1. Rabbenu Tam allowed one Jew to borrow from another Jew with interest when it is lent through a third party who is non-Jewish. Since there is no agency for a non-Jew (heb. אין שליחות לעכו"ם, trans. ein shelichut l'akum) it is considered as though there is a loan between the lender and the non-Jewish agent, as well as a separate loan between the non-Jewish agent and the borrower.
2. Rashi disagrees with this leniency as does Shulchan Aruch. Rama writes that in places where the minhag was to follow Rashi one should not protest such a minhag. Today this solution is not practiced.

Rav Yakov M'orleans

1. Rav Yakov of Orleans had a solution to allow charging interest by considering a late penalty. The money was lent interest free for a week and if the money wasn't paid back by a week a late fee was charged. The same arrangement applies to each subsequent week, thereby mimicking simple interest that accrues weekly.
2. Rashba vehemently disagreed and held that this is absolutely forbidden as interest. Shulchan Aruch accepts Rashba's view. This solution is not relying upon today at all.

Rivash

1. Rivash allows selling an item to be delivered at some later date for advanced funds today. It is also stipulated that if the item is not delivered by a certain time, a certain high amount must be paid and the item does not need to be delivered any more. This is like a one time late fee, which Rivash allows in this circumstance where it was structured as a sale and not a loan.
2. Even though it seems that Rashba would disagree with this solution, Shulchan Aruch accepts this solution. Practically, this solution is not used today because it is possible for the borrower to just deliver the item and not pay the high amount. Therefore, most lenders don't want to use this solution without guaranteed returns.
3. Another solution for ribbit that Rivash approved is the minhag of Barcelona. In Barcelona, they used to sell their house and then rent it from the buyer. This enabled the seller to get the money he needed and pay it back in regular installments to the buyer. However, since it was a complete sale, the house remained in the possession of the buyer and the buyer did not have the right to force the seller to sell it back to him at any point.

Maharam Rotenburg

1. Maharam Rotenburg allowed arranging an iska, which was split over time, partially as a investment and partially as a loan. First, the investee takes the money and invests it until he doubles the funds. Then, afterwards it is considered an interest free loan. Rama allowed the opposite arrangement of starting with a loan followed by a pikadon.
2. This is accepted by Tur and Shulchan Aruch and in part this is the basis for Maharam Avigdor's heter iska. However, it is worthwhile to note that Gra disagreed with this arrangement. This by itself isn't a complete heter iska because there's nothing ensures that the borrower return profits or capital if indeed the investments do poorly.

Trumat Hadeshen

1. The Trumat Hadeshen allowed an iska, business investment, with a stipulation that the borrower must produce witnesses that he lost money and the only witnesses he trusts are the local rabbi and shaliach tzibur. By making such conditions it makes it unlikely that the borrower will claim and prove that he had losses and instead will just pay the lender his original capital investment. It is permitted since it is possible for the borrower to get out of having to pay the capital if indeed he had losses and proves it in the appropriate way. In part this set the stage for the Maharm Avigdor's heter iska.

Maharam Avigdor (Pikadon followed by Halvah)

1. One of the most popular heter iska documents of all times was that of the Rabbi Mendel ben Rabbi Avigdor of Cracow, known as "Maharam Avigdor" or "Maharam". He lived in the end of the sixteenth century at the time of the Levush, Bach, and Sma. Originally, Maharam wrote a heter iska when he was the Av Bet Din in Ludmir and this version of the heter iska was heavily criticized by the Levush and Sma. When Sma arrived in Ludmir he convinced Maharam to change his heter iska. That version of the heter iska was popularized by Maharam when he moved to Cracow and became the Av Bet Din in Cracow.
   1. The details of the agreement was that the investor's money should first be considered completely a investment , which the investor bears all responsibility and stands to gain all of its profits. The investee should work to try to make profits off of the money until he reaches a certain agreed amount. Then the money is converted into an interest free loan.
2. For two and a half centuries after Maharam the most commonly used heter iska in Europe was this second version of the heter iska of Maharam. Therefore, when the heter iska of Maharam is referenced without qualification it refers to his second version of the heter iska. In fact, Magen Avraham advised people to add "נעשה על צד היתר כתיקון מהר"ם ז"ל" or "על פי היתר מהר"ם" and that incorporated by reference Maharam's heter iska.

Sma (Triangular Sale of Debt)

1. Another method that was engineered to help permit taking interest was set out by the Sma. It relies on a simple dictum of the Yerushalmi that it is permitted to sell debt at a discount. Using this instrument it can be arranged by three parties to create a loan which ultimately will be paid back for more.
2. The first party writes a loan against himself to a second party, and the second party writes a loan against himself to the first party. They exchange these loan documents. Then the second party sells the loan of the first party to him to a third party for less than the face value of the loan. The first party then pays the full value of the loan to the third party, and the second party pays the full value of the loan to the first party. In effect, the second party received a smaller sum immediately and later on had to pay a higher sum.

Chachmat Adam (Palga Milveh Palga Pikadon)

1. Today Maharam's heter iska fell out of use for several reasons and in its place the heter iska of Chachmat Adam, popularized further by the Kitzur Shulchan Aruch, became the standard heter iska. Nowadays, if someone writes "על צד היתר עיסקא" today they do not mean to incorporate Maharam's heter iska. They probably refer to a type of heter iska of half halvah and half pikadon, but since it is unclear to which heter iska he is referencing he should be more specific.
2. The classic heter iska of today is that of the Chachmat Adam. The main difference between the Maharam Avigdor's heter iska and that of the Chachmat Adam is how the iska is split. In the Maharam Avigdor's heter it was split in time, starting as an investment and then turning over to a loan, whereas in the Chachmat Adam's case it was split simultaneously, with part of the money being used for investment and part as a loan.

Rav Moshe Shternbuch (Kulo Pikadon)

1. The classic heter iska is half loan and half investment. However, it is also possible to use a heter iska which is completely an investment. Seemingly, if it is completely an investment there's no question of interest since there's no loan at all. However, if the borrower has responsibility for all or part of the money if it is lost or stolen, the investment is considered a partial loan and interest would be forbidden. This type of heter iska still requires the conditions to verify losses and lack of gains through witnesses and oath in order to ensure returns for the investor.
2. Another version of this heter iska involves the borrower accepting all responsibility for all of the money even for loss or theft. Nonetheless, even that type of heter iska still requires the condition of witness verification to ensure that the capital is returned.
3. The advantage of the kulo pikadon heter iska is that it is possible to use it for a higher rate of return. For example, if a person wants returns of 20%, for the Chachmat Adam's heter iska this would presuppose that it is reasonable to make 40% in that industry. Since that is very unlikely it is better to use a kulo pikadon, in which it is only necessary to suppose that 20% is reasonable in that industry, which is much more reasonable. Another advantage is that halachically it is certainly not considered a loan on a Torah level.
4. Rav Shternbuch popularized and advocated for this type of heter iska. This is also known as the Bnei Brak heter iska.
5. Some poskim argue that one shouldn't use this heter iska. Some prefer this when a high rate of return is picked.
6. Since a kulo pikadon arrangement is similar to a loan, the regular rules of a iska applies such that: it is necessary to pay the borrower for his efforts investing the money, it is forbidden to fix a rate of return even if there are losses, it is forbidden to charge for returns before the borrower worked, and the investor may not benefit from the borrower.

Parties involved in the Iska

Minors and Heter Iska's

1. A minor cannot borrow with interest using a heter iska. The premise of a heter iska is that he's indebted to work and invest the money to make a profit. A minor cannot obligate himself to do so.
2. A minor can lend with interest using a heter iska. The adult accepting the iska can invest the money to make a profit. However, it is necessary to stipulate that the verification by documentation and not oath since an adult is not obligated to make an oath for a minor's claims.

Guarantors

1. It is permissible for a Jew to be a guarantor for a heter iska between two other Jews only if the guarantor's arrangement is also made with a heter iska. This can be accomplished by writing a separate document between the lender and guarantor or by having the guarantor sign the original heter iska between the lender and borrower that is sufficient. It should be understood that the guarantor's obligation to the lender and then the borrower to the guarantor follows the parameters of the heter iska.
2. It is forbidden for a Jew to be a guarantor for another Jew who borrowed with interest from a non-Jew. (See Interest with Non-Jews#Guarantor for details.) However, this can be solved with a heter iska between the borrower and guarantor.

Relationship between Lender and Borrower

1. Since the borrower in a heter iska is really considered a borrower he may not benefit the lender in any way beyond the amount specified in the heter iska. If there is a specific benefit or gift that the borrower wants to give the lender he should include that in the heter iska as part of the specified amount he could pay to avoid taking an oath.
2. All the expenses of the investment should come from the investment money itself and the borrower shouldn't pay from his own money. Otherwise, this would be a benefit for the lender.

Duration of the Iska

Heter Iska after the Termination Date

1. If someone had a heter iska for a certain period of time if after that period of time the borrower does not return the money and continues to invest it, the borrower must pay the lender according to his profits and under the conditions of the iska even after the iska's termination. However, others disagree and hold that although the borrower may pay he is not obligated to give up his profits after the iska's termination.
2. Therefore, it is advisable to specify in the heter iska that the terms and conditions of the iska will survive the termination date if it happens that the borrower doesn't pay or the lender doesn't come to collect. This ensures that the lender is entitled to profits in such a post-term iska.

Pre-term Termination of a Heter Iska

1. The investor does not have the right to back out of the heter iska before the iska is due.
2. The borrower can back out of the heter iska deal before the completion of the iska.

Death of Borrower

1. If the borrower dies the iska is automatically terminated if either the investor or the inheritors of the borrower want to cancel the iska, even if it is before the iska was due. Similarly, if the investor dies, according to most poskim either the borrower or his inheritors may terminate the iska even before it is due.
2. If the borrower dies the inheritors of the iska don't have to pay the returns of the iska because the bet din claims on behalf of the inheritors that the borrower did not profit.

Timing of Payments

1. It is forbidden for the lender to require the borrower to make interest payments before there was time for him to possibly make that amount from the funds borrowed. The reason for this is that the entire concept of the heter iska is that the lender is investing money and the borrower is making money and returns those gains. If interest is charged before it was possible to make any gains that would be forbidden. Some poskim allow this but specify in the heter iska that the early payments are contingent on the fact that the investee will earn profits to cover those payments, and if it turns out that there wasn't enough profits those early payments should be deducted from the capital.
2. If the lender wants the borrower to return to him some amount at the very outset of the loan in the heter iska they should note that the capital for the heter iska is reduce by the amount that the borrower paid the lender at the beginning of the loan.
3. If the iska is specified to a certain type of investment and in that industry it isn't normal to make money right away it is possible to charge the borrower to pay returns before it is usual for him to generate profit.
4. It is forbidden to consider the capital of the loan greater than the amount that the lender gave the borrower.

How to Convert a Loan to a Heter Iska

1. If two Jews made a loan with interest it can be converted to a heter iska going forward. Any interest that accrued until this point is may not be paid and if it was paid must be returned. A heter iska does not work for the past.
2. Going forward the heter iska can specify a rate of return that will give the investor the amount of profit he wanted, as long as that rate is reasonable for an iska (see above).
3. Can they increase the rate of return going forward to compensate for the loss of past returns? Some poskim hold that it is absolutely forbidden. Since they are increasing the rate in order to compensate for lost interest that itself is interest. Other poskim hold that they may increase the rate of return but may not state that this is being done because of the previous loan. A rabbi should be consulted about how to navigate this.
   1. For example, a person lent money to a Jew with 5% interest for one year and after 6 months realizes that it is forbidden. At that point if any interest was paid it should be returned. Then for the next 6 months they can arrange a heter iska for 10%. In essence this will give the lender the same return he was hoping to get from his original interest bearing loan, but this way it is done in a permitted manner.
   2. This is permitted with a palga milveh heter iska as long as in that industry 20% profit is reasonable. If that isn't reasonable but 10% profit is reasonable a kulo pikadon heter iska should be used.
   3. According to those who allow charging the higher rate to compensate for the lost interest here the procedure how to do it. First the capital of the loan should be returned. Then, the lender should state in front of witnesses that the borrower is exempt from paying any interest. Only then should they begin a new iska with a heter iska at a higher rate that is doubled to compensate for lost time.
4. In order to convert a loan to a heter iska it is necessary to make a kinyan for the investor to acquire a portion of the merchandise, assets, or investments of the borrower. Halachically, the simplest way to do it is for the borrower to return the money to the lender and then have the lender lend him the money again with a heter iska. More practical suggestions are as follows:
   1. If the borrower has merchandise that he's going to sell, he can sell that to the investor with a kinyan sudar, in which the investor gives the borrower his handkerchief or pen to pick up.
   2. If the borrower is going to purchase merchandise the investor can appoint him to be his agent to purchase the merchandise. Furthermore, they should also make a kinyan sudar or write up a document for the heter iska.
   3. Some poskim hold that it is sufficient to write a heter iska and that automatically converts the loan into an iska. Others disagree.
5. If the original document of loan continues to exist in the hands of the lender after the loan is converted, it is necessary to write a a copy of the heter iska document that the lender signs and states that going forward this document is primary and supersedes anything written in the loan document.

Heter Iska Texts

Terminology in a Heter Iska

1. The contracts that are made with a heter iska shouldn't include terms of interest, but rather profits. After the fact, the heter iska is still valid.
2. It is proper to call the funds as an investment and not a loan, but after the fact this doesn't invalidate the heter iska.
3. It is permitted to call the investor a lender and the investee the borrower, even though technically these terms aren't fully accurate.

Incorporation by Reference

1. It is acceptable to incorporate the heter iska by reference such as "על פי היתר עיסקא פלגא מלוה ופלגא פקדון בתנאי בירור עדים על הקרן ובירור שבועה על הריוח". The simpler forms of incorporation by reference that referenced the heter iska of Maharam aren't used today.
2. Some poskim allow adding to a loan document the phrase "על פי היתר עיסקא כתקנת חכמים" and that is sufficient if the lender and borrower know what that means. However, others argue that this is questionable since it doesn't specify the heter iska and its conditions.

Conditions of the Heter Iska

1. Some heter iska documents add a condition that if the borrower doesn't appear in bet din each erev rosh chodesh to submit his claims for his losses he has admitted that there were no losses. Some argue that this condition should not be added.
2. Some heter iska documents add a stipulation to avoid a concern that the oath is an asmachta that it was executed in an important bet din with a kinyan, "שנעשה קנין בבית דין חשוב". However, this isn't critical if it is left out.
3. There are many other conditions and one must consult with a reliable orthodox rabbi regarding each situation and how to draw up a Heter Iska.

Heter Iska for Specific Cases

Advanced Payments for Sales

1. It is forbidden to offer a discount when the buyer pays in advance of the delivery of the merchandise. (See Buying on Credit page for details.) It is possible to make a heter iska for this situation by stipulating that money advanced is the iska money, and the agreed amount to avoid taking an oath is the actual merchandise. By delivering the merchandise on time that exempts the seller, who halachically is considered a borrower in this case, from an oath.
2. It is forbidden to pay for an item in advance of its delivery because the price of the merchandise might increase between the time of the payment and the time of the delivery. (This can be permitted under certain conditions, see Guaranteed Low Prices and Interest.) It is possible to solve this issue with the same type of heter iska described in the previous halacha.

Buying on Credit

1. It is forbidden to charge a higher amount for those who buy on credit. (See Buying on Credit for details.) It is possible to solve this issue with a heter iska where the iska is funded by the merchandise bought and it is stipulated that the buyer can pay the higher price to avoid taking an oath. When the buyer, who is considered the borrower in this case, pays the higher amount he is exempt from an oath. This works as long as it is reasonable for the merchandise to be rented out. If that's not the case then the seller in the iska should acquire a portion of the buyer's assets or businesses.

Heter Iska Klali

1. Rav Azriel Meir Eiger wrote that every Jew before they start to go into business should write a heter iska klali. That is, they should write a document that states that all loans or transactions that involve ribbit should follow the procedures of the heter iska so that they are permitted. Then this document should be given to a bet din. The idea of this institution was that if every Jew did it, it would solve all problems of ribbit for everyone. However, many rabbis disagreed. One major issue raised was if only party had signed a heter iska and the other did not. In that case, most rabbis held that the heter iska klali of only one of the parties was ineffective to permit taking interest.
2. However, there were some poskim who held that the heter iska klali did not help even if both parties had signed the heter iska klali. In summary, this institution is not widely practiced today.

Institutional Heter Iska's

1. A solution that is widely used today is to have a heter iska that a institution uses for all of its transactions. The first step would be for the owner to sign a heter iska klali with respect to all transactions of the business. However, this doesn't solve the issue completely since clients or customers of the business don't necessarily know about the heter iska, in which case most poskim hold that the heter iska is ineffective. To solve this, each document or receipt with a client or customer should include a reference to the heter iska.
2. Some poskim suggested hanging a heter iska klali up in the store and that automatically makes it binding upon all of the customers. However, many poskim question this because not everyone reads the sign or thinks that it is binding just because it is hung up upon the wall, and seems to be contradicted to by the language of the business documents.
3. Banks in Israel have heter iska documents. Even if it isn't written in every document, since it is well known that is effective. Also, since everyone knows that when you agree to do a transaction with the bank there are terms and conditions of the bank that you agree to even if you haven't read them. The same can be true of a heter iska as long as the bank includes the heter iska klali in the official policies of the bank.
   1. Nonetheless, because some poskim question this as well a person should try to make a personal heter iska with the bank and not just rely on the heter iska klali. This only solves the problem partially because if a person deposits money at the bank with a heter iska, he is automatically an investor of the bank and if the bank's investments are forbidden because of ribbit he may not take any profits either. Therefore, while it is ideal to make an individual heter iska, depositing money in the bank still relies upon the heter iska klali.
   2. Some poskim note that the heter iska klali in today's banks are questionable since the banks don't want to keep the conditions of the heter iska if a person would really want to take an oath or verify with witnesses. There are also problematic conditions in the banking heter iska document. For this reason some are strict and advise doing everything possible to avoid depositing money in a bank with a heter iska klali. However, in Israel that is usually impossible and there is what to rely upon to be lenient.
4. In America using a heter iska klali as part of the bank's official policies is highly questionable. The reason is that legally banks may not invest in risky investments and a heter iska klali redefines the bank loans and mortgages as investments in businesses, assets, securities, and merchandise of those who take loans and mortgages from the bank, which can involve great risk. If the heter iska klali isn't part of the official policies of the bank there is nothing that binds clients to the heter iska unless they agree to sign an individual heter iska with the bank.

Specific Companies Using Heter Iska

1. Quicken loans which goes through Chase Bank and has a large ownership of Jews has a heter iska provision in their loans. Nonetheless, the heter iska involved is questionable.
2. Using a credit card in Israel is permitted since the companies use Heter Iska. Generally speaking, banks in Israel have a heter iska klali. One may rely on that to deposit money in the bank, while others make a private heter iska with the bank.
3. See www.kfikosher.org for an updated list of lending companies that do or do not have a heter iska.

Heter Iska Text's Online

• Rabbi Yisrael Reisman's Heter Iska (dinonline.org)
• Rav Moshe Shternbuch's Heter Iska
• Bet Din of America's Heter Iska
• Heteriska.org
• Sephardi Heter Iska