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).