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).