Because of the difficulty of abiding by all the details of loaning without interest, there’s an institution which is a contract set up by the Rabbis to conduct a business loan without violating the Torah prohibition of interest. This is only a general overview and not a procedure to be done without consulting an Orthodox Rabbi.
The Heter Iska splits the money in two, half (or a 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, a loan is considered the money of the borrower and the profits belong to the borrower, who is then only obligated to return the capital without interest.
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 and he isn’t trusted to say that he didn’t profit unless he makes a Shevuah (biblical oath) that he didn’t profit. Another condition is that if the borrower pays the agreed amount (above the original capital) he doesn’t need to prove that he didn’t make any more money. Therefore, at the end of term, the receiver returns the half which is a loan (while keeping the profit made from that half) and returns the deposit along with the profit he made from that half up to the amount agreed upon (and if he didn’t profit that amount unless he proves it he must still pay the agreed upon amount, and if he profited more, he’s exempt from paying more).
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.
- Is using a heter iska permitted initially or only after the fact or in a difficult situation? Some poskim hold that it is only permitted in extenuating circumstances in order to make a parnasa. Others hold it is totally permitted when done correctly. Nonetheless, one should ensure not to use it at the expense of doing the chesed of lending another Jew money for free when that is possible.
- 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.
- A heter iska can only be used if the borrower is using the money for a business or investment but not if he is using it for paying bills or household expenses.
- 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.
- Some poskim permit using a heter iska if one has another business, assets, or savings plan any of which that are making profit and if not for the loan one would have sold that business, assets, or savings. The reason that it is permitted is because the heter iska could apply to that investment and its profits. If not for the loan one wouldn't have sold the business, assets, or savings plan anyway it is forbidden.
- The contracts that are made with a heter iska shouldn't include terms of interest but rather profits.
- The poskim work to explain why the heter iska isn't considered a harama, legal subterfuge to avoid ribbit.
- Quicken loans which goes through Chase Bank and has a large ownership of Jews has a heter iska provision in their loans.
- Using a credit card in Israel is permitted since the companies use Heter Iska.
Conditions of the Heter Iska
- Some heter iska's 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.
Complete Pikadon Heter Iska
- An alternate heter iska that is in use today is where the entire sum is considered an investment and there's no loan at all. Some argue that one shouldn't use this heter iska.
- Kitzur Shulchan Aruch 66:1-6. See Ribit Halacha LeMaseh chapter 20. One can see this shtar isko on the website of the Beth Din of America.
- Jewish Agent: According to Rashi (cited by Rama 160:16) that there’s no prohibition of ribbit when done through a shaliach perhaps that can permit using a bank loan since the teller is merely an agent of the bank. Bet Yosef 160:16 and Taz vehemently argue that this is completely forbidden and a ruse. Rather this citation of Rashi was made a mistaken student. Rama and Shach defend Rashi.
- Non-Jewish Agent: Rabbenu Tam (cited by Tosfot 71b s.v. kgon) held it was permitted to lend with interest to a Jew using a non-Jewish agent since there's no concept of agency between a Jew and a non-Jew. Therefore, even though one Jew asked another Jew to get a loan with interest from another Jew it is permitted since the non-Jew is acting on his own. Most rishonim disagree with the Rabbenu Tam.
- Non-Jewish Agent with a Security Deposit: The Ri held that it was permitted to send a non-Jew with a security deposit to another Jew through a non-Jewish agent in order to borrow with interest. The non-Jew is considered to have acquired the deposit and so it is as though there's a separate loan between the borrower Jew and the non-Jew and another one with the non-Jew and the lender Jew.
- "Witness Clause Heter Iska": The Levush 167:1 writes extensively against the Heter Iska of his time that required bringing witnessed to testify that the investment didn't make the expected gain. He claims that it is a biblical violation of Ribbit since it is known that with this condition one can specify not to trust any witnessed besides two witnesses on opposite sides of the world and make it impossible for the borrower to be exempt from having to pay the interest. Furthermore, the lender has no right to say that he is certain that the borrower made the gains they expected. Often he knows that it isn't the case and still he is collecting the interest. He distinguishes between ensuring you get back the capital with a clause of having to bring witnesses and that is based on the Trumat Hadeshen 302. However, he would not allow adding a condition to allowing the borrower to exempt himself from paying for the expected gain when he didn't gain money. Shach 167:1 and Taz 167:1 cite and agree with the Levush. Shach adds that one could ask the borrower for a vow that he in fact didn't gain money but he may not ask for witnesses. Taz adds that the witness clause for the capital has to be reasonable to allow for witnesses that could reasonably know about the state of the borrower's business. Lastly, both the Taz and Shach make it obvious that the measure that the Trumat Hadeshen allowed to ensure the return of the capital is only permitted when it is otherwise only a rabbinic interest such as an iska, half loan and half investment, but not for a case of pure loan.
- "Derisha's Heter Iska": Derisha 167:1 seems to allow setting up an iska half loan and half investment which evolves into a complete loan after the iska reaches a certain percent of gain. The lender needs to pay a small amount to the borrower in order to pay him for his work investing the half investment. Then the lender can buy the "call option" from the borrower that if the investment doesn't reach the percent gain specified then the borrower will pay the difference between the actual price of the investment and the specified price. They can adjust the price of this option to a small amount. However, the Taz 167:1 points out that this approach is complete incorrect and is a violation of biblical interest. He brings many proofs including the Rosh responsa 88:2 who explicitly rejects this idea. The Shaarei Bracha 167:1 cites the Maharam Chaviv 23 who agrees with the Taz. He also cites the Radvaz 946 who says the same.
- "Levush's Heter Iska": Shulchan Aruch 177:18 based on the Rivash allows selling specific amount of items at a price that is cheaper than the market price. Then the buyer would stipulate that he wants the seller to deliver the goods by a specific date and if he doesn't do so he has to pay a penalty of a certain amount. Then the buyer would pay upfront and the seller would miss the delivery date and be obligated to return the original payment as well as the penalty. That isn't ribbit since it is a penalty and not a payment for the time value of money. Additionally since it is done completely with sales it isn't considered a loophole around ribbit. For this to work the seller actually needs the property he is selling and the buyer needs to make a legal acquisition of the property (kinyan). Levush 167:1 adds that the buyer needs to be ready that the seller actually deliver the goods by that date instead of paying the penalty. Taz 167:1 adds that this is forbidden if initially they stated that they want a loan since then the entire deal becomes a loophole to interest. Nekudat Hakesef 167:1 argues with the Taz since this case is completely a sale and therefore isn't an issue of finding a loophole to ribbit even if one originally requested a loan.
- Modern Heter Iska: Chelkat Yakov YD 68 explains that it isn't a legal loophole because the parties involved really intend to follow the contract and not violate interest. Chelkat Binyamin Kuntres Heter Iska n. 12 agrees. (In light of the Taz 167:1 and others it is hard to understand this explanation.) Minchat Shlomo 1:27 is troubled how the Heter Iska is permitted but yet allows it completely as is the practice.
- Maaseh Rav n. 108 writes that the Gra disapproved of the heter iska altogether. See however Tosefet Maaseh Rav n. 28 which quotes Rav Chaim Volozhin as permitting it.
- The Sma (Derech Aruka n. 22), who popularized the modern heter iska, introduced it by saying that it should only be used as an ad hoc leniency for people to have basic needs. Malveh Hashem 13:27 concludes that the heter iska should only be used in extenuating circumstances. Mishpatei Ribbit 28:2 agrees.
- Chatom Sofer 4:48, Imrei Yosher 2:192, Brit Yehuda 40 fnt. 1, Horah Brurah (Kuntres Heter Iska ch. 2). Brit Yehuda concludes that someone who wants to be lenient can be and someone who wants to be strict will be blessed.
- Chafetz Chaim in Ahavat Chesed (Gemiliut Chesed 15) only complains that using the heter iska avoids lending money for free which is a chesed. Aseh Lecha Rav 1:60 (also printed in Or Torah 5732 Shevat siman 72) writes that the heter iska is permitted since it is for the purpose of business and only when a poor Jew asks for a loan a person may not use a heter iska and doing so would violate the basic principle of the halacha. Instead one should give them an interest free loan if one could.
- Horah Brurah (Kuntres Heter Iska ch. 2) quoting Rav Meir Mazuz
- Horah Brurah (Kuntres Heter Iska ch. 2) citing Ginat Veradim 6:4, Perach Shoshan 6:1, Maharival 2:26, Pri Amada (Shelichin Ushutfin 6), Eretz Chaim 177:5, Chaim Byad 41, Graz 42, 46, Kitzur Shulchan Aruch 66:10, Har Hakarmel CM 25, Atzi Levona 177:6, Imrei Yosher 1:108, Hari Besamim 2:143, Erech Shay 177:7, Teshurat Shay 88, Chut Shani 18:3, and Malveh Hashem 13:10.
- Horah Brurah (Kuntres Heter Iska ch. 3 p. 149)
- Netivot Shalom p. 719 quoting Rav Elyashiv, Horah Brurah p. 148 agrees but adds if one has a business one doesn't need this leniency and one can just acquire for him a portion of your profits.
- Netivot Shalom p. 734 n. 34
- Chelkat Yakov YD 68 writes that the heter iska isn't a harama because the people involved genuinely want to avoid any sin and so they fully mean to comply with all of the stipulations of the heter iska. Chelkat Binyamin Kuntres Heter Iska n. 12 agrees. (In light of the Taz 167:1 and others it is hard to understand this explanation.) Minchat Shlomo 1:27 is troubled how the Heter Iska is permitted but yet allows it completely as is the practice. Sefer Hazichronot cited by Brit Yehuda ch. 40 fnt. 1 writes that the heter iska is a harama. Maharsham 9:71 writes that the heter iska needs to be made in a way that is reasonable and not evident that it is going to come to interest since if there's a loss the borrower can swear he didn't gain and not pay any interest.
- It is reported that the heter iska for the quicken loans was approved by Rav Dovid Feinstein, Rav Shmuel Kamenetsky, Rav Shlomo Miller, Rav Moshe Heinemann, Rav Yisroel Reisman and Rav Shmuel Fuerst. Listen to Rabbi Yona Reiss's discussion of this heter iska.
- Torat Ribbit 17:28
- Teshuvot Vehanhagot 6:181 argues that adding this clause of the Chayei Adam is a complete haarama and forbidden. He explains that the Chayei Adam is referring to a case where the investor wanted to know the deals of the business each month and as such he ask the borrower to inform him. However, for a bank that gives loans today they have no interest to know the works of each person's business monthly and requiring a borrower to do so is a complete mockery of halacha.
- Brit Yehuda ch. 40 fnt. 2 writes that the gedolim of previous generations didn't endorse a complete pikadon heter iska since it isn't based on Chazal's institutions and is more of a harama.