Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?
THE EVOLUTION OF THE HETER ISKA STRUCTURE
The Maharam[1] (approximately 400 years ago) reported a number of amendments[2] to the form Heter Iska. The primary change involved the stipulation noted above that only the Rabbi[3] and Chazan[4] could testify on the matter of the debtor’s worldwide income from any source. This seemed to be too contrived and so the Maharam substituted having two kosher witnesses.[5] However, proof was still required that the managing member did not profit or earn income from any source anywhere in the world.[6] This was still virtually impossible to satisfy. After all, how could anyone (of their own personal knowledge) actually know an individual so well as to testify that the individual made no money at all. The standard is actual knowledge, not circumstantial evidence. Moreover, only two kosher witnesses with actual knowledge are acceptable. The Maharam also provides for a “kenas” (a penal amount as liquidated damages) that is due in lieu of the debtor taking an oath. This then is another means of providing for a return on investment. The fee can be fixed by formula to mimic interest.
The Shoal u’Mayshiv[7] considered the issue of whether a Heter Iska could properly be used to cover what appears to be a personal loan. Thus, a teacher wished to obtain funds in order to make a wedding for his daughter and asked whether a Heter Iska mechanism could be employed, in effect, to borrow the funds needed and repay them with what amounts to interest. The Shoal u’Mayshiv determined that the Heter Iska structure could also be used in this case. He reasoned that if the teacher could not borrow the funds needed to make a wedding, the teacher would necessarily have to forfeit his job in order to seek charitable donations for this purpose. He, therefore, concluded that the teacher’s wages could be treated as a source of income or profit under the Heter Iska structure. The Shoal u’Mayshiv deemed the teacher’s compensation retained as a result of continuing to work as the equivalent of Heter Iska profit. This is so even though the funds loaned were not invested in a business venture to earn a profit. The wages earned by the teacher were for work done and were not directly derived from the principal amount of the loan.
The Maharam[8] applied the Heter Iska exception to a mortgage loan against a personal residence.[9] This was so notwithstanding that the funds were used by the borrower personally to buy a personal residence. The mortgage loan (covered by the Heter Iska) was against a personal residence; not a pledge of business assets as was originally contemplated when the Heter Iska structure was initiated, as noted above.
The Mabit[10] further developed the form Heter Iska. He held that there may be various duties and obligations, which the debtor undertakes under the Heter Iska. The exception though was there could not be an explicit promise that there would only be profits.
There are various forms of Heter Iska in use today. In general though, they are based on the investment trust funds conceptual arrangement derived from the Talmudic discussion reported in Tractate Bava Kama,[11] as noted above and crystallized in practice by such halachic authorities as the Terumat Hadeshen and Mabit. They all have in common the concept of having threshold conditions, which are virtually impossible to fulfill.
This tradition has been further refined over time by extending it to the threshold procedural requirements of Bet Din, as well. The effect is to assure that the Heter Iska cannot be improperly used to defeat the implicit obligation of the borrower to repay the loan together with what amounts to interest.
Rav Asher Weiss[12] in his discussion of Heter Iska described a modern iteration of the form, which contains a number of very interesting provisions. The form is premised on kulo pikadon (all investment). Among the duties set forth in the Heter Iska is the requirement that there be an accounting of worldwide income which is attested to by an oath every month (i.e., from the very inception of the transaction and in good times and bad). If this condition is not met, then a fixed rate of return must be paid in lieu of a profit share in accordance with a formula agreed to by the parties. This tracks along the precedent established by the Mabit (which is based on the Talmudic discussion in Bava Kama[13] as described above).
Rabbi Asher Weis also noted that there are threshold procedural requirements of Bet Din that apply to this kind of a case. Thus, an oath would not be administered to the borrower in support of his claim of no profits, unless the debtor first demonstrated to the Bet Din satisfaction of the pre-conditions to bringing such a claim. This includes the monthly accounting (of debtor’s worldwide income from any source) requirement that itself had to be sworn to by two competent witnesses each and every month from the inception of the loan and until payment in full with interest. If this burden was not satisfied first, then the oath of the debtor would not be administered and debtor’s claim would fail before it could even be presented.[14]
Rav Blau,[15] a recognized expert in the area of banking transactions, also dealt with an number of knotty issues in connection with formulating a bank form of Heter Iska.
Among the many questions I had occasion to discuss with him was the issue of whether the Heter Iska had to be enforceable under the laws of the jurisdiction were it was executed (i.e., US law). Thus, if for any reason a Heter Iska might not be enforced under the laws of a particular country, then would that affect the Halachic validity of the Heter Iska. Rav Blau concluded that so long as the Heter Iska was validly created under the Halacha, it did not matter that the document was not enforceable under other laws. This was an extremely important consideration in drafting the Heter Iska procedures for the IDB Heter Iska, as noted below.
[1] Rabbi Mendel ben Avigdor of Cracow, a 16th century Halachic authority.
[2] Volume 2, Section 216
[3] Supra Footnote 66.
[4] Ibid
[5] Ibid
[6] Infra footnote 91
[7] A Halachic work by Rabbi Joseph Saul Nathanson, a 19th Century Halachic authority (in Volume 3, Section 170). Rav Shalom Mordechai Schwadron (author of the Tshuvat Maharsham), an early 20th century halachic authority (in Volume II, Section 216) agrees with the Shoal U’Mayshiv that a Heter Iska may be used for a personal loan. Others disagree, including Rav Moshe Feinstein (Igrot Moshe-YDII:62), a leading 20th Century Halachic authority. See also In re Yosher (Volume I: 108) by Rav Meir Arak, a 20th Century Halachic authority (who holds that the debtor’s salary is not considered profits from a venture for purposes of justifying the applicability of the Heter Iska exception to the prohibition against Ribit; as well as, Ginat Veradim (YD Section 6:4) by Rav Avraham ben Mordechai Ha Levi, a 17th Century Halachic authority; Shulcham Aruch Ha Rav (Hilchot Ribit: 42) by Rav Schneur Zalmin of Liady, an 18th Century Hassidic Master (Lubavich) and Halachic authority (who also authored the Tanya); and the Kitzur Shulchan Aruch (Section 66:10) by Rav Sholom Ganzfried, a 19th Century Halachic authority. Also, see The Oxford Handbook of Judaism and Economics by Aaron Levine (Oxford University Press – 2010).
[8] Volume2, Section 216.
[9] I.e., not an investment property.
[10] Rabbi Moses ben Joseph di Trani, a 16th century Halachic authority, Volume I, section 244.
[11] Page 102a
[12] In oral communication with author.
[13] At page 102a.
[14] We also discussed other possible non-Ribit structures. Of particular interest was the possibility of using a classic bill of exchange kind of construct, where payment was made in another currency. The concept was to use a currency in which there was an implicit inflationary hedge (as the equivalent of an interest factor) when compared to the local currency. This structure was based on a Halachic decision by the Maharsdam (a 16th century Halachic authority) in response to a question he received on the subject (See Maharsdam Y.D. Section 176 at page). This kind of an interest analogue was in vogue in the Middle Ages prior to the Protestant Reformation to mimic what would otherwise be prohibited interest. Thus, back-to-back bills of exchange each specifying a sale of currency transaction. These were used to create the equivalent of a built in interest-like return. In essence, the borrower agreed to pay a price in a selected currency at an agreed upon exchange rate to the local currency of the borrower. A corresponding sale by the lender of the currency the other way locked in the profit with no risk to the lender. If the two transactions in currency were integrated then the borrower was, in effect, paying a higher cost in the local currency, thereby generating an artificial, risk free, profit to the lender, in the very same local currency. See Talmud Tractate Bava Metzia pages 44-45. See also The Valuation of Coins in Medieval Jewish Jurisdiction by Daniel A. Schiffman.
[15] A 21st century Halachic expert on banking and lending, in oral communications with the author. Rav Blau is the author of the Bris Yehuda, a seminal Halachic work of our times on matters of Heter Iska and Ribit. He also helped formulate the Heter Iska format and practices adopted at Israel Discount Bank, while I was Chairman of IDB in the US. See also discussion by Rabbi Blau in Brit Yehuda:40 about Heter Iska Klali (as opposed to an individually signed one for each loan).
Leonard Grunstein 