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.
Leonard Grunstein 