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)
“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 firstname.lastname@example.org. 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 email@example.com.
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