Loans and interest in Judaism

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Loans and interest in Judaism is a complicated and detailed field of Jewish law and the Torah and Talmud encourage the granting of loans. However, lending money, objects or services on interest is forbidden according Jewish law and is called ribbit.

[edit] Biblical sources

If your brother becomes destitute and his hand falters with you, you shall support him; [whether] a stranger or a resident, and he shall live with you. Do not take from him a loan charge or increasing [interest], and you shall fear your God; your brother shall live with you. You shall not give him your money with a loan charge, nor shall you give your food with increasing [interest]. I am the Lord, your God, Who took you out of the land of Egypt; to give you the land of Canaan, to be a God to you. (Leviticus 25:35-38) [1]

[edit] Heter iska: Avoiding penalties for charging interest

Heter iska (lit: "exemption contract") is a Halakhic exemption that was developed by the ancient rabbis in order to structure business transactions in such a manner as to avoid running afoul of the Biblical prohibition of taking interest.

The Heter iska principle is based upon the borrower and lender agreeing to be partners in a business venture, whereby one partner invests money and the other uses his entrepreneurial skills to manage the venture. The investor-partner can thereby earn profit attributable to his portion of the joint business venture, and the sharing of such profit by the manager-partner would not constitute payment of interest upon a loan. The arrangement thus has characteristics of both a loan and a trust.

Ideally, the business transaction is successful for all concerned parties. Realistically, such is not always the case, and disputes can arise as the parties to the unfortunate deal seek to enforce their rights and protect their property. The reality is that Jewish parties to ill-fated Heter iska arrangements sometimes resort to the secular courts, a course of action fraught with Halakhic issues in itself. As detailed in this article, actual resolutions of disputes involving Heter iska in the normative secular American court system can and do leave something to be desired from a halachic perspective. In addition to the usual propensities for litigants to disparage one another unnecessarily, parties to Heter iska disputes in secular courts can easily make contentions in the heat of the dispute which, in the given context, can be perceived as minimizing the validity of halacha. Furthermore, there is the risk that interest can be imposed by the secular courts in a manner contrary to Halakha.