Must Investments Be Invested?
‘The Parts of the Iska Are Interdependent’
(Bava Metzia 105a)
The Historical Development Of The Heter Iska
A heter iska hangs at the entrance of almost every bank in Israel and is familiar to everyone there, from housewives to businessmen. A number of years ago, a local bank demonstrated its faithfulness by respecting a heter iska and cancelled half of a huge debt. A client of the Bank in the United States instructed a clerk to overdraw his current account and invest the amount in shares of stock. After a while, the stock market crashed and the client became bankrupt. Asked to pay the debt, he asserted that as the bank had signed a heter iska, he was exempt from half the debt and the bank honored his claim.
A heter iska is a commercial contract between an investor and a businessman formulated by halachic authorities over generations so that transactions performed within its framework do not infringe on the Biblical prohibition against interest. The money is given to another for a profit (as opposed to interest) guaranteed in advance. So, half the amount is given as a loan, from which the borrower takes the profits, and the other half as a deposit whose profits accrue to the investor.
Some poskim (Tzemach Tzedek, Yoreh De’ah 88; also see Chochmas Adam 143:3 and Chelkas Yaakov 3:189) maintain that a person who signs a heter iska without understanding all its clauses transgresses the interest prohibition.
May A Bank Account Be Overdrawn?
Our sugya explains that the borrower must not use the investment funds for his living expenses as the heter iska requires him to invest them in an enterprise to yield profits for the investor. Consequently, anyone who instructs his bank to honor regular demands for payment on the part of personal phone or credit card services or the like must apparently avoid being overdrawn as the bank charges interest accordingly.
By the same reasoning, an overdrawn client should not draw cash from his account for regular expenses as he is investing nothing and the bank will charge forbidden interest. (This refers to banks in Eretz Yisrael required by law to operate by heter iska or to Jewish-owned banks; lack of space prevents discussion of the need for heter iska for banks of mixed ownership).
Most poskim advise adding a clause to the heter iska, stating that the borrower grants the lender a percentage of the profits from all his enterprises and not only from the original funds of their deal. In our example, the borrower borrows from a bank to buy himself food but, in exchange for the loan, he grants the bank a percentage of his other investments. The withdrawal is thus no ordinary loan but an investment and the percentage of the withdrawal charged by the bank is permitted by the expanded heter iska. Furthermore, an added clause allows a drawer to grant the bank that percentage at a rate fixed in advance in exchange for his right to refuse to report his profits.
The above advice applies only to businessmen or people with a profit-yielding account. A person who is not a businessman and lacks investments must carefully examine the permissibility of borrowing from a bank as most poskim believe such loans would be halachically problematic. (Some poskim allow such loans even for those without investments under certain conditions; see Responsa Shoel Umeshiv, 1st ed. 3:160 and 3rd ed., 1:137).
Home Mortgages
This discussion is relevant to anyone applying for a home mortgage loan who has no business or profitable asset expected to cover the payments. May a home be regarded as an investment, assuming its value rises, and, if so, may the mortgager and bank be seen as partners therein, subject to the rules of heter iska? On the other hand, a home is bought to live in, not for profit, and perhaps therefore cannot be defined as an investment. Many poskim are inclined to be lenient when the economy regards buying real estate as an investment (see Toras HaRibis paragraph 16, end of section 16).