I. Loans and Loopholes
Financing personal purchases is an integral part of contemporary Western life. Small and large loans enable people to buy the luxuries and necessities of life today and pay later. But the religious individual cannot ignore that the interest that accrues on these loans seems to contradict an explicit biblical verse. R. Ya’akov Ariel, in two controversial essays (Halakhah Be-Yameinu: Morashtah, Limudah, Hora’asah Ve-Yisumah, pp. 309-318), argues that a Torah society must eschew these modes of personal financing for other, less objectionable methods, thereby solving one of our largest cultural problems.
While the Torah forbids Jews from lending to or borrowing from other Jews with interest (Lev. 25:36-37; Deut. 23:20-21), the Talmud (Bava Metzi’a 104b) points out that legal structures exist that achieve the same result without violating the prohibition. A specially designed partnership–an iska–yields the same cashflow as an interest-bearing loan while functioning as an investment. Broadly speaking, the investor (i.e. the lender) receives regular payments from the profit. Since measuring the partner’s profit is a complex task, often made nearly impossible with conditions on how to determine the profit, the recipient can instead opt to pay regular payments, conveniently equal to interest payments on an equivalent loan.1 Some may call this a legal fiction but R. J. David Bleich points out that the more proper term is a legal device.2 These types of structures are formed daily in modern finance for many legal and tax reasons. What bond purchaser does not view his loan as an investment? In the case of an iska, the loan is structured as an equity stake, essentially a preferred stock, rather than as a bond.3
Partnership structures can turn business loans into business investments but what can they do for personal loans? For personal loans, a transformation is accomplished differently, by making the lender a partner in the borrower’s equivalent investments. If you borrow $20,000 for home improvements, the loan is structured as an equity stake in whatever $20,000 of investments you already have. Alternatively, you are given the choice to invest this money and make the lender a partner in the investments you say you have the option to make. The conditions of reporting your investment profits, or even whether you invest the money at all or spend it on home improvements, are so cumbersome that the recipient always chooses to instead pay pre-determined amounts, equal to payments on an interest-bearing loan.4
II. Loopholes and Values
R. Ariel5 asks what these legal devices accomplish. The Torah prohibits interest-bearing loans for a reason. While legal devices may technically work, we still have to ask whether we should utilize them. R. Bleich6 distinguishes between three types of loopholes: 1) those that further Torah goals, 2) those that contradict the spirit of the law and 3) those that are value-neutral. He suggests as an example of the first, the sale to a gentile of an animal about to give birth to its firstborn. Because we cannot bring the firstborn to the Temple today, we are wise to avoid its sanctity through use of a loophole. The subterfuge is appropriate because it prevents violation of a prohibition difficult to escape in current circumstances.
The sale of chametz, R. Bleich claims, is value-neutral. We must rid ourselves of chametz before Pesach and a sale is a valid method of doing so. Those who historically objected only questioned the efficacy of the sale, not its correspondence with Torah values. An example of a loophole that contradicts Torah values is bringing unfinished produce into your home through the back door to avoid the tithe obligation (Berakhos 35b). Bringing produce into your house is considered “finishing” it, thereby obligating it in tithe. The Gemara looks askance at those who use the back door loophole to avoid this obligation.
R. Ariel argues that a business heter iska, investment partnership that enables charging interest, corresponds with the Torah’s values. The prohibition against charging interest is directed at personal needs.7 Business loans did not exist in the agrarian economy of biblical times. While the prohibition against charging interest still applies in this at-the-time-unknown case of a business loan,8 we may use a legitimate device to bypass the prohibition.
However, offering an interest-free loan for personal needs is a kindness, a chesed. We are required to help our fellows in need, even at a personal cost. We cannot charge them for the opportunity cost of the capital we lend them in their time of trouble, and certainly not an additional profit margin. Making a personal loan, offering help in a time of financial trouble, is a mitzvah. We should not, argues R. Ariel, use a legal device to bypass the prohibition of charging interest in order to avoid the mitzvah of chesed. That is contrary to Torah values. This is in contrast to business loans. We are not required to help people acquire wealth and may therefore use a legal device to charge interest in such a case. Therefore, R. Ariel–following the majority view that the corporate legal structure does not shield shareholders from these laws–suggests that Jews refrain from taking interest-bearing loans from Jewish-owned businesses, including banks, even if they arrange a heter iska.
III. Credit and Consumption
R. Ariel points out that avoiding interest-bearing personal loans solves a widespread societal problem. Many people live beyond their means, buying luxuries on credit that accumulates until it crushes them. The availability of easy credit opens the door for widespread abuse and then rampant distress when the debt catches up with people. Ending access to these lines of credit would force people to live within their means.
The proper forum for personal loans is the free loan society, the gemach. If a widespread need exists for personal loans to address private needs, we must expand our systems of gemach. Allowing people to fall into the cycle of interest-bearing loans is a failure of chesed and an abandonment of a biblical prohibition.
Imagine a world in which you can only acquire interest-bearing loans for investments. Presumably, real estate is considered an investment so people would still be able to take out mortgages. Cars are not investments so you would have to buy a car with cash and not finance its purchase. Leasing would rise, as would sales of used cars. Student loans, which are currently crippling so many households and sustaining the higher education bubble, would have to be replaced with tuition scholarships. Instead of credit cards with revolving debt that accumulates interest if not paid immediately, people would have to use debit or charge cards (the latter must be paid in full each billing cycle).9
This is not a scary world. It is a world of fiscal responsibility, where finance meets values. The haves will still buy luxuries but the have-nots will only buy what they can afford. They will not crumble under the burden of interest debt. But it is a world that can only succeed if the already vibrant free-loan societies find the capital to vastly increase their scale.
Ultimately, I suspect that R. Ariel’s projection is overly rosy. Human nature is not changed so easily. Home loans can be abused, as can bank overdraft. However, his idea of socially responsible finance, what R. Jonathan Sacks calls “moral markets,” inspires and challenges us to think critically about the social costs of common financial practices.
- For details on iska arrangements, see R. J. David Bleich, “Hetter Iska, The Permissible Venture: A Device to Avoid the Prohibition Against Interest-Bearing Loans” in R. Aaron Levine ed., Oxford Handbook of Judaism and Economics ↩
- Ibid., p. 198 ↩
- An iska is usually structured as half investment, half loan for technical reasons. On all this, see R. Bleich, ibid. and R. Yisroel Reisman, The Laws of Ribbis, ch. 23. ↩
- This is all a simplification of even more complex arrangements. See the sources cited in the prior note. ↩
- Ibid. ↩
- Ibid., pp. 198-200 ↩
- R. Daniel Z. Feldman writes: “It seems to be inarguably the case that all theories as to the scope of the prohibition are directed toward personal loans, servicing those in need, rather than business-oriented loans” — “The Jewish Prohibition of Interest” in R. Aaron Levine ed., Oxford Handbook of Judaism and Economics, p. 253. ↩
- R. Bleich (ibid., p. 197) writes: “Although in biblical days the economic structure of society was predominantly agrarian and loans were sought primarily for personal purposes, the strictures against usury apply with equal force to loans extended for commercial purposes.” ↩
- Although halakhah only allows for a single late fee. See R. Reisman, ibid., ch. 9 ↩