Tag Archives: Interest

Leonard Grunstein Gives Lecture at Yeshivat Sha’alvim

Interest February 26, 2015 Leave a comment

Leonard Grunstein recently gave a lecture at Yeshivat Sha’alvim on religious law and interest. Opening remarks were given by Rav Yechezkel Yakovson and Rabbi Asher Weiss, respected teachers and thinkers within the community. Grunstein’s lecture revolved around his article titled, “Interest, Ribit and Riba,” which was published in The Banking Law Journal in 2013. The article analyzes Sharia finance, and proposes a way to reconcile capitalist and Islamic financial markets. The full text of his article can be found here, and the lecture can be viewed in its entirety by following the link below:

http://new.livestream.com/accounts/665286/shaalvim?utm_source=Grunstein+Event_Feb+2015&utm_campaign=grunstein+1&utm_medium=email

The conference program can be found, here.

Interest, Ribit and Riba

Interest Ribit & Riba July 8, 2013 Leave a comment
Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?

 

PART I

PART II

PART III

PART IV

PART V

PART VI

PART VII

PART VIII

PART IX

PART X

PART XI

PART XII

PART XIII

PART XIV

PART XV

PART XVI

PART XVII

Solution & Conclusion | IRR Part XVII

Interest Ribit & Riba July 7, 2013 Leave a comment
Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?

 

PROPOSED SOLUTION & CONCLUSION

As noted above, the concept of trying to meet the requirements of the capital markets the needs of the capital markets and the conflicting needs of the Sha’ariah or Halacha as the case may be, within a unitary structure is problematical. Embedding the documents favored by one structure within another only seems to cause more problems; not solve them. It is suggested that the key is to apply a more nuanced approach.

Underlying this approach is a recognition that when documents are entered into under one system of law and ethics and enforcement is sought under another contradictory system of laws and ethics, problems can and do arise.  Each system is better able to deal with its own laws and traditions and to overcome the problems they face.

Melding the competing systems creates a situation where anomalous and unpredictable results can occur.  As demonstrated with respect to the Heter Iska, precisely the wrong result was obtained in a New York lower court case, as noted above, from that which was intended under the Halacha.  There also appears to be genuine resistance in the US to enabling religious orientated forms and usages that conflict with established business norms.  This kind of push back is to be expected even in the healthiest of diverse societies, when the implicit message is, in effect, my system is morally superior to yours.  As I hope is demonstrated above, these concerns are borne more of ignorance and misperception than as a result of genuine differences.  I do believe that resolution of these issues does not lie in integrating these discordant systems of law and practice.  Rather, it is suggested the solution lies in a healthy respect of each system for the other and self-respect, as well.

Why not therefore allow each system to exist and develop on its own.  As discussed above the concept of embedding hybrid loan documents in a Sha’ariah complaint structure does not cure the problem. Indeed it would appear to cause more problems than it solves.

It is suggested that one way of accomplishing this result is to enter into Halachic or Sha’ariah compliant documents in a manner that is enforceable under the respective religious laws that created them; but, which do not require enforcement under US law, as more fully discussed below. Similarly, a separate capital markets compliant structure and set of documents would be entered into that is enforceable under US law.

In the case of Heter Iska, I have accomplished this by having the document executed in a manner, which makes it enforceable under the Halacha, but, which absolutely makes it unenforceable under US Law.  As noted above, the Heter Iska need not be enforceable under US Law to make it effective, Halachically.  The fact that the Heter Iska is or is not enforceable under US law is wholly irrelevant.  It only has to be enforceable in a Bet Din under the Halacha.  This is accomplished through the simple device of the parties themselves not signing the document.       It is also recommend that another clause be added as well.  The clause would provide that the Heter Iska could only be enforced in a Bat Din and not in any other forum; and then only in accordance with the Halacha.

In the case of the Shariah, I am relying on the Hanifa Fatwa and its progeny that permit loans on interest in a non-Islamic state, as more fully discussed above. I am also relying on the Tantawi Fatwa and to a lesser extent the Quaradawi Fatwa. As also noted below, the loan structure is non-recourse. Thus, not only is there no individual borrower or lender (both are entities), the borrower generally has no personal liability. The only qualification is that the borrower not interfere with the enforcement of the loan or violate certain covenants intended to preserve bankruptcy remoteness and the integrity of the collateral. This is often referred to as a “good guy guarantee”.

In this regard I can’t help but note that it is the lender that is taking real risks in furnishing the credit to the borrower. Indeed as between the lender and borrower, it is the lender who is taking most of the risk. If anything, the price, in terms of interest rate charged to the borrower, is most beneficial to the borrower. After all the lender is putting up most of the money to accomplish the transaction. When you look through the transaction, it is in substance the pre-fixing of return by the lender. Most borrowers don’t want the lender to be their partner in the upside. Hence they prefer to borrow as much money as possible at a fixed rate of return. Under this structure, the borrower is not personally liable on the downside. It is the assets forming the collateral package that stand for the loan.  The key to this structure, which benefits the borrower, is to satisfy the requirements of the capital markets without qualification.

Thus, it is proposed that there be a wholly capital complaint structure that fully and unequivocally satisfies the requirements of the capital market. In addition, there would be a wholly Sha’ariah compliant structure created which is separate and apart from the capital compliant structure and which does not interfere with it. The Sha’ariah compliant structure would also not require enforcement under US law.  This could be accomplished by isolating the religious oriented financing transaction from the loan transaction format. The loan transaction format would be formulated to best take advantage of the opportunities for placement through the capital markets. The Sha’ariah compliant format would similarly be structured separately to fully comply with the requirements of the Sha’ariah. This separation could be accomplished as follows:

  1. A US lending company could be formed.  It could be an actual bank or public or private lending platform.  If not a bank then a public or private lending REIT might be a useful lending entity.  This is because it is a recognized form in the marketplace and it offers tax advantages, like pass though of taxable income (i.e., no double taxation).  This is particularly useful for a foreign investor that is otherwise not taxable in the US or receives other tax concessions under certain treaties (depending on the country of origin of the ultimate lender).
  2.  The US lending company would be staffed with expert personnel who are able to originate, underwrite and process loan transactions through the capital markets.
  3. The US lending company would be capitalized in a Sha’ariah compliant manner using financing mechanisms along the lines suggested above.
  4. This kind of structure could be used for each financing transaction or as an ongoing business format.
  5. The Sha’ariah compliant capitalization of the US lending company could be made subject to binding arbitration under the Sha’ariah.  The documentation for this kind of remedy is readily available.  It has been used successfully in the analogous circumstances of a Bet Din under the Halacha and has been found to be enforceable under NY law,[1] if properly drafted, executed and effectuated in practice.
  6. The loan transaction would take the form of a typical capital markets loan transaction.  It would include a note, first mortgage, assignment of the rents and all of the special purpose entities and bankruptcy remoteness demanded by the capital markets, as the threshold requirement of accessing the favorable rates and terms achievable in this context.  As is typical, US law would govern and the documents would be enforceable in the US courts, exclusively.
  7. There would be strict separation between the Sha’ariah compliant source of funding and the Sha’ariah compliant documents and the actual lending entity and loan documents with the ultimate borrower.  If appropriate under the Sha’ariah, the US lending entity need not be run day to day by the Sha’ariah compliant capital source.  This so as not to run afoul of any rules that prohibit this kind of direct involvement under the Sha’ariah.
  8. The structure would provide that, aside from a so-called good guy guarantee, the loan would be non-recourse. This would prevent the occurrence of one of the most fundamental reasons for the prohibition against Riba. As Timur Kuran notes[2], the term Riba is derived from the word “Rib. According to Kuran the term Rib means the construct in the Koran[3] that describes how the lender abused the borrower by doubling or quadrupling the loan amount as a condition of the extension of a loan that had become due. This is the essence of Riba according to Kuran. He distinguishes this from ordinary interest. He goes on to say that the wrong that the Koran sought to interdict was what happened next. The debtor couldn’t repay the loan with so usurious a rate and was forced to lose all his property to the extortionate creditor and become a slave.  While, as noted above, modern US debtor-creditor laws and bankruptcy laws are designed to prevent just this kind of a condition (and there is no such thing as debtors’ prison in the US,) nevertheless the dangers of penury were sought to be avoided by this measure against the imposition of Riba.

It is suggested that this kind of structure[4], is permitted by the Hanafi Fatwa in the US, because it is not an Islamic state where Sha’ariah law governs. Furthermore, the typical lender, whether a bank or otherwise, is generally an entity (i.e.: a legal person) not an individual. Thus whether it is the Tantawi Fatwa or previous Fatwas dealing with Cash Waqf’s or the progeny of the Tantawi Fatwa, where under banks are allowed to pay and receive interest, there is a sound legal basis under the Sha’ariah to permit this solution. On the other hand, there are many who would object and argue that this structure nevertheless yields prohibited Riba. Be that as it may, I offer this as a proposed structure for those who might embrace it, for all the reasons discussed in this article.

It is suggested that using this kind of a structure can achieved the goals of all parties concerned.  The capital source is able to follow their religious principles without having to be concerned that somehow a US court might undo what was intended.  The borrower receives the benefit of more favorable rates and terms than would otherwise be the case.  Concomitantly, all of the terms and conditions of the capital markets, that were designed so as to afford so favorable an execution will continue to take precedence under US law, without religious complication or entanglement.  The result is the kind of predictability that each system of law intended, before they became entangled.  I can’t help but note the wisdom of our founding fathers in seeking to prevent this very kind of entanglement.

[1] See CPLR Article 75. See also The Collision of Church and State: A Primer to Bet Din Arbitration and the New York Secular Courts, by Ginnie Fried, in the Fordham Urban Law Journal (Volume 31, Issue 2, Article 8: page 644, et seq.-2003).  See also Religious Arbitration and the New Multiculturalism: Negotiating Conflicting Legal Orders by Michael A. Helfand (NYU Law Review 86-2011); and Fighting for the Debtor’s Soul: Regulating Religious Commercial Conduct by Michael A. Helfand (George Mason Law Review 19-2011).

[2] In the Logic of Financial Westernization in the Middle East, Journal of Economic Behavior & Organization Vol.56 (2005) at page 595.

[3] Ibid. See Koran 2:274-80, 3:130 and 4:160-61 as cited by Kuran

[4] Already implicit in the more modern Sukuk financing product described in Section XIV above.

Heter Iska & U.S. Courts | IRR Part VIII

Interest Ribit & Riba July 7, 2013 Leave a comment
Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?

 

HETER ISKA AND THE US COURTS

The nature and enforceability of a Heter Iska has been the subject of a number of NY court decisions with varying consequences.  This is problematical in a number of respects.  Of primary concern is the fact that these kinds of anomalous and unpredictable results are the bane of lenders and the capital markets.  Furthermore, as shown below, the treatment of a Heter Iska by a US court may be wholly inconsistent with how the very same document would likely be treated under the Halacha.

To better understand the basis for these concerns, it is important to analyze a number of the seminal decisions under New York law in this area, which affected the way banks structure loans involving a Heter Iska.

One of the more important cases in this area of law is IDB v. Weiss & Wolf,[1] a 1985 NY State Supreme Court[2] decision.  In that case, the Court held that a triable issue existed as to whether a Heter Iska defense was available to the borrower.  As a result of this decision, banks no longer typically sign an individual Heter Iska.  Instead, there is the Heter Iska on the wall, as it were.[3]  Its presence on the wall, instead of in an individual loan file, says much about how serious an issue (i.e., the existence of a Heter Iska signed by the lender and borrower) was presented by the decision in the IDB case.  Ever since then the banks have correctly balked at signing a Heter Iska.  While the case is not reported to have gone to final judgment (presumably it settled), it did establish a precedent in practice.  Thus, given that a properly drawn and executed Heter Iska could be enforced by the courts, banks therefore avoided doing so.  The court’s finding that a triable issue existed was sufficient to case a chilling effect on entering into a Heter Iska on an individual basis.  No bank wants to take the chance of having a borrower interpose a defense, which survives a motion for summary judgment, let alone conceivably lose any portion of the principal amount of the loan.

In 1986, the NY Supreme Court faced another case involving a Heter Iska in Bank Leumi Trust Company of New York v. Morris Spitzer.[4]  In that case, the Court found that Spitzer did not know about the Bank’s Heter Iska, even though it was displayed on the wall, until well after the loan was made.  The Court in the Leumi case granted summary judgment for the benefit of the bank (unlike in the IDB case).  This is because, among other things, the borrower did not rely on the Heter Iska when he entered into the loan.  Indeed, the borrower didn’t even have a copy of the Heter Iska.  Moreover, the US Bank Leumi subsidiary of the Israeli parent bank did not ratify or sign the Israeli parent’s Heter Iska document.  Neither did the borrower (Spitzer) sign a Heter Iska.  The Court found that the bank had never executed and delivered the Heter Iska to the borrower, even though there was a form that was hung on the wall.  On the other hand, the Court found there was a promissory note, which was signed and delivered by the borrower under US law.  The Court weighed this against an unsigned Heter Iska, which the borrower was not even aware of and the bank had disavowed.  The Court therefore granted summary judgment in favor of the bank.  It found that a loan transaction existed, not a Heter Iska relationship.

There have been a number of other unique and interesting cases involving a Heter Iska.  In Bollag v. Dresdner,[5] a civil court case in 1985, the lender sought to use a Heter Iska as a sword instead of a shield.  Thus, the lender sought to collect a usurious rate of interest (in excess of 24% per annum) arguing that the arrangement was truly a profit sharing deal.  The civil court held that substance controlled over form.  It found that notwithstanding the Heter Iska, the arrangement was in fact a loan, which was subject to state usury laws.  The prohibition against usury (excessive interest) could not be avoided by styling the loan as a Heter Iska relationship.

In Heimbinder v. Berkowitz,[6] the lender tried to use the Heter Iska document to assert  personal liability against the shareholder in the corporate borrower, where none existed under US law.  In that case, the borrower was a corporation, notwithstanding that the Heter Iska document was signed by the individual principals.  The court found that the Heter Iska could not change a corporate loan into a personal loan.[7]

Arnav Industries, Inc. v. Westside Realty Associates, et al[8] involved a mortgagee, which sought to foreclose on its mortgage.  The lower court denied summary judgment.  It focused on the insertion of a Hebrew phrase in the mortgage, to wit: “al pi Heter Iska” (in accordance with a Heter Iska)[9] above the signature on the mortgage note and found that there was an issue of fact as to whether it created a partnership agreement between the lender and borrower.  The Appellate Division disagreed and reversed the lower court decision.  It held that the language could not be used by the borrower to vary the terms of the mortgage note.  Among other things, there was no actual Heter Iska signed by the parties.  The note also contained a provision to the effect that nothing contained therein was intended to create a joint venture or partnership.

The Appellate Division in Arnav also cited its own decision in Barclay Commerce Corp. v. Finkelstein.[10]  In the Barclay case, the Appellate Division noted that the Heter Iska constituted “merely a compliance in form…with Hebraic Law.”[11]  It held a partnership is not created thereby and the issue is devoid of merit.  A similar decision was made by the Federal District Court for Massachusetts in Edelkind, et al v. Fairmont Funding, Ltd., et al.[12]

The Appellate Division in LZG Realty LLC, et  al v. HDW, et  al[13] also dealt with an action for foreclosure of a mortgage.  The defendant borrower failed to raise the matter of a Heter Iska and the binding rabbinical arbitration clause thereunder until 1½ years into the matter.  The court held that it was too late to raise the issue at that point in the case.  The court therefore did not reach the underlying issue of the Heter Iska in the case.

In Koenig v. Middlebury Land Associates, LLC, et al,[14] the court dealt with a Heter Iska that had a rabbinical arbitration clause.  The court found, however, that it was not a binding arbitration clause.

The US Bankruptcy Court for the Southern District of New York In Re Venture Mortgage Fund, L.P., Debtor (and In Re David Schick et al Debtors)[15]  ruled that the Heter Iska could not be used as a means to collect a usurious rate of interest of 27% interest per annum.

A recent noteworthy lower court opinion in the NY Supreme Court of Nassau County (dated January 11, 2012) involved the foreclosure of a mortgage.  The name of the case is VNB New York Corp v. 47 Lynbrook LLC, et al (Index # 018467/2010).  In case the mortgage made reference to the fact that to ensure compliance with Jewish law, the Bank has entered into a Heter Iska.  The defendants sought to amend their answer to interpose a defense against a deficiency judgment based on the Heter Iska.  The court noted that the note and mortgage made it clear that applicable civil law (i.e., NY law) was to govern.  Accordingly, the court found that the existence of the Heter Iska did not alter the clear intent of the parties that NY law governs the enforcement of the mortgage documents.  The Heter Iska was not ground for overturning the foreclosure judgment nor could the defendants defend against a corresponding deficiency judgment based thereon.

[1] NY State Supreme Court-1984, NYLJ 2/4/85 at page 14.

[2] The court of original jurisdiction in New York. This as distinguished from the US Supreme Court, the highest court of the land. The highest court in New York State is the Court of Appeals.

[3] It is said that when Rav Moshe Feinstein visited an American-Israeli bank, he noticed that there was a framed Heter Iska on the wall.  He is reputed to have said “Kiknah de Heter Iska oif de Vant” (see the Heter Iska on the Wall).

[4] Unreported decision dated 9/18/86 by Judge Leonard N. Cohen in NY Supreme Court New York County under Index # 017734/1986.

[5] 130 Misc.2nd 221, 495 NYS2nd 560 (NY Civ. Ct. Kings County-1985).

[6] 175 Misc.2nd 808, 670 NYS2nd 301 (S. Ct. Kings County-1998).

[8] 180 AD2d 463, 579 NYS2d 382 (App Div 1rst Dept.-1992).

[9] An example of this kind of a text may be viewed online at sec.edgar-online.com regarding Allou 10-k annual report (dated 6/30/97)- Exhibit B: Section 1 (iii). The Exhibit is an Amendment to the Guaranty, which adds the following provision to Section 15 of the Guaranty: “Heter Iska: This Guaranty is being provided to BLT in accordance with BLT’s Heter Iska.” BLT is a reference to Bank Leumi Trust Company of NY.

[10] 11 AD2nd 325, 205 NYS2nd 551 (App Div 1rst Dept-1960). See also Leibovic v. Rawicki 64 Misc2nd 858, 316 NYS2nd 181 (NY Sup-App Term-1969).

[11] Ibid at page 328

[12] 539 F. Supp. 2d 449 (2007)

[13] 71 AD3rd 642 (App Div-Second Dept.-2010)

[14] 2008 Conn. Super. Lexis 1816 (July 23,2008)

[15] 245 B.R. 460 (2000) aff’d 282 F3rd 185 (2d Cir. NY-2002)

Origin of “Iska”, Theme in Talmud | IRR Part IV

Interest Ribit & Riba July 7, 2013 Leave a comment
Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?

 

THE ORIGIN OF THE TERM ISKA AND THE DEVELOPMENT OF THE THEME IN THE TALMUD

In dealing with the issue of how to source capital for use in a business venture without falling astray of the strictures against Ribit, the Talmud discusses using the business vehicle then commonly known as an “Iska”.[1]

The Talmud begins its analysis of the topic as follows:  “The Nehardeans[2] said this Iska.”  The discussion of an Iska relationship appears in the context of a prior analysis of a number of other types of business relationships (such as a sharecropper or lease of a field).

The Talmud digresses at this point in the text to discuss a non-real estate business relationship based on what was then commonly known as an Iska.  It notes that a key element in the Iska relationship is that one party (referred to in the Talmud as the “lender” but sometimes otherwise referred to as the “investor”) has capital or assets (i.e., money or goods).  The other party (referred to in the Talmud as the “borrower” but sometimes otherwise referred to as the “working party” or “managing member”) has sweat, talent and/or contacts and a willingness to devote the same to effectuate the purposes of the Iska.  It is the borrower who is actually to conduct the business of the venture.  The lender has no active role other than providing the money for the Iska venture.

It is important to recognize that the Iska relationship is not a partnership or joint venture.  It is just what the Talmud says it is – an Iska.  The Iska format is to be distinguished from all manner of other relationships.  It is a unique business structure.  Much like a limited liability company and limited partnership are two distinct statutory vehicles, which have certain elements in common and others that are dissimilar; so too an Iska.  Thus, an Iska relationship may be analogous in certain respects to a partnership, but it is at its very essence a lending vehicle.  It is to be distinguished in a number of important ways from a partnership,[3] as outlined below.  The Iska vehicle has its own set of rules.  The Talmud describes the structure used at the time and adapts it to the lender/borrower relationship because of its utility.

It would appear that the origin of the term “Iska” predates the Talmud.  Indeed the Talmud invokes the term as an existing business structure in use at the time.  I have researched the term to determine its origin.  In this regard, I searched various texts in a number of different languages in antiquity in an effort to fix the original use of the term.

The word Iska appears to be one in use in ancient Assyrian.  The particular usage identified below was one in cuneiform on a piece of clay.  It is described[4] as the  “ISKA-LARIM”.  The word “Larim” is said to be a proper noun; the name of an individual, Larim.  The term “Iska”, as used in that context, is defined as an agent or “one in control or possession” of some goods.  As I understand the circumstances, Larim was the manager of a caravan.  He entered into an arrangement, known as an Iska, whereby he was given goods or produce by the owner at the source location.  The purpose was to sell the goods or produce in a destination location. where the prevailing market price was more advantageous.  In this particular Iska, Larim, the manager of the caravan, was to transport the goods or produce and sell them at the destination.  The sales proceeds were to be applied first to pay for the original principal amount of the goods or produce.  The profits earned were then to be split between the caravan manager and the original provider of the goods or produce.  The clay text noted above was an accounting by Larim, the caravan manager, to his Iska compatriot.

This appears to be the Iska structure that the Talmud adapted to the lender/borrower context.  Thus whether it was money or food, the lender (capital source), in effect, loaned the same to the borrower (operator of the Iska).  The borrower was entrusted with the money or goods in the business venture to make a profit.  Upon sale of the goods (i.e., loaned to the venture or purchased with the money loaned to the venture), the profits were then divided up (after repayment of the principal amount to the lender).  Questions of liability for the principal amount at risk were handled by contract, within the context of the overall Iska business structure.

In the Talmudic Iska, the money or goods provided are characterized as one-half loan and one-half investment.  The terms used are “palga milvah” (loan) and “palga pikadon” (investment).  The difference conceptually between a loan and an investment is critical to the understanding of this business vehicle.

In general, when one individual lends another individual money or other assets, there is no right to earn interest or, better said, it violates the Biblical commandment against doing so.  Remember in the Biblical context; one individual lends to another individual a thing of intrinsic value.  Precision is required; because other constructs might not be Biblically proscribed and may not even violate rabbinical enactments, under certain circumstances, as described below.

Getting back to the Talmud’s formulation of the Iska relationship, the portion of the money that is deemed to be a loan must be repaid to the lender even if the business venture fails.  As to the investment portion, in general, there is no right of the lender to receive a return of the capital invested if the venture fails.  Any profits derived from the venture that was funded by the lender (i.e., both the loan part and the investment part) are to be shared by both the lender and the borrower, as the owners of the Iska business venture.

In the example given in the Talmud, the lender supplies merchandise to the borrower.  As Rashi points out, the lender must bear some risk of loss. This is the key to understanding the difference between a loan and an investment.  Thus, as to a loan, the borrower bears the risk of loss, if the principal (or goods purchased with the loan) are lost at sea, in a fire or by reason of other casualty.  However, in an Iska, as to the portion that is an investment, it is the lender who bears the risk of loss.  Unless the lender bears some level of risk of loss as prescribed by the Halacha, in substance, the transaction is nothing more than a loan and is subject to the prohibition against Ribit.

Rashi then notes that the borrower has certain duties with respect to the investment portion.[5]  Moreover, those duties extend even to the loan part (not just the investment part), as more fully discussed below.  This is a novel feature of the Talmudic Iska structure.

The transaction described in the Talmud, which was the underlying premise for entering into the Iska relationship, was motivated by a business opportunity.  The value of the goods in one place (where the borrower and lender entered into the Iska relationship) was less than the value in another location.  To take advantage of this arbitrage opportunity, the borrower is to travel to the agreed upon destination with the goods and sell them there.  As an aside, so as to avoid any stricture against Ribit, the borrower is to be paid appropriate compensation for the work the borrower performs as the managing member under the Iska.[6]  In this manner, the efforts expended by the borrower as the working party are not deemed to be Ribit.

The Talmud then comments that the Iska structure as adapted by the Rabbis was good for the borrower and good for the lender.  Notice the language.  The Talmud uses terms that are consistent with a loan, not terms such as “partners” or “investor and “managing member”, which are characteristic of a partnership relationship.  This is because the underlying nature of the parties to the relationship is that of a borrower and lender.  Under the Iska structure, the lender benefits because all of the money furnished to the borrower must be used to generate a profit in the venture.  In addition, the borrower is personally liable for the return of one-half the principal amount furnished.  The borrower similarly benefits because all of the funds needed by the borrower are provided by the lender and the borrower is personally liable for only half of the principal amount.  Given the risks involved in this kind of a transaction, the Talmud concludes that the Iska structure is comforting to both parties.[7]

The Talmud then continues with a discussion by Rava[8] as to the reason why the term Iska is used to describe the goods that are the object of the venture.[9]  He posits a comparison of the term “Iska” with another word, “Easuki,” which in Hebrew is spelled similarly.  The term “Easuki” means for use in business.  Hence, the use of the term Iska to describe the goods loaned (or acquired with the money loaned) for use in the business.

Rava posits[10] that the capital invested in the Iska relationship is for use in the business venture only; not for personal use.  This is another fundamental and distinguishing characteristic of the Iska.  A loan is a personal matter, both in terms of obligation and use.  The borrower does not have to use the proceeds of a loan for any particular purpose.  This is so even if the loan was taken for the sole purpose of using the proceeds in a business to generate profits.  Thus, as the Talmud notes,[11] although the borrower can even drink beer with the proceeds of the loan, generally, (despite the fact that it was characterized as a business loan and not a personal one; or, give the loan proceeds to the borrower’s children as an inheritance), this is not the case with a Iska, where all the proceeds (including the one-half loan portion) must be used in the Iska venture for the intended purpose of generating a profit.

This is not the case with an Iska type loan, as noted above.  Thus, the Talmud rules that the Iska structure mandates use of the entire principal amount (both the investment and the loan portions) furnished in the business venture for the intended business purposes (and for no other purposes).  This in order to fulfill the businesses purposes of the venture (i.e., to earn a profit).

Rashi[12] points out the motivation behind this important and essential condition of the Iska.  He finds that the borrower seeking to profit on his share will therefore earn a profit on the entirety of the principal amount funded by the lender (i.e., both the loan portion and the investment portion).

In line with the foregoing, Rava holds unlike an ordinary loan, which is collectible only as against the real property of the debtor’s estate, in the case of an Iska, the lender can also collect against the merchandise (i.e., personal property) in the Iska relationship.  Moreover, if the debtor were alive at the time, the debtor’s obligation in an Iska relationship may be enforced against all of the debtor’s property, both moveable and real property.

[1] Tractate Bava Metzia- Chapter 9 ( Hamekabel) on page 104b.

[2] Talmudic scholars from the Town of Nehardea  (i.e. in the area of Bavel) outside of the Land of Israel.

[3] The reference to other comparable structures is as a convenience only, so as to better understand the unique nature of the vehicle.

[4] In the Proceeding of XLV Recontre Assyriologique Internationale (books.google.com)by Tzvi Abusch, Carol Noyes and William Halo (2001) at page 171.

[5] This concept was further developed in the Heter Iska structure  and the effect was to shift all of the risk of loss to the borrower as a practical matter.

[6] Talmud Tractate Bava Metzia at page 68b, where it states that any amount agreed to whether much or little is sufficient. It should be noted however, that Rav Shimon ben Yochai dissents and requires that the full measure of appropriate wages must be paid.

[7] The Talmudic passage cited notes the Iska is beneficial to both parties as noted above.

[8] One of the preeminent Amoras (i.e. Halachic spokesman) in the Talmudic era.

[9] It is the goods themselves and not the venture that is being discussed in terms of the name Iska. Under the Assyrian definition it is the agent who is referred to as the Iska, as noted below.

[10] See in the cited portion of the Talmud noted above

[11] Talmud Tractate Bava Metzia at page 104b.

[12] The Rashi commentary on the passage of the Talmud cited above is printed on the same page of the Talmud alongside the cited text.