Usury

Answer

You are absolutely correct that it is forbidden by the Torah to lend money for interest. It is actually a Mitzvah to lend money for free – and this is incumbent even on Jews who are in the banking business. Our Rabbis very harshly criticize anyone who lends (or borrows) money for interest to his fellow Jew, and say that anyone who participates in this (i.e. the borrower, lender, witnesses, and guarantors), will not be included in the ultimate resurrection of the dead (Techiyas HaMaysim).Why is this prohibition such a grave one, and why is it only prohibited when dealing with a fellow Jew? Ultimately, we must accept this as a Chok, an unexplained law in the Torah. However, one possible explanation that the Rabbis discuss is that this law encourages a person to strive for a higher level of sensitivity towards the needs and feelings of his fellow Jew. If your brother needed a loan, would you request that he pay interest? Of course not! One who lends to a fellow Jew with interest, even though the borrower is happy to pay it, is not sufficiently sensitive to the fact that all Jews are brothers.

Getting to your question, regarding Jews being so prominent in finances (which, by definition, requires interest and dividend payments), we need to understand that our economy has drastically changed over the last few centuries. Whereas it used to be based a good deal on agriculture and barter, it is now commerce based. This has created an increasing dependency on borrowed capital. In time, the demand for interest free loans far outnumbered their availability, and this made conducting business very difficult for the practicing Jew.

The Rabbis, when dealing with this problem, instituted a Hetter Iska (lit. a business permit). Although it is clearly forbidden to loan or borrow money for interest with “your brother”, there is no prohibition to invest or enter into a partnership with him! Therefore they stated that if a business owner would be interested in borrowing money from his fellow Jew, they should enter a contractual agreement stating that the money lent is actually being invested, and the interest to be paid is actually a dividend on this investment. This may be done either in a way where the entire loan is an investment, or part of it is an interest free loan and part is an investment.

The custom is that the “lender” pays a token amount to the “borrower” for managing his investment, to show that it actually is an investment.

There is still one problem that must be dealt with. If it is an investment, and the borrower loses the money, the lender should also lose his dividends and the invested capital. Can we arrange a “no-fault” investment, where the investor is guaranteed to receive his dividends even if the investment turns sour? The Rabbis said that a clause should be added to the agreement stating that in the event of loss the debtor must:

a) Prove that it was uncontrollable by introducing two witnesses to testify that this is so;

b) Declare any profits or lack of profits under oath;

c) And be responsible for loss due to theft or other causes.

If he agrees to pay a predetermined sum (equal to the amount of the interest), these restraints will be waived.

It is important to note that a Hetter Iska will only work on a transaction for which there are anticipated dividends, such as a business or tuition loan. However, it would be problematic to borrow money in order to purchase a car for personal use or to pay for a wedding, as there is no anticipated dividend in these cases. A Rabbi should be consulted to see if and how this may be arranged.

Again, a Hetter Iska is only required when one Jew lends to another. If one of the parties is either a non-Jew or a company in which majority of the stockholders are not Jewish, then a Hetter Iska is not required.

A common application of these laws relates to a mortgage. If a Jewish controlled bank is the lender, then it is forbidden. Not only that, but unless the home was being purchased as a business to rent out to others, a Hetter Iska would not be effective according to some Torah authorities (due to the fact that, as stated above, there are no anticipated dividends). Rav Moshe Feinstein (Iggros Moshe Yoreh Deah Vol. 2 Siman 62) states that a special format of Hetter Iska must be instituted for a mortgage.

I hope that this information is useful. I believe that people are not sufficiently aware of these laws and the mechanics of Hetter Iska. Their ignorance may cause them to transgress this grave prohibition. I encourage you to consult a respected Torah authority as questions of this nature arise.

Take care,
Aaron Tendler