web analytics
August 28, 2015 / 13 Elul, 5775
At a Glance
Judaism
Sponsored Post


Loan Conversion

Business-Halacha-logo

Jonathan needed some extra cash, about $30,000 for his business. He applied to a number of banks for a loan, but they were being tight on issuing him credit and were also asking for more interest than he wanted to pay.

He tried, instead, to raise the cash from relatives and close friends. After a few unsuccessful attempts, he called his cousin Ezra, who was willing to help him out and invest in the business. “I’d like a 3.5 percent return on the money annually,” said Ezra. “Can you do that?”

“Reasonable enough,” said Jonathan. “We’ll call it an investment, though, not a loan, so that there will not be a prohibition of ribbis [interest].”

They drafted a document stating: “Ezra F. is investing $30,000 in Jonathan F.’s business, and will receive 3.5 percent profit annually. After two years, either party can terminate the agreement with 60 days notice, and the $30,000 will be returned to Ezra.”

Ezra gave Jonathan a check for $30,000 and took a signed copy of the agreement.

Two months afterward, Ezra had a chance to speak with his local rav about the agreement. “We made sure to structure it as an investment, not a loan,” Ezra said. “The 3.5 percent is my share of the profit. Am I right that there is no prohibition of ribbis in such a case?”

“Your arrangement has some of the crucial aspects of a heter iska,” replied his rav, “but your arrangement doesn’t suffice to eliminate the prohibition of ribbis. Despite the fact that you called it in an investment, the money is still considered a loan, and the profit, therefore, is considered interest.”

“Why is that?” asked Ezra.

“The agreement stipulates that at the termination of the agreement the $30,000 will be returned in full, regardless of the financial state of the business. Absolute liability of the recipient to return the full amount of the investment is tantamount to a loan, in which the borrower carries absolute liability to return the principle. Therefore, the purported ‘profit’ is considered interest on the loan and is prohibited.” (See Y.D. 177:1; Shach Y.D. 177:1)

“How is this different from a heter iska?” asked Ezra.

“A heter iska leaves, in theory, a small window of loss on the investor if the business should fail,” answered the rav. “Jonathan, however, accepted full liability to return the principle.”

“Then what should I do now?” asked Ezra. “Can we simply agree verbally that the investment should now be in accordance with heter iska?”

“It would be best to consult Rabbi Dayan on this,” said his rav. “Let me give you his number.”

Ezra called Rabbi Dayan. “I invested money in my cousin’s business in a manner considered a prohibited loan,” he said. “Is there any way to convert it into an iska agreement? Does he have to return the money? Can we agree verbally? Do we need to draft a heter iska document?”

“Returning the money and starting over as an iska agreement would certainly work,” answered Rabbi Dayan, “but it is not necessary to do that.” (See Nesivos Chiddushim 176:5)

“Can we just make a verbal statement?” asked Ezra.

“A verbal agreement of heter iska suffices initially, but now that the money has already been given as a regular loan it is insufficient,” answered Rabbi Dayan. “Rama cites from the Mordechai that a loan received from someone else doesn’t convert to an iska investment relationship with a verbal agreement alone. The money continues to be considered loan money.” (C.M. 176:1; Shach Y.D. 177:15,41)

“What about if we draft and sign a heter iska document?” asked Ezra. “That’s not just a verbal agreement; it’s a document!”

“That would be sufficient, since this expresses clear sincerity in the agreement,” explained Rabbi Dayan. “Alternatively, the investor and recipient can make a kinyan sudar that the investment will now be in accordance with the rules of heter iska. Some recommend doing both, drafting a heter iska and making a kinyan.” (Dagul M’revava Y.D. 177:19; Bris Yehuda 35:5[19])

“Does this work retroactively?” asked Ezra. “What about the two months that passed?”

“Restructuring the loan as an iska agreement only affects it for the future,” concluded Rabbi Dayan, “but it does not allow taking ribbis for the previous time.” (Bris Yehuda 40:23)

“Do you have a copy of a heter iska?” asked Ezra.

“I’ll be happy to e-mail you one,” said Rabbi Dayan. “Just give me your address.”

Ezra gave Rabbi Dayan his e-mail address. “Thank you,” he said. “I’ll be sure to take care of it promptly.”

About the Author: Rabbi Meir Orlian is a faculty member of the Business Halacha Institute, headed by HaRav Chaim Kohn, a noted dayan. To receive BHI’s free newsletter, Business Weekly, send an e-mail to subscribe@businesshalacha.com. For questions regarding business halacha issues, or to bring a BHI lecturer to your business or shul, call the confidential hotline at 877-845-8455 or e-mail ask@businesshalacha.com.


If you don't see your comment after publishing it, refresh the page.

Our comments section is intended for meaningful responses and debates in a civilized manner. We ask that you respect the fact that we are a religious Jewish website and avoid inappropriate language at all cost.

If you promote any foreign religions, gods or messiahs, lies about Israel, anti-Semitism, or advocate violence (except against terrorists), your permission to comment may be revoked.

2 Responses to “Loan Conversion”

  1. Romi Itzik says:

    עם הלכת גלות הלכה המדינה והציונות

  2. It's just easier to adopt the rule, "Never loan money to your friends". You'll keep your money and your friends that way.

Comments are closed.

Current Top Story
Swiss Amb. to Iran Giulo Haas presents his credentials to Iranian Pres. Rouhani
‘US and Iranian Cartoon Doves’ Shown Defecating on Bibi by Swiss Amb to Iran
Latest Judaism Stories
Torat-Hakehillah-logo-NEW

The common translation of the opening words of this week’s parsha, Ki Seitzei, is: “When you go out to war against your enemy.” Actually the text reads “al oyvecha” upon your enemy. The Torah is saying that when Israel goes out to war, they will be over and above their enemy. The reason why Bnei […]

Rabbi Avi Weiss

The love between Gd & Israel is deeper than marriage; beyond the infinite love of parent for child

Q-A-Klass-logo

Question: When a stranger approaches a congregant in shul asking for tzedakah, should the congregant verify that the person’s need is genuine? Furthermore, what constitutes tzedakah? Is a donation to a synagogue, yeshiva, or hospital considered tzedakah?

Zvi Kirschner
(Via E-Mail)

Taste-of-Lomdus-logo

Since giving the machatzis hashekel will not change his financial situation, he is obligated to do so even though it is more than a fifth of his income.

Today, few people fast during the Days of Selichot, but the custom is to rise early to recite Selichot.

Each month is associated with a particular tribe. The month of Elul is matched up with Gad. What makes Gad unique?

Sanctions and indictment of the Jew, holding him to a higher standard, is as common and misplaced as ever.

To allow for free will, there are times when Hashem will allow a person the “opportunity to be the messenger.”

“There is a mitzvah to pay the worker on that day,” answered Mr. Lerner.

Be happy. Be grateful. God knows what he is doing. It is all happening for a reason.

We get so busy living our lives, handling our day-to-day little crises that we forget to go that one step deeper and appreciate our lives.

The promise for long life only comes from 2 commandments; What’s the connection between them?

Mighty Amalek deliberately attacked enemy’s weakest members, despicable even by ancient standards

If we parents fail to honor responsibilities then society’s children will pay the price for our sins

Consider how our Heavenly Father feels when He sees His children adopting all other parents but Him

More Articles from Rabbi Meir Orlian
Business-Halacha-NEW

“There is a mitzvah to pay the worker on that day,” answered Mr. Lerner.

Business-Halacha-NEW

Mr. Steinberg ran downstairs to the ground floor. He saw that the table had fallen onto one of the cars sitting in the parking lot below.

“I don’t understand, though,” objected Mr. Weiss. “If the Torah states that the loan should be remitted, how can Hillel institute that the creditor can collect, against Torah law?”

“So there’s no way to lend past the shemittah year?” asked Eli.

The director picked up the phone to Rabbi Dayan. “One of our counselors lost his check,” he said. “Do we have to issue a new one or is it his loss?”

The two decided to approach Rabbi Dayan. “What is the halachic status of conquered territory?” asked Shalom.

“Does that mean a person can simply renege after payment was made?” asked Benjy incredulously.

“But I’m already dwelling in the apartment,” said Mr. Gold. “Shouldn’t that count? I’m no worse than a neighbor!”

Printed from: http://www.jewishpress.com/judaism/halacha-hashkafa/loan-conversion/2014/01/23/

Scan this QR code to visit this page online: