Halakha: A Weekly Shiur In Halakhic Topics
Yeshivat Har Etzion

SHIUR #14: THE PROHIBITION OF RIBBIT IN THE MODERN WORLD

Rav Daniel Wolf

THE PRINCIPLES OF THE PROHIBITION OF RIBBIT

The prohibition of ribbit is found in several places in the Torah [1], and the Sages attributed great importance to it. According to Halakha, a borrower is forbidden to pay interest, just as the lender is forbidden to charge it. Any contractual obligation to pay interest is null and void, and has no validity whatsoever. The Sages said as follows:

By Torah law, the prohibition of ribbit only applies in a case of "fixed interest" - that is, when the borrower and lender agree at the time of the loan that the principal will be returned with the addition of interest. When the payment of interest is not certain, and it is possible that in the end the borrower will not pay back more than he had borrowed, the interest is only forbidden by rabbinic decree (e.g., karov le-revach ve-rachok me'hefsed).[2] Two additional cases that are forbidden by rabbinic law are the cases of "postpaid interest" (ribbit me'ucheret) and "prepaid interest" (ribbit mukdemet). In "postpaid interest," the borrower returns the money with the addition of interest, even though he had not obligated himself at the outset to pay interest; and in "prepaid interest," the borrower gives the lender gifts prior to the loan, so that he will agree to lend him money.[3]

What then is the nature of the prohibition of ribbit? Many Acharonim discuss the question whether the prohibition of ribbit falls into the category of ritual law or civil law. In the Shulchan Arukh, the laws of ribbit are brought in Yore De'a, the section devoted to ritual law. In the Mishna, however, they appear in tractate Bava Metzia among the rest of civil law, and so too in the Rambam, they appear in Hilkhot Malve ve-Love. This may be the critical issue in the question raised by the Gemara: Can fixed interest be recovered through the courts? According to the Halakha, fixed interest is indeed recoverable through the courts - that is to say, if the lender collected interest from the borrower, the borrower may go to court and sue for the return of the interest; but if the lender died, his heirs are not obligated to return the interest. There were those who concluded from this ruling that the prohibition of ribbit falls into the realm of Yore De'a, and so the prohibition applies only to the lender himself, and not to his heirs. Therefore, in contrast to ordinary monetary debts, the borrower can sue for the interest only the lender but not his heirs.

THE PROHIBITION OF RIBBIT IN OUR DAY

In the halakhic literature, beginning with the Gemara and extending to the posekim of our day, there were many attempts to find allowances through which to collect ribbit in all kinds of cases and situations. But nowhere do we find a general allowance similar to the heter iska common today, which in effect causes people to behave as if there were no such thing as a prohibition of ribbit.

Many argue that the economic reality of our time, which is based on loans and capital investments, necessitates the finding of solutions to the prohibitions of ribbit. This, however, is not altogether precise. Already at the time of the Gemara, the economy was based on loans and delayed payments. Farmers would borrow money in the spring for the purchase of seed, and they would repay their loans only in the fall, after harvesting their produce and bringing it to market. The Gemara tells of people who would buy merchandise in places where the prices were low, and then transport and sell it in places where the prices were higher. Clearly, businesses like these required financing, loans and several months of credit.

Another difference between traditional society and the modern period relates to the existence of banks. In the past, a person had a clear interest in hiding his money in some hidden corner of his house, and this for two reasons: First, there is no gain without risk, and if a person did not wish to risk all his money, it was a good idea to keep at least part of it in his house. And second, it was a good idea to save a little money for difficult times, should such times come upon him. The novelty of a bank lies in two significant components:

1) A bank constitutes a money market. It brings together people who have money and people who need money. Those with money can extend loans without bothering to look for borrowers.

2) The bank assumes all the risk. Money deposited in the bank earns a profit without being exposed to any risk. Even today, a person can assume risk, invest his money in the stock market and earn significant profits; but the potential profit of this kind involves great risk. If a person wishes to make a profit, but is unprepared to assume any risk, he can deposit his money in a bank, and thus make risk-free profit. Obviously, the profit derived in this manner is smaller than that which can be derived from investment in the stock market, but it is still risk-free profit. All money is concentrated in the banks, and the banks lend it out at interest to those who need a loan.[4]

What is the most significant change in the wake of the development of banks? During the talmudic period, a person who was in possession of a sum of money could lend it out without loss, for it made no difference to him whether the money remained hidden in his house or it was lent to another person (assuming that he could rely on that other person to return the loan). In those days, lending money fell into the category of "this one benefits, and that one suffers no loss." Today, a person who lends money to another forfeits the profit that he could have earned had he deposited the money in the bank and earned interest. Hence, today a loan has turned into a case of "this one benefits, and this one suffers a loss." As a rule, however, the Torah does not relate to the absence of profit as a loss, but our gut sense is that a non-interest bearing loan involves a significant monetary loss. It should be noted that the modern administrative sciences also relate to "lost opportunities" (the absence of profit) as a significant financial loss.[5]

It follows from the talmudic passages in the fifth chapter of Bava Metzia - Eizehu Neshekh - which deals with the laws of interest - that already in the talmudic period it was exceedingly difficult to avoid taking interest, and all the more so today. There are those who have proposed the establishment of a great number of free-loan societies, and thus set up an alternative economic system that is not based on interest. It would appear, however, that there it will be impossible to change economic reality by way of free-loan societies alone. The Israeli mortgage market alone, for example, encompasses tens of billions of shekels, and it is impossible to lend out enormous sums like that through free-loan societies.

Does the prohibition of ribbit apply to loans to banks? Rabbi Moshe Feinstein proposed that it is permissible to lend money at interest to corporations, for the assets of corporations are absolutely separate from the assets of the companies' owners and management. According to him, the focus of the prohibition of ribbit lies in the personal lien - the responsibility which the borrower assumes upon himself to repay the loan. Since a corporation is not a person, and the liability for its actions is cast solely on the company's assets, there is no personal lien, and so no prohibition to lend at interest.

Rabbi Shlomo Zalman Auerbach came out sharply against Rabbi Moshe Feinstein's ruling, and the simple sense of the Gemara implies that the prohibition of ribbit is not connected in any way to the personal lien created by the loan. It should be remembered that Halakha makes explicit mention of particular bodies to whom it is permissible to lend at interest (e.g., the community), but nobody ever suggested that such loans be permitted across the board, whether in cases of fixed interest or in cases of non-fixed interest. Similarly, it should be noted that even if it is permissible to lend money to corporations at interest, there is no allowance to borrow money from them at interest. Hence, even according to Rabbi Moshe Feinstein, it may be permitted to have a positive balance at the bank, or to deposit money into savings accounts, even if these accounts bear interest, but it should be forbidden to be in overdraft and pay interest to the bank.

Before we deal with the particulars, it is important to emphasize the moral dimension of the prohibitions of ribbit. A few years ago, two Jews in the United States agreed on a loan between them, signed a "heter iska," and agreed to a certain sum of demei hitpashrut (that is, an alternative to interest, as we shall see below). The sum of demei hitpashrut was higher than the interest rate permitted by American law, and the case reached the U.S. courts. As we shall see below, the heter iska is based on a business arrangement between the lender and the borrower, which allows us to treat the loan as a business, rather than as a loan. Therefore, the lender claimed that the loan was not an interest-bearing loan, but rather a business arrangement with demei hitpashrut. Hence, he was not in violation of the law. Indeed, the judge ruled that loan was a business arrangement and not a loan, so that the laws of usury were inapplicable.

I find this story shocking, for it turns out that the halakhic solution to the problem of ribbit is more detrimental to the borrower than American law. Instead of the laws of ribbit protecting the borrower, they serve as the basis for the trampling of his rights on the part of the lender. It is true that the posekim hardly ever mention any limitations on the solutions to the prohibition of ribbit, and that we do not find any specific limit to the interest rate that may be charged by means of such solutions. But we must remember the Torah's intentions, and not relate to such allowances as blanket permission to charge interest. Here is the place to mention that parallel to the prohibitions of interest that apply to the borrower and the lender, there is also a positive commandment to lend money without charging interest: "And if your brother grow poor, and his means fail with you, then you shall relieve him..." (Vayikra 25:35). This mitzva is clearly valid today, in even greater force, when economic reality makes non-interest-bearing loans even more necessary.

WHAT IS THE HETER ISKA?

Halakha makes use of "evasions" of the law in various different realms. The idea of the heter iska arose already in the seventeenth century, and expanded to enormous proportions over the last hundred years, despite its inherent halakhic difficulties.

How does heter iska work? In a heter iska, the "lender" and the "borrower" turn into "investor" (=capitalist) and "businessman." Thus, it is noted that all the documents mentioning the terms "borrower" and "lender" actually mean "investor" and "businessman." The investor gives money to the business, and the businessman is supposed to invest the money in a business that yields profits.[6] The profit and loss derived from the money is divided equally between the investor and the businessman, except for the small salary that the businessman takes for his work. The important point in the agreement is that the investor cannot know exactly how much the businessman profits from the business, and so the parties agree among themselves that the businessman is required to prove the truth of the figures presented by him.[7] If the businessman is unable to prove to the investor how much money he earned, he must pay him demei hitpashrut, at the rate of interest. Practically speaking, the businessman (i.e., the borrower) is unable to prove how much his business profited or lost, and therefore he must pay the investor (the lender) the agreed upon demei hitpashrut.

The most serious problem regarding the heter iska is the very "evasion." Some Acharonim write that "evasion" of interest is permitted only in the case of a rabbinic prohibition. Others write that one is forbidden to employ such "evasion" even with respect to interest that is only forbidden by rabbinic decree. And there are those who argue that "evasion" is permissible in some cases, but forbidden in others. Indeed, the Gemara and the Rishonim disallow certain types of "evasion" regarding the prohibition of ribbit. The heter iska appears to be an "evasion," for nobody would sign such an agreement were it not for the prohibitions of interest. The entire setting up of the "business" is to solve the problem of ribbit. For this reason, the heter iska is an "evasion" of interest.

The Acharonim tried to overcome this problem in two basic ways:

1) Some Acharonim have argued that the heter iska is not an "evasion" of interest.

2) Another approach may be suggested: The heter iska is indeed an "evasion"; however, it is permitted because of the conditions prevailing in the modern world. Obviously, we must observe every jot and iota of the Torah's prohibitions throughout the ages. Since, however, in the modern world there is no moral deficiency in collecting interest - there is no problem in solving an halakhic problem by way of an "evasion." According to this approach, there is no need to distinguish between the various "evasions." The heter iska is an "evasion" like any other solution, and it is even permissible to employ the "evasions" which the Gemara explicitly forbids because they are "evasions of ribbit."[9]

A NON-BUSINESS LOAN

A fundamental problem that is unique to the heter iska arises when a person borrows money not for the sake of a business venture. A classic example of such a loan is overdraft - a loan to cover everyday expenses. How can a person in overdraft sign on a heter iska; surely he is not going to invest the money and he has no expectation to earn from it a profit!

One solution to this problem was put forward by the Beit ha-Levi. According to him, it is possible to exchange the money: Even though the person uses the money to purchase food, had he not borrowed the money, he would have been forced to sell other investments and use the money raised through the sale to buy food. Hence it is possible to exchange the money, as if the person were investing the money received as a loan.

Obviously, this solution works only for a person who has other investments to the value of his loan, and indeed could have sold his investments in order to purchase food. A person who has no such investments cannot "exchange" the loan money, and does not conduct business with the loan nor with any other money in its place. Therefore, the Acharonim suggested another solution: Every asset is regarded as an investment and every purchase or acquisition is regarded as a business, because without food or clothing, a person cannot find work. In any event, there seems to be a difficulty with this explanation.

In order to justify the common practice, Rabbi Shlomo Zalman Auerbach suggested another solution: In practice, the "investor" need not be concerned whether or not the "businessman" actually invests the money he received as a loan. Let us assume that a person borrowed money in order to invest in shares in a certain company, but then took the money for himself and did not invest it. Later, the lender checked the stock prices of that company and discovered that the stock went up in value, and demanded that the borrower repay the loan. Clearly if the borrower repays the full value of the loan, as if he had invested the money in the stocks, the lender will not care that the borrower did not actually make that investment. Hence, when the "investor" and the "businessman" agree in the heter iska to invest the money, we don't care whether or not the businessman actually does so, as long as he fulfills his obligations.

In any event, I have heard it reported in the name of Rabbi Shlomo Zalman Auerbach that, owing to this problem, it is much more problematic to be in overdraft than to have a positive balance. When a person's account is in the black, he lends the balance to the bank, and the bank pays him interest on the money. Since the bank signed on a heter iska, there is no problem, for the bank surely conducts business with the money that it borrows. On the other hand, when a person's account is in the red, the bank lends him money, and he pays interest to the bank. This situation is far more problematic when the person does not have other investments in the sum of his overdraft (and generally speaking he does not have other investments, for if so, he would cover the overdraft).

ADDITIONAL PROBLEMS WITH THE HETER ISKA

In addition to the problem discussed thus far, which is the main problem with the heter iska, the posekim have pointed out additional limitations on the application of the heter, which many people are not careful about today.

One of the conditions for a heter iska is that it is forbidden to make any mention of the terms "loan," "interest," "lender," "borrower" or the like, but only the "kosher" substitutes for these words. Another limitation mentioned by some of the Acharonim is that the people who use the heter must understand how it works. It goes without saying that out in the real world, the situation is totally different.

These are technical problems, which are joined by substantive problems arising in specific types of loans. Sometimes, a bank lends money for a specific purpose (for example, to purchase a home), and writes a check to the order of the seller. It is more difficult to relate to such a loan as a business investment, when the borrower cannot use the money for any other purposes.

A similar problem arises when one pays interest to a credit card company (when utilizing the "credit" option). The loan (delaying payment or paying in installments) is extended for the purchase of a specific article, and it is difficult to "exchange" this money, as proposed by the Beit ha-Levi, with money invested elsewhere. Obviously, when the payment is put off or spread out into installments without interest, there is no problem of ribbit whatsoever.

Another problem with the heter iska relates to the determination of the profits. As we mentioned earlier, the borrower is obligated to pay demei hitpashrut only if he is unwilling or unable to prove how much profit he earned from the business. Sometimes there is no problem clarifying the profit: a person borrows money from the bank, and invests the money in the shares of that very bank. The bank knows precisely what is happening with the money that had been given to that person, and how much profit he earned. Why, then, must the borrower pay the bank demei hitpashrut, instead of sharing his profits (or losses) with the bank?[10] A similar problem arises with home mortgages: The bank knows the address of the acquired property, and can therefore easily clarify the value of the property and how much profit has been made.

ALTERNATIVES TO THE HETER ISKA

Other suggestions have been made to resolve the problem of ribbit, and we shall deal with two of them.

1) LATE FEE

The Mishna deals with a person who took a loan, repaid half of the sum, and stipulated that if he does not repay the outstanding balance by a certain date, he will pay a penalty in addition to the sum of the loan. The Tannaim disagree whether or not the borrower is required to pay the penalty. The Gemara explains the issue about which the Tannaim argue:

According to the Gemara, the dispute revolves around the question of asmakhta - can a person obligate himself to pay a certain sum if he believes with all his heart that he will not pay it. The Rishonim already noted that the Gemara does not relate to an additional problem - the problem of ribbit. Surely, the borrower will end up returning to the lender a sum greater than that which he had borrowed!

Two answers were given to this question:

1) Since the sum that must be returned increases not incrementally, but in a one-time jump, it is not called ribbit.

2) The extra payment is not ribbit, but rather a penalty. The prohibition of ribbit forbids the taking of money in exchange for the extension of a loan. Here, however, the extra payment is not for the loan, but rather a penalty for the breach of contract. As opposed to a loan at interest, where the lender profits from the loan, here the lender does not at all want the borrower to be late with his payment and become liable for the penalty.

The Ri of Orleans, one of the great Tosafists, relied on this passage to propose a solution to the prohibition of ribbit: For every loan, the two parties should agree upon a repayment schedule, that certain sums must be repaid by specific dates. If those dates pass, and the specified sums are not repaid, the borrower will be required to pay a penalty. The Mordechai vigorously opposed this solution, arguing that, if put into operation, it would entirely wipe out the prohibition of ribbit.

The Shulchan Arukh mentions this solution in Yore De'a 177:16, ruling that it may not be used:

The Rema (ad loc.) adds:

The Rema's position is apparently based upon the Rashba's explanation. It is forbidden to set a penalty that grows incrementally, such that it constitutes an "evasion" of the prohibition of ribbit. A one-time penalty, however, is permitted: If the borrower does not repay the loan by a certain date, he will have to pay an additional sum.

There were certain Acharonim who understood from the Rashba that the problem of "evasion" exists only when there is explicit mention of the way the penalty is calculated. But if they specify how much the borrower will have to pay if he repays his loan in a particular month, it is permitted, even if the payments change each month at a set rate.

Is it possible to use the solution of the Ri of Orleans, and define the added payment as a penalty, overcoming thereby the prohibition of ribbit? The posekim who dealt with this question ruled that it is forbidden, for this is an "evasion" of ribbit, which is prohibited. According to them, the heter iska is not considered an "evasion," and therefore it is preferable to use it, and avoid using what is explicitly described by the Gemara as an "evasion."

However, this solution should be considered when we are dealing with ribbit that is truly a penalty for late payment. When a person owes money to a certain company, the company collects interest as long as he is late in his repayment of the loan. Clearly, such interest is not ordinary ribbit, but rather a penalty: the company prefers that the person pay his debt on time, and does not at all want him to be late and pay the penalty. Today, these companies collect these penalties using the heter iska. It would seem preferable to define these payments as penalties, and use the allowance of the Ri of Orleans. In such cases, it is very difficult to deny that the heter iska is an "evasion," for the companies prefer that the person pay his debt on time. Thus, it is difficult to relate to the late penalty as agreed upon demei hitpashrut, when the company is not at all interested that such payments be made. Moreover, it is difficult to argue that the company has loaned the money to the person for the purpose of investment, for generally speaking the person has no money at all, and therefore does not repay his debt, from which it follows that he cannot invest the money. On the other hand, relating to a late fee as a penalty does not constitute an "evasion," for it really is a penalty. It seems, therefore, that in such a case the Ri of Orleans's solution is preferable to the ordinary heter iska.[11]

2) JOINT ACQUISITION

In closing, we wish to mention that regarding a mortgage, another solution is available - joint acquisition: the bank and the borrower are partners in purchasing the apartment, and each month the borrower buys part of the apartment from the bank, and pays it for use of the portion of the apartment that still belongs to it. The problem of this solution is that according to Halakha, the owner of the property must have some sort of surety for the property, and in the absence of such surety, it is considered a loan. Today, the problem is not that acute, because generally the bank requires the borrower to insure the property. This means that the bank has a certain surety for the property. Therefore, with proper preparation, it would be possible to solve the problem of ribbit regarding a mortgage in this manner, by joint acquisition of the property, and thus solve the problem of ribbit in a better way than using the heter iska.

Footnotes:

[1] See Vayikra 25:35-38; Shemot 22:20; Devarim 23:20-21.

[2] Rabbi Shlomo Zalman Auerbach discusses the question whether the distinction between fixed interest and uncertain interest is based on the distinction between certain and uncertain interest, or on the distinction between ribbit and a business deal (which can sometimes end in a loss for both parties). He argues that this question has a practical ramification regarding the case of "uncertain fixed interest." For example, if the borrower and lender agree that if it rains, the borrower will pay interest. On the one hand, the ribbit is uncertain (for it might not rain). On the other hand, such a stipulation does not constitute a "business deal," but rather a loan at interest.

[3] There is room to discuss whether avak ribbit is an expansion of the biblical prohibition of ribbit, or forbidden merely because it "looks like ribbit."

[4] Therefore, the bank profits even if some of the borrowers default on their loans.

[5] An example of the distinction between an absence of profit and an outright loss may be found in the laws of Chol ha-Mo'ed. The absence of profit is not considered a davar ha'aved, which sets aside the prohibition of work on Chol ha-Mo'ed. On the other hand, Halakha relates to the loss of one's place of employment as a real loss, even though this involves only the loss of potential profits.

[6] In practice, the iska divides into two: half is regarded as a loan, and half as a deposit for the purpose of the business. This arrangement is based on the Gemara's advice that a person should invest half of his money in loans and half in business deals.

[7] Most of the Acharonim write that the required proof is the testimony of witnesses or an oath. There are Acharonim, however, who require a higher level of proof - one which is almost impossible to provide.

[8] The original controversy dealt with the expansion of the allowance of selling chametz, which is an "evasion" of a rabbinic prohibition, because the chametz was already nullified. There were those who suggested allowing a person to sell his animal to a non-Jew in order to feed it chametz, even though this involves an "evasion" of a Torah prohibition.

[9] It may, however, be argued that the "evasions" that were explicitly forbidden by the Gemara are forbidden even today; once Chazal forbid them, they are like any other rabbinic prohibition.

[10] This problem in its sharpest form may be resolved by investing the money in shares of another bank. While the lending bank can easily clarify how much the shares went up in value, as long as it does not do so, it does not know how much profit has been made.

[11] I am aware of the problematic nature of the allowance proposed by the Ri of Orleans. It is possible that this allowance is subject to a dispute between the posekim. It might be possible to improve this allowance by stipulating "from now and after a period of time," or in other ways. In any event, those who oppose using this allowance must consider whether it is more problematic than a sweeping heter iska. There is no real possibility of banning the taking of interest in our day. The question is only which allowance is more reasonable. In the cases discussed above, where the heter iska is plagued by very serious problems, other allowances appear preferable.

(Translated by David Strauss)