Q: What are the prohibitions of ribbis (charging interest)? Who violates them?

A: The Mishna (B.M. 75b) teaches that the lender, borrower, guarantor, witnesses, and even the scribe (lawyer) violate when engaging in an interest-bearing loan. This is true even if the borrower is wealthy and willingly agrees to pay the interest (Yoreh De’ah 160:1,4). The lender violates the prohibitions, “Do not take interest from him ... Do not give him your money for interest” (Vayikra 25:35-36); the borrower violates, “Do not provide interest to your brother” (Devarim 23:20); the guarantor and witnesses violate, “Do not place interest upon him” (Shemot 22:24); and the scribe (lawyer) violates, “You shall not place a stumbling block before the blind” (Vayikra 19:14).

The Torah prohibition includes any loan of money, food or other items with a fixed-return interest (ribbis ketzutza). The Sages prohibited other transactions that include elements of interest (avak ribbis), including: floating-rate or non-guaranteed returns (ribbis she’aina ketzutza), business arrangements that contain elements of interest (ribbis derech mekach u’memkar) or resemble interest (mechzei k’ribbis), and even favors performed on account of the loan (ribbis devarim).

Q: I lent with interest before I was aware of the prohibition. What should I do now?

A: A person who lent with interest may not collect it, even if the borrower says he is giving the interest as a gift. This applies even to interest prohibited by the Sages (Y.D. 160:5; Shach 160:6). If the lender already collected the interest, there is a difference between ribbis prohibited by the Torah and that prohibited by the Sages. There is an obligation to return ribbis prohibited by the Torah – a loan with guaranteed interest (ribbis ketzutza) – even if the borrower willingly gave the interest. There is even legal recourse through Beis Din to force the lender to return the interest (Y.D. 161:5; Pischei Teshuva 161:5). If the borrower decides to forgo (mochel) the interest that he paid, though, his decision is valid, like with any other theft (Y.D. 160:5). If the lender earned a significant portion of his livelihood through ribbis and repents of his own accord, it is even recommended to forgo the interest, so as not to dissuade him from repentance (Y.D. 161:7). However, if the ribbis was prohibited by the Sages, Beis Din will not enforce returning the interest, but there is a moral obligation to return it according to most authorities (Y.D. 161:2; Pischei Teshuva 161:4).

Q: May I buy bonds issued by Jewish companies or the State of Israel?

A: A company that issues a bond is essentially accepting a loan from the buyer. The interest they pay would thus seem a violation of ribbis. However, R’ Moshe Feinstein zt”l ruled that there is no violation of ribbis when lending to a corporation, even if Jewish-owned, because the Jewish owners do not carry a personal lien and the liability is limited to the corporate assets (Igros Moshe Y.D. II: 63). Other authorities dispute this, since they view the corporation as a partnership of the various Jewish owners or shareholders, who are considered the borrowers. Many acknowledge, though, that the prohibition of taking interest from a corporation is rabbinic (Minchas Yitzchak 1:3, 4:16). Some are also lenient regarding bonds of the Israeli government, which does not even have defined owners (Har Zvi Y.D. 126). Therefore, while it is possible to rely on the leniency of R’ Feinstein, it is preferable to subject the bond to a heter iska. The government of the State of Israel subjects its bonds to a heter iska. While some authorities question the widespread usage of heter iska, one can certainly rely on it in conjunction with the other leniencies mentioned (Bris Yehuda 7:n66; The Laws of Ribbis, R. Reisman, 5:26-27 & 12:37).

Q: Is it permissible to take a mortgage from a Jewish mortgage broker or a Jewish-owned mortgage company?

A: Although a Jew may not lend to another Jew with interest, it is permissible for him to serve as a loan officer in a non-Jewish bank, since it is clear that the money is not his and he is serving only as an agent. Similarly, it is permissible to take a mortgage through a Jewish mortgage broker if the mortgage capital is provided by a non-Jewish bank (or a Jewish bank with a heter iska), and the broker is serving only as a mediator. This is permissible even if the broker takes a fee for his services (Y.D. 163:23-24; Shach 71).

Mortgage companies, on the other hand, often grant the loan from their own capital and then sell the mortgage to a bank. In this case, it is not permissible to take a loan from a Jewish-owned mortgage company unless they have a heter iska, because the loan is initially granted by the Jewish-owned company with a stipulation of interest, and because they maintain the loan for a short time. A person considering taking a loan from a mortgage company should first verify its ownership (The Laws of Rabbis, R’ Reisman, 13:24-25). If it is difficult to obtain this information, a competent Rav should be consulted.

Q: What is a “heter iska?”

A: With the greater involvement of Jews in banking and commerce, there was a need to enable Jewish financiers to achieve secure returns on their capital without violating the prohibition of ribbis, to encourage the granting of loans and facilitate modern finance. Over the generations, this evolved as the “heter iska,” based on an arrangement drafted by R’ Menachem Mendel ben Avidgdor of Cracow over 400 years ago, known as “tikun Maharam” (Y.D. 167:1). The heter iska is patterned after a business venture in the Gemara (B.M. 104b) called “iska.” A financier would provide capital to an entrepreneur to open and operate a business for a defined time, after which the capital would be returned and the two would share the profit. To achieve this, half the capital remained the financier’s (from which he would take profit) and half was granted as a loan to the entrepreneur (from which he would take profit). In the eventuality of loss, the two would share the loss (Y.D. 177:2). Rav Moshe Feinstein zt”l emphasizes that since the heter iska redefines the loan as a business venture, it is important that both parties understand how the heter iska operates, which we will explain in the next two weeks (Igros Moshe Y.D. II:62).

Q: What is the basis of the heter iska? Can it be used for all loans?

A: The heter iska is based on the distinction between a loan and a business venture. Only interest on a loan is prohibited; profits from a business venture are permitted. Conversely, a loan must always be repaid by the borrower and carries no risk of loss (other than default), whereas a business venture bears the risk of loss of capital and carries no guarantee of gain. Therefore, the basic idea of the heter iska is to redefine the interest-bearing loan as a (joint) profit-bearing business venture, similar to the “iska” arrangement mentioned last week, with built-in clauses to protect the capital of the financier and facilitate the expected profit (Y.D. 177; The Laws of Ribbis, Rabbi Reisman, ch. 22).

As such, the heter iska is most appropriate for commercial loans or real-estate mortgages, where there is a real expectation of profit or capital appreciation. The validity of the heter iska for personal loans is questionable, especially when the borrower does not have other profit-bearing assets (TLOR 22:31-35).

Modern Jewish banks and financial institutions usually have an “all-purpose” heter iska that covers all their transactions (TLOR 23:12-13).

Q: How does a “heter iska” operate?

A: A full explanation of the heter iska is beyond the scope of this column; we will suffice with a brief summary of the four essential parts of any heter iska.

1. As mentioned last week, only interest on a loan (i.e. monies that are guaranteed by the borrower) is prohibited, but profits on an investment (i.e. monies that are not secured by the manager) are permitted.

Therefore, the loan is redefined as a “(joint) business investment venture.” The lender becomes the “investor”; the borrower becomes the “active partner” or “manager” of the venture; the principal becomes the “invested capital,” half or all of which remains the financier’s; and the interest becomes the “anticipated profit” of the financier.

2. To protect the unsecured principal, conditions are stipulated that make it difficult for the “manager” (i.e. borrower) to claim that the capital of the “investor” (i.e. lender) was lost in a failed business venture. This is usually done by requiring full testimony of halachically valid witnesses to claim a loss.

(To be continued next week)

Q: How does a “heter iska” operate?

A: (Part Two, continued from last week)

3. To facilitate the anticipated return, a stipulation is made that the “manager” (i.e. borrower) will not be believed that the “anticipated profit” of the financier was not realized unless he takes a severe oath. He is given the option of paying the amount of “anticipated profit” (i.e. interest) for relieving him of his responsibility to take this oath.

4. If only half of the capital remains the investor’s and half is a loan, a provision is included to provide a nominal salary, often a dollar, to the “active partner” (i.e. borrower) for his efforts in managing the investment venture. Otherwise, his free service in managing the financier’s half would be a form of interest on the half that is a loan.

Ideally, this agreement should be attached to, or incorporated though reference, in the loan document.

(For further elaboration, see The Laws of Ribbis, Rabbi Reisman, 22:24-29; 23:1-5.)

Q: Can businesses list one price for immediate cash payment and a higher price for credit or payment in installments?

A: This two-tiered pricing is considered a form of rabbinically prohibited ribbis. Payment for an item is due upon consummation of the sale, and therefore the price charged for immediate cash payment is viewed halachically as the “true price.” Therefore, if the vendor charges more for credit or payment in installments, he is considered as charging interest for the delay in payment (Y. D. 173:1). In the absence of a heter iska, a customer faced with two-tiered pricing should pay the lower, immediate cash price (Bris Yehuda 22:7-8).

Some authorities maintain that if the credit price clearly reflects the true price, and the cash price is a discount from the true price, it is allowed (see Chochmas Adam 139:5).

It is permissible to quote a single price factoring in the credit or payment in installments if the price discrepancy is not evident. For example, one may offer an item for 12 installments of $99, even if the item might have been sold otherwise for less, provided that the item does not have a clearly defined value. After the sale is concluded, it is also possible to offer a discount for immediate cash payment (Y.D. 173:3; Rabbi Reisman, The Laws of Ribbis, 6:5-14).

Q: A car dealer offers a 10% discount on next year’s model if payment is made by May 31, four months before delivery. May I take advantage of this offer?

A: Prepayment discounts are often a forbidden form of ribbis; they are the flip side of buying on credit for an added charge.

In the prepayment case, the customer advances money to the seller before the purchase is consummated, which is effectively a loan to the seller. On account of this prepayment “loan,” the seller gives the customer a discount, i.e., sells him an item worth more than he paid. In our example, because the customer “lent” the dealer $30,000 for four months, the dealer agreed to sell him a car worth an extra $3,000. There are a number of situations, however, in which prepayment discounts are permitted: 1. If the seller currently has sufficient quantities of the item in stock (yesh lo); 2. If the item has no set market value, such as a custom order item; 3. If the merchandise’s worth is variable, and may turn out even less than the discounted price, such as buying a farmer’s future crop. Even in these situations, the seller may not explicitly state that the discount is being offered because of prepayment, but should simply state that this is the price for payment now (Yoreh De’ah 173:7-9).

Q: Is there a ribbis problem is receiving a discount for a yearly subscription to a magazine or buying a discounted bus ticket for multiple rides?

A: It is possible to permit such an arrangement because prepayment discounts are prohibited only when the discount is explicitly linked to the prepayment or is clearly due to the available usage of the customer’s money. When the discount is not explicitly linked to the prepayment and can be attributed to other reasons, it is permitted. In the case of a subscription, the discount can easily be attributed to the customer’s commitment to purchase the magazine for a full year. Similarly, the discount of the bus ticket is understood as an incentive to ride the bus on a regular basis or a means of saving the driver the hassle of receiving a fare each time. A bus ticket may also be considered yesh lo (having in stock), since the company can provide all the rides immediately.

Therefore, purchasing the subscription or bus ticket at a discounted price is not a violation of ribbis unless the subscription offer explicitly states, “Subscription price is contingent on prepayment in full” or “Pay for a year and save 45%” (Bris Yehuda 23:7(20); The Laws of Ribbis, 7:23,8:24).

Q: I am renting a summer home for July and August at $2,500 a month. The landlord is willing to accept $4,500 if the entire sum is prepaid. Can I accept this offer?

A: The Mishna (B. M. 65a) teaches that although prepayment discounts for merchandise are considered ribbis, it is permissible to provide a discount for rental prepayments. One explanation of this distinction is that in prepayment for merchandise, there is no monetary obligation before consummation of the sale. Therefore, any advance payment is considered a loan to the seller: potential ribbis. However, in prepayment of rental, there exists a monetary commitment from the beginning of the rental, even if the actual payment is due only month by month. Therefore, the prepayment is not viewed as a loan to the landlord, but as payment of an existing obligation, so it is permissible to provide a discount for the months ahead (Y.D. 176:6; Bris Yehuda 26:1 ftnt. 1). According to many authorities, it is permissible to provide this discount even before the renter moves in. For example, the landlord may demand that payment be made by June 1, a month before the rental period. However, there must be a binding commitment to the rental, through a signed lease or kinyan sudar (Taz 176:7; The Laws of Ribbis 11:14-22). 

Q: My business is low on cash. Can I offer my workers a “bonus” if they agree to delay payment of wages for a month?

A: Once wages are due, it is prohibited to offer the workers an additional amount for delay of payment, because awaiting payment of owed wages is considered a “loan” to the employer and the “bonus” is considered ribbis on this loan (Y.D. 173:12). Therefore, the contract cannot stipulate additional, increasing charges for delayed payment. Even if the employer withheld the wages without consent, the worker is not entitled to receive interest on the delayed wages (Shach 176:8; Bris Yehuda 2:17). However, after the salary is paid, some authorities permit a small bonus if it is not linked to the delay in salary. An employer may distribute a holiday bonus or issue the next paycheck ahead of schedule (Shach Y.D. 160:10; The Laws of Ribbis 10:13). Also, if the wages are not due yet, it is permissible to extend the job and pay a higher amount at the end. For example, if a person hired a painter and wants to delay payment, he can suggest – before the work is finished – to also paint the pantry later and add for the delay till then. This is permitted because the homeowner has no obligation to pay until the job is finished, so awaiting payment until then is not considered a “loan” to him (Y.D. 173:12).

Q: A dry cleaners has the following price arrangement: $1 per shirt if prepaid; $1.50 if paid at pickup. Is there a violation of ribbis in this arrangement?

A: There is no violation of ribbis; the customer can choose either option. This is because, in principle, payment for labor is due at the end. Therefore, the price of $1.50 is considered the “regular price” and not additional charge for delayed payment (Y. D. 176:6).

Furthermore, similar to rentals, it is permissible to provide a discount for prepayment of wages. This is because it is an equally legitimate option to pay for the services at the beginning of the work. Therefore the discount is viewed simply as accepting a lower wage (Y.D. 176:8).

However, unlike rentals, it is only permissible to offer a discount if the worker begins immediately and works on a continuous basis. It is not permissible to provide a discount for work that will only begin later, since there is no binding commitment yet. In the case of cleaners, though, when the cleaners take the shirt, they become obligated in the job, even if they do not actually begin cleaning it until later (see Rama C. M. 333:1; The Laws of Ribbis 10:27).

Q: Many schools and camps provide “early bird” discounts if payment is made ahead of time. Is this practice allowed?

A: We learned that prepayment discounts for merchandise are generally not allowed, whereas prepayment discounts for labor are allowed if the work begins immediately.

Payment for school or camp is primarily for the service of teaching or providing summer activities. Therefore, if payment is required only at the beginning of the school year or summer season, there is no ribbis problem. Even if payment is required ahead of time, but it is only a small partial payment that can be attributed to the desire to secure the registration of the child, there is also no concern of ribbis. However, if a substantial payment is required before the beginning of the year or season, as is common, there is a potential ribbis problem according to many poskim (see Bris Yehuda 23:7; 26:3). Some poskim argue, however, that the payment to the administration is not only for the actual teaching or camping, but for making any necessary arrangements, such as hiring staff, developing curriculum and schedule, etc. Therefore, since this work is underway long before the school year or summer season begins, the “early bird” discount is permissible (The Laws of Ribbis, ch. 7 ftnt. 30).

Q: Does the prohibition of ribbis apply also to borrowing merchandise? For example, may I borrow produce and repay later an equivalent or greater amount?

A: The prohibition of ribbis applies not only to money, but also to merchandise. Therefore, borrowing 100 lbs. of tomatoes and repaying 110 lbs. later would be ribbis prohibited by the Torah.

Borrowing merchandise and returning the same amount is permitted by the Torah. However, our Sages prohibited it in many situations, because the value of the merchandise may increase during this time. For example, the 100 lbs. of tomatoes may have been worth $50 when borrowed, but cost $60 at the time of repayment. This prohibition is called se’ah b’se’ah (a measure for a measure). Therefore, our Sages required that loans of merchandise be made based on the merchandise’s value when borrowed, e.g., $50. Even if this was not done, if the value increased, one may only return an amount of tomatoes equivalent to the value borrowed (Y.D. 162:1).

There are three significant exceptions to this rabbinic prohibition, which we will discuss next week.

Q: Under what circumstances are merchandise loans permitted?

A: We mentioned last week that Chazal prohibited merchandise loans unless they are based on the cash value, lest the price of the merchandise rise before repaying the merchandise. This is called se’ah b’se’ah (a measure for a measure). Nonetheless, Chazal allowed three exceptions to this prohibition, which cover many common cases:

1. Yesh lo (he has): If the borrower has even a small amount of the merchandise in stock, he may borrow more of that merchandise. It is even permissible for the lender to give or sell the borrower a little bit of the merchandise, in order to allow borrowing a large quantity (Y.D. 162:2).

2. Yatza ha’shaar (there is a stable price in the market): If the item is readily available at a fixed, stable price, it is permissible to borrow, e.g. postage stamps or, possibly, produce after the season is well under way (162:3; The Laws of Ribbis 14:11).

3. Davar mu’at (small amount): It is permissible to borrow a small amount of food from neighbors, since the potential price discrepancy is generally insignificant and neighbors do not care (Rama 162:1; Mishna Berurah 450:2).

Q: Can I borrow and repay Israeli shekalim (NIS) in the States even if the shekel rises?

A: This question actually relates to merchandise loans (se’ah b’se’ah), not monetary loans, because foreign currency is considered merchandise or a commodity relative to the local currency (C.M. 203:8). Therefore, it is permitted to borrow foreign currency only in the three situations mentioned last week:

1. Yesh lo: If the borrower already has a shekel, he may borrow more. The lender may even sell or give the borrower a shekel, and then lend him additional shekalim (Y.D. 162:2).

2. Yatza hasha’ar: Some authorities suggest that since NIS are readily available on the foreign currency exchange, it should be considered as yatza hasha’ar. However, most disagree, because the exchange rate fluctuates constantly (The Laws of Ribbis, 14:14).

3. Davar Mu’at: The application of davar mu’at to foreign currency is highly questionable, since it is not common to borrow foreign currency from neighbors.

All these halachos apply, conversely, to borrowing and repaying dollars in Israel.  Although the use of the dollar is fairly common there, it is not a legally acknowledged currency and therefore considered a commodity (Bris Yehuda 20:9).

Q: A relative lent me money to publish a sefer. I repaid the loan. May I now give him a complimentary copy of the sefer as a token of appreciation?

A: The Torah prohibits only ribbis that was stipulated (ribbis ketzutza). However, the Sages prohibited - during the course of the loan or when repaying the loan - even ribbis that was not stipulated (ribbis she’aina ketzuza). Most poskim maintain that this is prohibited even if the additional payment is called a “gift” (Y.D. 160:4; Bris Yehuda 5:2).

Moreover, the Sages prohibited even ribbis given beforehand to secure the loan (ribbis mukdemes) or afterwards as compensation for the loan (ribbis me’ucheres).

Therefore, even after the loan is repaid, it is prohibited to give the lender a gift that is explicitly linked to the loan. However, it is permitted to give a modest gift after the loan is repaid, if not explicitly linked to the loan. A large gift should not be given until a significant time elapses (160:6; The Laws of Ribbis 2:23).

If you would have given the relative a complimentary copy even had he not loaned you, then it is permitted to give him a copy even before repaying the loan, provided that you do not link the gift to the loan (160:7).

Q: My uncle lent me money to buy a house. When I repay the loan, may I attach a letter of profuse thanks?

A: Our Sages prohibited the lender from receiving any form of benefit from the borrower, even verbal benefit. This is referred to as ribbis devarim and is associated with the verse, “neshech kol davar” (any word). It is even prohibited for the borrower to go out of his way to greet the lender, if he was not accustomed to do so beforehand (Y.D. 160:11-12). Some authorities indicate that even simple, cordial thanks are prohibited, but many contemporary poskim allow a “Thank you” offered as common courtesy (The Laws of Ribbis, 3:14-18). Therefore, you should suffice with attaching a simple letter of thanks, without profuse writing. You may also give the lender greetings that are unrelated to the loan, such as “Mazal Tov” on the occasion of a simcha (Bris Yehuda 11(63)).

The prohibition of ribbis devarim, such as greeting the lender, is usually limited to the duration of the loan or the time of repayment, but is permitted afterwards. It is questionable, however, whether it is permitted afterwards if directly linked to the loan, such as thanking profusely for it (Bris Yehuda 10(8), but see Darchei Teshuva 160:87).

Q: I granted my cousin a $25,000 loan, which required withdrawing money from my savings account. Can I charge him the 2% interest that I would have earned?

A: Loss of potential earnings is not reason to allow charging ribbis. Therefore, you may not charge your cousin the 2% unless you draft a heter iska (Igros Moshe Y.D. 3:93; Bris Yehuda 3, nt. 4).

If lending the money incurs an actual cost or expense, such as a wire transfer fee or legal fee to draft a loan document that expense can be charged to the borrower. A penalty for early withdrawal of CD depends on the nature of the penalty, so a posek should be consulted (The Laws of Ribbis, 4:1, 8-9).

Regardless, interest payments to a non-Jew for which the lender is responsible may not be “passed on” to the borrower. Therefore, if someone took a loan from the bank, he may not share it with his friend and have him pay the interest on the proportional amount [without a heter iska]. Similarly, one may not take a cash advance from his credit card on behalf of his friend and pass on the incurred interest (Y.D. 168:17).

Q: Is there any requirement to grant an interest-free loan or just a prohibition to charge ribbis?

A: It is important to realize that there is a great mitzvah to grant an interest-free loan when a person is able to, not just a prohibition against charging ribbis. This is a fulfillment of the verse (Shemos 22:24), “When you lend money to My people…” (C.M. 97:1). The amount and duration of a loan that a person is required to lend depends on his financial ability and the needs of the borrower. You are not required to borrow money or sell assets to grant a loan, but money which is deposited in a checking or savings account is considered available (Ahavas Chesed 1:4-5,12; Pischei Choshen, Halva’ah 1:9). A person can apportion some of his ma’aser kesafim for the purpose of granting interest-free loans, either through a gemach (free-loan fund) or private loans. The Chofetz Chaim recommends apportioning a third of one’s ma’aser for loans at first, until he has amassed a sufficient amount for granting loans (Ahavas Chesed, II, 18:1). However, a person is not obligated to grant a loan if he does not have sufficient security, collateral or guarantees from the borrower that he will repay (C.M. 97:4; Ahavas Chesed, 1:8).