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)