Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?
WHY THE HETER ISKA NEED NOT (AND UNDER US LAW AND PRACTICE SHOULD NOT) BE SIGNED BY PARTIES UNDER THE HALACHA
The concept of a “Shtar”[1] under Halachah is to be distinguished from a contract under New York law. A contract is a legally binding agreement entered into by the parties thereto where there are mutual expressions of obligation or other consideration in support of the agreement between the parties. A Shtar, on the other hand, is not an agreement.[2] It therefore need not necessarily be signed by the parties. It does not require consideration. Indeed, classically it is signed by two witnesses; not the parties. A Shtar is an attestation by the two witnesses as to the existence of an agreement and the terms thereof. The actual agreement between the parties is accomplished by way of a formal act of “Kinyan.”[3] There are various types of Kinyanim,[4] all of which are intended to symbolize the effectuation of a transaction between the parties. Classically, under the Halacha, there is no concept of an agreement that can be enforced. There are only completed transactions.
Thus, a Heter Iska may be properly entered into under Jewish law as described above, but nevertheless not be enforceable as a contract under US law. On the most basic level, if the parties themselves do not sign and deliver the Heter Iska in accordance with the formalities required under US law then the document does not constitute an enforceable contract under US law. There may or may not be an enforceable oral agreement depending on the circumstances. However, a written agreement must be signed by the party charged in order to be binding. By following this kind of a procedure, (i.e., of complying with Halachah, with witnesses and not the parties executing and delivering the Heter Iska so as not to become a binding written agreement under US law), in effect, the requirements of the Halacha can be complied with, but not US law. A situation can thereby be avoided which causes the Halacha or US law to be dishonored because of the unfortunate tactics practiced by some borrowers to avoid their obligations.
Given all of the potential issues associated with trying to enforce a document promulgated wholly under Halacha and never intended to be consistent with US law or any other law, it is no wonder that issues of the sort described above have cropped up, from time to time. This also helps explain why certain banks have adopted the practice of displaying a Heter Iska on the wall, as opposed to signing an individual Heter Iska. They do not wish to take the risk that the Heter Iska document will be enforced in a manner that was never intended This is because it is virtually impossible to satisfy the evidentiary requirements that are a precondition to the debtor asserting a defense of no profits under the Heter Iska. This kind of a nuanced tradition has been developed over the centuries. A secular court, relying on outside religious experts (who are often in dispute) cannot be expected properly to apply the Halacha as intended. The reliance by secular courts on outside religious experts to explain the intricate details of the Halacha is just not appropriate. There may also be constitutional infirmities, as discussed below. The proper forum for enforcing Halacha is a Bet Din, comprised of Halachic expert judges who are well versed in the nuances of this arcane area of law and practice.
- II. THE SHA’ARIAH- SOURCES OF THE PROHIBITION AGAINST RIBA.
The Sha’ariah[5] is not a monolithic legal code. The Koran[6] and the Sunnah[7] (upon which the Sha’ariah is said to be derived,) are also not a legal code. Instead of containing precise answers to questions of religious law, they set forth broad guidelines.
In the period since the Koran, Islam did not experience a phase of codification in the development of the Sha’ariah of the sort experienced by the Halacha. There is no Sha’ariah equivalent to the encyclopedic work represented by the Talmud. There are also no codes of law like that compiled by Maimonides or represented by the TUR or Shulchan Aruch.
There is also no comparable body of legislated laws or common law to that in effect in the US. The US has federal, state and local laws that have been legislated and are binding on its citizens. The US also has a body of common law, with established legal precedents, that can be relied upon in courts or other proceedings. Neither of these hallmarks of the US legal system exist in Islam. While, some Sha’ariah scholars have sought to establish some sort of consensus (known as “Ijma”), this has not necessarily been successful in practice. It does not appear that such scholarly positions have actually been accepted as binding by most who profess to be members of the Islamic faith.
There is also no supreme authority that can determine questions of law like the Supreme Court of the US. In this regard, both the Sha’ariah and Halacha suffer from this same disability in modern times. Hence, the many conflicting views of greater or lesser authority or acceptance, that remain unresolved.
The Sha’ariah might fairly be described as a collection of views over the years, from a variety of sources. As noted above, many of them are in conflict. The sources of the views expressed include those of recognized legal authorities such as the Mufti of a particular Islamic state, as well as, those reputable scholars. It also includes the views of self-professed authorities and spokesmen of differing backgrounds, education and authority. All claim to derive their views from the Koran or the Sunnah. However, sometimes the Koranic text quoted in support of a particular position may not be so clear. As noted below, these claims may or may not survive genuine scholarly scrutiny. Indeed, as noted below, self-appointed spokesmen for Islam, such as Osama Bin Laden, apparently can successfully challenge the views of such leading legal authorities as the Mufti of Egypt’s Al Azhar Institute[8]. This is often done in the name of advancing a particular brand of Islam. There is often not even the veneer of a legal or scholarly approach to these pronouncements. As discussed below, just because someone says that the Koran says so doesn’t make it so. Fortunately, extremists, no matter how strident, cannot actually legislate and control how most members of Islam act in practice. Nevertheless, the extremists have caused a great deal of conflict, discussion and debate by established legal authorities.
In this regard it should be noted, that there is a dispute among recognized Sha’ariah authorities as to the very meaning of the term Riba and its application. Yet, there is no supreme authority, recognized by most of Islam that is capable of deciding the matter.
What is a Moslem in a non-Islamic state to do? How is a determination to be made given the lack of a supreme authority? Is everyone to make his or her own personal decision as to which Sha’ariah authority to follow? Are there mitigating circumstances applicable when living in a non-Islamic state? What about those who reside in an Islamic state that purports to apply Sha’ariah law; but, nevertheless permits foreign banks to make loans on interest and its own banks to do so, directly or indirectly, as discussed below? Moreover, which of the conflicting views is right? Absent a supreme Islamic authority recognized by most Moslems, does any Islamic state have the right to decide on its own?
Notwithstanding all the clamor about prohibited Riba and the pedantic distinctions between “interest bearing” instruments vs. “interest based” interments, the reality is that interest or its equivalent is being charged by all manner of banks or other lenders. This includes loans or its equivalent by Moslems to other Moslems. Indeed this has been the case both before Islam, after the inception of Islam and to date.
Is everyone just wrong or is there another interpretation of the Koran? Are there views espoused by religious authorities and scholars that can help explain these practices?
This article suggests that not everyone who charges or pays interest or its equivalent is wrong. But, the fact is many disagree with this proposition. Furthermore, as a practical matter, many Moslems can and do vote with their feet on the issue. Thus, as noted below, many Moslems have bank accounts. Many also borrow from banks using traditional interest bearing loan documents (and not Sha’ariah compliant forms,) because it costs less. In line with the foregoing, HSBC has reportedly closed its Sha’ariah compliant mortgage lending department in London. Consider, why should HSBC or any other bank offer something more expensive and complicated than a traditional mortgage loan when there is no genuine demand for the product. It would appear that Moslem borrowers rightly prefer the simplicity and lower cost of a traditional bank mortgage loan product. They also apparently want to earn interest on their insured bank deposits.
Is right to prohibit these beneficial financial products to Moslems? Is it better to offer Moslems only non-competitive financial products, that are at rates and costs less favorable than prevailing market terms? Is it fair to require Moslems to do so, all in the name of an interpretation of the Koran that may not be justified or appropriate? What about the relevant scholarly views and Fatwas issued by noted Islamic authorities that purport to permit the same, as discussed below; are they just to be ignored?
The answer is not clear. Thus, as discussed below, there appears to be no accepted definition of the word Riba, or of the rules governing the application of the prohibition against Riba, in practice. Instead there are conflicting views of the sort described below and practices accepted by some, but not all, of Islam.
[1]A written document that is signed by witnesses who, in effect, testify as to transaction described in the document.
[2] Traditionally, the Halacha does not recognize the common law concept of an executory agreement (i.e., a contractual obligation to sell or buy property). Rather, under the Halacha, there are only completed transfers of property effectuated by a Kinyan. If, however, the buyer does not pay for the property, then the Halacha recognizes that there are various rights and/or remedies, including rescission (see Shulchan Aruch-Yoreh Deah 236:6). In addition, the Halacha also deems the right to payment of the purchase price as a debt of the buyer, which is secured by a floating lien on the property purchased, as well as on the buyer’s other property. See Talmud Tractate Bava Metzia at page 49a and also Bava Metzia: 47b (regarding a vendor claim of fraud), as well as, Bava Metzia: 44a (regarding “Mi Shepara”). See also Bava Metzia: 49a (absent a formal Kinyan, it is all just words). Moreover, see Bava Batra at page 3a and Shulchan Aruch-Choshen Mishpat 198:1-5. For a fuller discussion of the matter, see Understanding Rights in Context; Freedom Contract? A Comparison of the Various Jewish and American Traditions and Michael J. Broyde and Steven S. Wiener (2010); The Metaphysis of Property Interests in Jewish Law, by J. David Bleich (2010); and when Religious Practices become Legal Obligations; Extending the Foreign Compulsion Defense by Michael A. Helfand (Journal of Law and Religion Vol. 23: page 101-2008).
[3] A symbolic method of effectuating a transfer of property. In modern times, this includes a Kinyan known as “Situmta”. Rashi describes the origin of the term “Situmta” as the mark made by wine merchants on their barrels to identify them as having been sold (see Rashi on Talmud Tractate Bava Metzia: 74a). Tosafot (Bava Metzia 66a) explains that Situmta embodies a class of actions, which are recognized by custom as methods of accomplishing a transaction. This, even though they are not recognized as Kinyanim in the Torah. Aaron Levine (in The Oxford Handbook of Judaism and Economics) defines Situmta as a mode of acquisition in practice in a particular place. He concludes that by employing the law of Situmta, Halachic authorities have, in effect, recognized halachically, prevailing modes of acquisition (despite the fact that they are not sourced in the Talmud). I discussed the matter of modern contract law and practice under the common law with Menachem Elon. I noted to him that there was no such thing as an enforceable executory contract in the Talmud. Rather, there were only executed transactions (i.e., transfers by way of Kinyan) and, in effect, a debt for the purchase price. He responded that as a matter of custom (“minhag”) contracts were recognized. He went on to say the basis of the applicable minhag was “diamonds”. I responded that diamonds were consignment arrangements not a contract for the sale and purchase of real estate. He smiled and said that it was nevertheless enforceable as a matter of custom (minhag).
[4] Plural of Kinyan.
[5] Loosely defined as the way or the path. It appears to be similar in meaning to the term Halacha, which may also be loosely defined as the path or the way.
[6] A book attributed to Mohamed that is said to be authored with prophetic inspiration.
[7] The Sunnah are a collection of reports by others of the (i) sayings of Mohamed (“Hadith”) and (ii) actions of Mohamed.
[8] A scholarly institution of authority and position within the Egyptian governmental and religious establishment of Egypt
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Tagged: Halacha, Heter Iska, Leonard Grunstein, Riba, Ribit
Leonard Grunstein 
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